FCA test case on COVID-19 insurance claims – the outcome
In June 2020, the Financial Conduct Authority (FCA) issued an expedited test case in the High Court to address the uncertainty as to whether non-damage business interruption (BI) insurance policies cover losses sustained as a result of COVID-19. The judgment of the Court was handed down on 15 September 2020. Overall, the ruling is helpful to a majority of policyholders. However, beneficiaries of certain policies, have been left disappointed as the Court held the BI coverage would not be triggered by the pandemic.
The FCA test case
The case concerned 21 policy wordings from a selection of 8 insurers, dealing with a variety of arguable coverage issues and was pursued from a policy holder friendly perspective. It is estimated that as many as 370,000 policyholders are affected with claims totaling approximately £1.2 billion. A previous edition of Perspectives offers further detail.
Lord Justice Flaux and Mr Justice Butcher laid down a number of principles and applied them to the policy wordings, leading to a variety of outcomes dependant on the precise wording. The judgment, running to over 160 pages is very detailed and nuanced, making it difficult to summarise but we set out below the main points.
BI policies traditionally focus on loss of profits and additional expenses incurred, often as a result of physical damage. This case, however, dealt with non-damage business interruption. The issues in the case can be broadly split into the following categories:
Particular infectious or notifiable diseases occurring within a specified radius of the insured premises.
The insurers argued that the disease had to be local to the premises and cover would only be triggered for the effects of a local outbreak, as distinguished from the wider spread of the disease.
The FCA disagreed with this interpretation and argued that an outbreak of the disease in the area local to the premises was indivisible from the national pandemic. In the alternative, the FCA argued that the clause covered instances having many different effective causes, including the disease in a very large number of places. The Court generally concluded that the outbreak of the disease was the occurrence and that cover was not limited to outbreaks only in the area, as those were indivisible from the wider outbreak. It was decided most of these wordings did provide cover, subject to some policies where cover was limited to matters occurring in a particular time, in a particular place and in a particular way.
Denial of access clauses
Preventions or restrictions of access to or use of the premises following government or authority actions.
The arguments on this point were very policy specific. However, the FCA broadly argued that the insured’s inability to use the premises could be partial or total, and the restrictions imposed did not have to be include mandatory regulations – it would be sufficient if an authority promulgated guidance that it required or expected to be followed. In addition, the interruption did not have to amount to a cessation of business activities. The insurers responded with a variety of arguments, including that the public authorities had to restrict the policyholder’s ability to use the premises, as opposed to a more general category of people. Also, the inability to use the premises had to amount to a prohibition and nothing less. Further, the interruption was required to be a cessation of business. The restrictions also needed to be mandatory, as opposed to guidance.
The conclusions reached by the Court depended on the precise policy wording. However, generally it constructed these clauses more restrictively than the disease clause described above. Some of these policies were held to provide cover, but it depended on the wording of clause and how the business was affected by the government response to the pandemic, including whether the business was ordered to close.
Further, the Court held that in the context of these clauses, the term “vicinity” was to be interpreted as being in the immediate neighborhood of the insured business. This is arguably somewhat at odds with the finding in the context of the disease clauses that the term “vicinity” was to encompass England and Wales.
A combination of disease and denial of access clauses, where losses were incurred as a result of BI due to being unable to use the premises because of an imposed restriction following an occurrence of a disease.
The parties raised the specific arguments listed under the two previous categories and the Court took a similar approach to disease clauses, rejecting the insurers’ argument that cover would only be triggered for loss resulting from a local outbreak. However, in line with the approach to denial of access policies, the Court found that “restrictions imposed” requires a mandatory action (for example regulation forcing closure) and “inability to use” had to be extend beyond an impairment of normal use.
Causation and trends clauses
The Court distinguished the finding in the case of Orient Express from this case on a matter of construction. The insurance companies argued that the government regulations and the global nature of the pandemic should be considered to be competing causes of loss, such that damages should be reduced accordingly. They argued that the insured businesses would have suffered loss as a result of the pandemic even in the absence of a government mandated shutdown or in the absence of a localised outbreak of the pandemic. The Court found in favour of the FCA on this point, stating that these factors should not be taken into account in any counterfactual.
Interestingly, the Court stated that had Orient Express not been distinguishable, the Court would have found that it was wrongly decided and declined to follow it.
Use of financial list test case
This is the first time that the financial list test case scheme has been used. The case was an ideally matched to the test case addressing as it did issues of issues of general importance that were immediately relevant. Further, the damages suffered by individual insured were not always of high enough value to justify bringing a claim individually. The test case has enabled all parties to gain clarity on the interpretation of the insurance contracts in question in a cost-efficient way.
Regardless of your view of the legal outcome, the test case scheme should be judged to have been a success. A very complex matrix of facts was distilled into a workable framework. There was an appropriate level of engagement with stakeholders. The case proceeded through the Court on an expedited basis and a conclusion was reached far more quickly than would have been the case in an ordinary claim.
Whilst this judgment will be welcomed by many policy holders, it is also only one step in the claims process, as it does not quantify damages and any businesses seeking compensation will now need to work on producing schedules of loss to substantiate their claims. Further, the judgment has left some policy holders disappointed with no insurance cover at all.
The ruling is binding on those insurers with policies subject to the judgment and is intended to provide persuasive guidance for others. However, both the FCA and the insurers have the right to appeal. All parties have agreed to request that any appeal will be heard on an expedited basis with the possibility of a ‘leapfrog’ appeal to the Supreme Court (rather than needing to be heard by the Court of Appeal first). Given the complexity of the judgment and the wide variety of issues covered, we expect appeals will be filed. Although the on-going process does not preclude parties from settling with insurers in the interim, there is concern that any appeal may permit insurers to further delay paying out under policies.