Financial Conduct Authority Hails Business Interruption Ruling as Policyholder Win

The Financial Conduct Authority said today’s High Court judgment in its coronavirus business interruption insurance test case found in favour of policyholders on the majority of the key issues.

“Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful,” said Christopher Woolard, interim chief executive of the FCA.

Woolard said insurers should now consider the steps they can take to “progress claims of the type that the judgment says should be paid” as well as communicate directly with policyholders who have made claims to explain next steps.

Insurers and policyholders have issued statements in reaction. (See Insurers, Policyholders, Analysts React to UK’s Covid-19 Business Interruption Ruling.)

Hiscox said the judgment clarifies that fewer than one third of its 34,000 UK business interruption policies may respond and it estimates additional COVID-19 claims arising from business interruption to be less than £100 million net of reinsurance

Insurer RSA said the ruling upheld some but not all of its interpretations of provisions and it estimates the impact of this judgment to be around £85m, which it expects will be reduce further through reinsurance.

Zurich Insurance said the decision affirms its policy interpretations.

Lawyers for the policyholders’ Hiscox Action Group said they are writing to Hiscox “demanding immediate interim payments for many clients who are struggling to survive.”

While the judgment may be appealed, the FCA said any appeal does not preclude policyholders seeking to settle their claims with their insurers before the outcome of any appeal is known.

‘If any parties do appeal the judgment, we would expect that to be done in as rapid a manner as possible in line with the agreement that we made with insurers at the start of this process. As we have recognised from the start of this case, thousands of small firms and potentially hundreds of thousands of jobs are relying on this,” he added.

Meaning for Policyholders

While many policyholders will be advantaged, the judgment did not say that the eight defendant insurers are liable across all of the 21 different types of policy wording in the representative sample. Each policy needs to be considered against the detailed judgment to work out what it means for that policy. Policyholders with affected claims can expect to hear from their insurer within the next seven days.

The ruling also does encompass all possible disputes, but to resolve some key contractual uncertainties and “causation” issues to provide clarity for policyholders and insurers. The judgment does not determine how much is payable under individual policies, but will provide much of the basis for doing so.

However, the test case has removed the need for policyholders to resolve a number of the key issues individually with their insurers, according to the FCA.\

Case Background

The 162-page judgment on coverage for covid-19 business claims is complex. The FCA’s legal team at Herbert Smith Freehills have provided a summary, which is referenced in the following background and analysis.

While most small-to-medium enterprise policies are focused on property damage and only have basic cover for business interruption as a consequence of property damage, the FCA argued that some policies also cover for BI from other causes, in particular infectious or notifiable diseases and non-damage denial of access and public authority closures or restrictions.

The FCA noted that in some cases, insurers have accepted liability under these policies, while in other cases, they have disputed liability.

The FCA sought to establish liability under a representative sample of policy wordings. 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 High Court judgment says that most, but not all, of the disease clauses in the sample provide cover, according to the FCA. It also says that certain denial of access clauses in the sample provide cover, but this depends on the detailed wording of the clause and how the business was affected by the government response to the pandemic, including for example whether the business was subject to a mandatory closure order and whether the business was ordered to close completely.

According to the FCA, the test case ruling has also clarified that the Covid-19 pandemic and the government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid even if the policy provides cover.