Business interruption insurance test case outcome – positive for insured, but subject to appeal
The High Court has recently handed down judgment in what has become known as the 'FCA test case'.
The case was brought by the Financial Conduct Authority (FCA) against a number of insurers to seek to obtain clarity on several key points relating to the interpretation of business interruption policy wordings in the context of the COVID-19 pandemic.
Business interruption (BI) insurance exists to potentially provide cover to an insured for business losses or expenses in circumstances in which business premises are damaged or cannot be accessed. The Covid-19 pandemic has not caused physical damage to premises preventing access and so one of the key issues that the Court needed to consider was in relation to 'non-damage denial of access' extensions in BI policies. The Court also considered the issue of causation and the basis on which successful claims might be quantified.
The judgment is to be welcomed to the extent that some clarity has been given, but on 29 September, the FCA confirmed that it has filed and application to appeal the decision directly to the Supreme Court and therefore, it is not the end of the matter.
Although the judgment establishes a number of points of principle on policy wording interpretation, the key point to keep in mind is that each policy and claim will need to be considered on its own merits, guided by points made in the judgment.
The FCA argued for policyholders that the ‘disease’ and/or ‘denial of access’ clauses in the representative sample of policy wordings provide cover in the circumstances of the Covid-19 pandemic, and that the trigger for cover caused policyholders’ losses.
The Court held that many (but not all) of the disease clauses in the sample do provide cover. It also said that certain denial of access clauses in the sample provide cover. However, a key point for determination will always be the detailed wording of the clause and how the business was affected by the Government response to the pandemic. This is particularly relevant for example if the business was subject to a mandatory closure order and whether the business was ordered to close completely.
To illustrate the distinction, a hypothetical case of a restaurant has been used. The restaurant which pre-lockdown offered takeaway facilities could still operate (to an extent) post the imposition of lockdown measures, by continuing to provide takeaways, or in other words was not closed completely - yet the restaurant that did not offer takeaway pre lockdown (and did not do so afterwards) would have to close completely.
The test case has also confirmed that the Covid-19 pandemic and the Government and public response was a single cause of the covered loss, which is a key requirement for claims to be paid, contingent on cover.
Despite the pending Appeal, the Court confirmed that insurers should engage with policyholders and to begin to deal with claims, indeed the FCA, in its regulatory capacity has written a 'Dear CEO' letter to insurers, confirming its expectation that insurers should pay valid and successful claims in full at the earliest possible date to support businesses and consumers during the current situation.