The FCA’s business insurance test case: key takeaways from the judgment and next steps for businesses
The High Court has delivered its ruling in the highly anticipated business interruption insurance (BII) test case. The FCA brought proceedings on behalf of policyholders, along with two action groups, in which the Court considered whether a sample of BII policies provided cover for losses arising from the Covid-19 pandemic.
Overall, the judgment was a welcome decision in favour of policyholders and businesses, with the Court finding for them on many key points which can be applied to other BII policies. However, the Court found that not all of the insurers involved are liable across all of the sample policies that it considered.
We explain some of the key takeaways for our business clients below. However, the core message is that, subject to the expected appeal, coverage still very much depends on the type of policy you have and even then the exact policy wording. As such, if a claim is rejected by your insurer you may be able to challenge this decision.
If you have had a BII claim rejected, we offer a cost-effective fixed fee review of your policy wording. Do get in contact to discuss how we can support you.
The case concerned a representative sample of 21 policy wordings from eight participating insurers but is likely to impact around 700 policy types, 60 insurers and 370,000 policyholders.
A number of BII policies focus on physical damage to property and provide very basis cover for losses flowing from this. However, policy wording that also covers matters such as notifiable diseases or denial of access were in issue here.
Following inconsistent decisions on BII claims by insurers, the FCA was prompted to bring action to clarify the position for as many policyholders and insurers as possible.
The Court’s decision
The judgment is lengthy, running to 162 pages, complex and covers a lot of issues. Here, we attempt to summarise a number of the key points for our clients.
The Court reviewed the sample policies in three categories:
- Disease clauses;
- Clauses concerned with the prevention of access to premises/ public authority restrictions; and
- Hybrid wording.
Disease clauses provide cover for business interruption following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises.
The judgment says that most, but not all, of the disease clauses in the sample provide cover. The Court established that, generally, disease cover is not limited to the effects only of the occurrence of a notifiable disease within the relevant radius, particularly where it was part of a wider outbreak.
Notably, the Court found that two versions of disease wording contained in QBE policies required an “event” to trigger cover and the occurrence of Covid-19 in different places and at different times was not enough to constitute an “event”. Therefore, no cover was available.
Prevention of access / public authority wordings
These policies concern a prevention of access to or use of the insured premises as a result of Government or public authority action or restrictions.
The Court took a more restrictive approach here and found that prevention of access wording related to specific, localised events rather than the Government’s national response to the pandemic. On that basis, the Court concluded that there was no cover provided by these clauses in most cases. However, the availability of cover will turn on the precise language used, the type of business and how the Government’s rules from time to time impacted that business. For example, if there was not a complete closure, there would be no prevention of access but there might be hindrance of access.
Policyholders will need to look at their specific wording and consider the restrictions relevant to their business as against the judgment to determine whether there is any cover. This is an analysis we can assist with.
These clauses are engaged by restrictions imposed on the premises following a notifiable disease and could be considered a combination of disease and denial of access clauses.
There were several variations of wording within this category considered by the Court
The Court took a similar line to the “disease” part of the clause to that set out above, i.e. that cover was not confined to losses flowing from a local outbreak.
As for the second limb of these clauses, relating to prevention of access to premises, the Court construed the wording narrowly. The judgment provides that any restrictions imposed on the policyholder’s business must have been mandatory and that, to demonstrate an inability to use a premises, it would not be enough for a policyholder to establish they could not use their premises in the usual way.
Again, careful assessment of the relevant clause is required to determine whether a policyholder will benefit from cover.
What does this mean for businesses?
Whilst the decision provides clarity for policyholders and insurers as to which BII claims are likely to be successful, each policy needs to be considered in the context of the policyholder’s business and the judgment. Equally, it is clear that some policies will not provide cover for losses arising out of Covid-19. The judgment does not, however, determine how much will be payable under individual policies, but will provide much of the basis for doing so. The FCA have confirmed that insurers are due to contact those with affected claims within the next 7 days.
The judgment is legally binding on the eight insurers who were party to the test case, namely Arch, Argenta Syndicate Management, Ecclesiastical, Hiscox, MS Amlin, QBE, Royal Sun Alliance and Zurich, but only in respect of the limited policies considered. However, the consequences are expected to be much more far-reaching in that other insurers and policyholders with similar policy wordings may now be able to progress and settle claims.
In particular, the judgment will assist policyholders to overcome some hurdles which will not now need to be resolved with their insurers during the claims process. We hope that insurers will now be encouraged to make pay outs, upon which many businesses will be relying to stay afloat.
It is likely that the judgment will be appealed. Some of those participating have already requested permission to appeal. If permission is granted, it is possible that the appeal will be heard by the Supreme Court, rather the Court of Appeal, given the importance of the decision. An appeal should not prevent policyholders from attempting to settle their claims with their insurer before the outcome is known, which is not likely to be until 2021.
Businesses with delayed claims should remember that they may also have a right to claim damages for late payment under the Enterprise Act 2016.
The comfort for some businesses will therefore, unfortunately, be short-lived and they will no doubt be frustrated that uncertainty remains and that their claims may still be rejected.
Should this be the case then it is imperative that policyholders seek advice on their position. A careful analysis of policy terms and consideration of any other issues should be undertaken to establish whether a valid claim can be brought. It is clear from the above that, although the validity of each claim will be fact-specific, cover is most likely to be triggered where the policy contains a disease clause.
The reality is that there will still be many businesses that are not covered by their BII policy for Covid-19 losses and for others, the judgment and any subsequent appeal will already be too late. In that case, what can you do?
The judgment does not prevent small businesses from making complaints to the Financial Ombudsman Service.
Further, businesses who believe they have either a) received incorrect advice, for example from a broker or other intermediary, regarding the scope of their policy; or b) been mis-sold their policy, should seek advice as soon as possible.
How we can help
Our Dispute Resolution team can advise on your policy in light of the decision.
In the event that you have made a claim to your insurers and it has been rejected, we can offer a cost-effective fixed fee review of your policy wording and explore your options.
Our team can also assist with making complaints to the Financial Ombudsman Service and advise in connection with any professional negligence or mis-selling claims.
Please contact us for further details about how we can support you.
Please contact us for further details about how we can support you.
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