The UK’s High Court has paved the way for insurers to appeal to the Supreme Court in the UK Financial Conduct Authority’s (FCA’s) business interruption (BI) test case. The move is set to delay the payment of BI claims related to COVID-19 but it is also likely to avoid any potential compromises that an agreement with insurers would otherwise inevitably have involved.
The decision follows a 15th September judgement (opens a new window) in which the High Court had decided in favour of policyholders in the majority of the 21 disputed policy wordings that have come under scrutiny in the test case brought by the FCA in July.
The fast-tracked appeal process was now granted to six insurers (Arch, Argenta, MS Amlin, Hiscox, QBE and RSA). Zurich and Ecclesiastical declined the opportunity to appeal, perhaps unsurprisingly given their relative success in the original hearing. A late attempt for the Qatar Insurance Company (QIC) to join the proceedings has been refused.
The High Court order
In a virtual High Court ‘Consequentials’ hearing on Friday, 2nd October, the parties discussed the terms and construction of the High Court order which is expected to be released shortly by the FCA.
The order will set out in detail what the judgment means for policyholders who have cover under one of the representative policy wordings considered in the original hearing. This order will be used by up to 370,000 policyholders with non-damage denial of access and disease extensions to try and determine how the judgment will affect cover under their particular wordings.
While all parties who sought a certificate for appeal were granted one, the question now is whether the Supreme Court will accept the case. Most commentators believe that they will, considering the importance of the case to hundreds of thousands of businesses. If accepted, the hearing is likely to take place towards the end of 2020/early 2021 with a judgment to follow thereafter. If declined the matter will have to proceed to the Court of Appeal, potentially elongating the process of achieving a final resolution.
The FCA discussions
All this will come as little comfort, particularly to those policyholders who are insured by policies which the High Court considered provide widespread cover for losses resulting from the pandemic. Whilst the FCA confirmed that they had ‘hoped to reach an agreement with the insurers on the interpretation of some important elements of the judgment affecting which small businesses get paid and how much’, the agreement was unsurprisingly ‘complex’ and ultimately unachievable by the 30th September deadline.
It is the FCA’s intention to ‘continue discussions with insurers and action groups, to find a solution which resolves the outstanding issues as soon as possible to enable pay-outs on eligible claims’. However, considering the general importance of the issues dealt with in the test case, and the likely financial ramifications of any agreement to avoid appeal, it would appear more likely than not that the matter will proceed to the Supreme Court. It might be argued that the FCA also has a moral obligation to policyholders to pursue all matters to a final legal resolution; any agreement would inevitably involve an element of compromise with insurers leaving some insureds very disappointed.
The FCA Appeal
The FCA has released (opens a new window) their application for appeal on their dedicated test case website along with their skeleton arguments and those of the relevant insurers/actions groups.
The FCA intends to appeal the High Court judgment on the following four broad grounds:
i. Whether and the extent to which pre-trigger COVID-19 related negative effects on revenue should be taken into account to reduce the indemnity.
ii. That prevention of access and hybrid wordings are triggered by actions without force of law.
iii. The prevention of access and hybrid wordings do not require total closure of the business, and a fundamental change by closure of a part of the business for which the premises is used or prohibition on a substantial part of the customer base can be sufficient.
iv. References to ‘incidents’ or ‘events’ in ancillary wording to the triggers (exemplified in the QBE 2 & 3 wordings) does not mean that the cover is intended only to cover disease within the 25/1 mile limit.
The 1st ground was subject to much discussion at the Consequentials hearing and is thought to be fundamental to how much insureds will receive where they have sustained a downturn in business prior to their policy cover being triggered. If applied strictly, any downturn trend could be used to try and vastly reduce the value of an insured claim.
Interestingly, Hiscox have made a concession in this respect noting in their skeleton argument that they ‘will not treat a voluntary closure following the announcement of the 21 March and/or 26 March Regulations (as applicable) and before their coming into effect as representative of a trend’. The Court noted that this was a seemingly ‘generous’ move by the insurer; others were not prepared to take the same approach. The lack of agreement on this issue is seen as being a fundamental sticking point in any negotiations between the FCA and insurers to try and avoid the need for, not to mention the cost of, an appeal.
The second and third grounds of the FCA’s appeal look to expand the coverage afforded to insureds under the non-damage denial of access and hybrid wordings considered in the High Court judgment. In what will clearly be a disappointment for some, the lack of appeal in respect of what is meant by ‘danger or disturbance’ or ‘emergency’ in the ‘vicinity’ or specified area (or similar) is suggestive that the FCA accepts that in many instances non-damage denial of access extensions are intended to provide restrictive and localised cover.
Finally, those on QBE2 & QBE3 type policy wordings that refer to ‘events’ or ‘incidents’ will no doubt be pleased that the FCA is seeking to overturn (under ground 4) the High Court decision that these disease clauses only provide cover where losses relate to cases of COVID-19 within a prescribed radius of the premises and not for the wider losses resulting from the pandemic as a whole.
The insurers' appeals
The various insurers in the test case have raised numerous and wide ranging appeals, the specifics of which are too voluminous to discuss here. However a key summary of some of the key aspects of their appeals is as follows:
i. The Court erred in law in holding that “the occurrence of the disease within the area was a part of an indivisible cause, constituted by COVID-19”.
ii. The Court’s approach to the causative elements of the wordings was flawed and that the proximity requirements imparted a requirement of proximate ‘but-for’ causation.
iii. The Court adopted the wrong analysis on counterfactuals by concluding that it was necessary to ‘strip out’ the entirety of the COVID-19 pandemic and/or the authorities’ and/or public’s response thereto.
iv. The pollution and contamination exclusion should apply to the pandemic.
v. The Court was wrong to conclude that Orient-Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm) could be distinguished and/or was wrongly decided and/or wrongly declined to follow it.
vi. The Court was wrong to hold that where insured premises were required to be closed, the losses which could be recovered would include losses which the policyholder would have suffered in any event by reason of the emergency and by the social distancing advice and Regulation 6.
The Lockton Claims Team will continue monitoring the FCA BI Test Case and provide further information about any major developments.
Disclaimer This document is in no way intended to provide legal advice. The recipient of this note should obtain independent legal advice from a suitable practitioner as required. Lockton Companies LLP does not accept any liability with respect to reliance upon the content or accuracy of this note.