FCA test case on Business Interruption – what is the case about?

In April 2020, the FCA outlined that most SME insurance policies only provide cover for Business Interruption resulting from property damage. In most cases, therefore, insurers are not obliged to pay out in relation to the coronavirus pandemic. 

The FCA test case addresses the remainder of policies that could arguably include coronavirus cover. The intention is to provide urgent certainty and clarity for both policyholders and insurers.

FCA engagement with insurance companies

On 1 May 2020, the FCA asked 56 insurance companies to provide information on their Business Interruption policies with more than 500 policyholders, and on how they intended to handle claims on these policies. It imposed a deadline of 15 May for replies. 

A number of the insurers decided to accept claims from policyholders with policies which included particular wording which had previously been in dispute. 

On 15 May 2020, the FCA also invited holders of Business Interruption insurance policies who remained in dispute with their insurers over the terms of their policies to send their arguments to the FCA, together with related policies and relevant facts by 20 May 2020. The FCA received over 1,200 submissions from policyholders and brokers.

The representative sample of policy wordings

From the policies reviewed, the FCA selected a representative sample of 17 policy wordings for the court to consider. It selected samples representative of the key arguable issues and invited insurers to participate in the test case.  

16 insurers use at least one of the policy wordings in the representative sample.

The FCA then asked the following insurers, who underwrite policies in the representative sample, to participate in the High Court test case: Arch Insurance (UK) Limited; Argenta Syndicate Management Limited; Ecclesiastical Insurance Office plc; Hiscox Insurance Company Limited; MS Amlin Underwriting Limited; QBE UK Ltd; Royal & Sun Alliance Insurance plc; and Zurich Insurance plc.

How will this affect insurers who are not participating directly in the test case?

Given the representative nature of the selected policies and wordings, the FCA expects the test case to provide guidance on the interpretation of many other Business Interruption policies that are not in the representative sample. This means that other insurers will also be affected by the test case and its conclusions. 

Declarations sought by the FCA

The FCA has sought extensive declarations including:

• That COVID-19 is a human infectious and contagious disease, when it occurred and when it became notifiable under different policy wordings
• That specific advice instructions and regulations referred to in the particulars of claim were all actions of government, governmental authority or agency, public authority, competent public authority, civil authority, competent civil authority and/or statutory authority
• That the advice, instructions and regulations about social-distancing, self-isolation, lockdown and restricted travel and activities, ‘staying-at-home’ and home-working given on 16 March 2020 and on many subsequent occasions amounted for all businesses on that date, or on a subsequent date as determined by the Court, to each of the following:
  • prevention of access to the premises and denial of access to the premises
  • prevention of use of the premises and inability to use the insured premises
  • hindrance in access to the premises 
  • hindrance of use of the premises
  • closure and enforced closure of the premises
  • restrictions placed on the premises
  • interference to or with the insured’s business or usual activities and/or
  • interruption to, with and of the insured’s business or usual activities
• That specific exclusions in respect of pollution and/or contamination and a competent local authority exclusion do not apply to claims under the clauses tested in the case
• That losses do not fall to be reduced because but for the business closure, or particular Government measures, all or the majority of the losses would have been suffered anyway as a result of the broader COVID-19 pandemic, the lockdown, self-isolation, social distancing or other national measures imposed by the Government. 

Declarations sought by the Insurers

These include:

• That where insured premises were required to close by reason of specified Government Regulations or Advice, there was a prevention of access to the premises due to government action or advice which was due to an emergency likely to endanger life
• That where insured premises were required to close by reason of specified Government Regulations or Advice and did close, the policyholder is obliged to prove on the balance of probabilities that, but for the prevention of access to the premises, the claimed business interruption losses would not have been incurred 

The case is being heard over 8 days from 20-23 July and 27-30 July. The outcome of these proceedings will have significant repercussions for insurers and policyholders alike. Doyle Clayton’s regulation, investigations and financial services disputes expertise means we are well placed to support our clients with any queries relating to Business Interruption insurance.  Please contact Charlie Herbert or your usual Doyle Clayton contact to discuss how we can help you.