The coronavirus pandemic has led to widespread disruption and business closures resulting in substantial financial loss. Many policyholders believe that their respective insurers wrongfully denied claims on their business interruption insurance over the cost caused by the COVID-19 outbreak.
To achieve clarity for all concerned, the UK’s Financial Conduct Authority’s (FCA) has asked the High Court for a ruling (opens a new window) on how a representative sample of BI policy wordings respond to COVID-19 related losses. A draft judgement over the FCA business interruption (BI) test case is expected by mid-September and it is likely to have significant implications for (re)insurers who operate under English Law.
Some market observers warn (opens a new window) that if the regulator succeeds the consequences could be profound and may potentially lead to insurer insolvencies and heavy reinsurance losses. For policyholders, however, such a judgement could offer financial relief to as many as 370,000 UK policyholders (opens a new window).
Lord Justice Flaux, presiding over the FCA COVID-19 Business Interruption Test Case on its 8th and final day at the High Court, has confirmed that the draft judgment in the matter should be ready by ‘mid-September’. Whilst this news will certainly be well received by policyholders it should be noted the Lord Justice confirmed that, taking into account the importance and complexity of the case, this estimate may slip.
The FCA Test Case began on 20 July with lawyers for the FCA (Mr Colin Edelman QC and Ms Leigh-Ann Mulcahy QC) presenting the case for policyholders. Some of the key arguments pursued by the FCA were as follows:
• The FCA said that COVID-19 has been prevalent across the UK and policyholders should be free to rely on government data to evidence that they meet policy vicinity requirements. The FCA also dealt with the defendants’ argument that it must be shown that a local case directly caused closure of an insured business, saying that this argument is incorrect and narrowly restrictive.
• There is no reason that cover for ‘notifiable diseases’ should not include losses sustained as a result of a pandemic. Mr Edelman QC noted that insurers ‘say they cover notifiable diseases as long as it isn’t ‘too bad’, going on to argue that ‘they (the Insurers) should restrict to known diseases if they don’t want to cover unknown notifiables’ adding ‘bad things happen. It is just bad luck being an insurer.’
• The FCA suggested trends clauses are not applicable in COVID-19 claims, either because they only relate to claims with a damage trigger or on the basis that they were not intended to cover circumstances such as those sustained by policyholders as a result of COVID-19. Illustrating the alleged purpose of trends clauses Mr. Edelman QC referred to an example of a restaurant where the popular head chef handed his notice in just before a fire. Remove the fire from consideration and the revenue for the restaurant would have reduced because of the loss of the chef.
• The decision in Orient Express Hotels –v- Generali (which states that losses in wide area damage scenarios should be construed using the ‘but for’ test, i.e. taking into account the wider context of damage to the geographical area) is wrong as it was premised on ‘an incorrect analysis of what the insured peril actually was’. This leads to ‘mayhem’ with the FCA noting the possibility of either a windfall for policyholders or no cover at all. The FCA argued that the Court should ‘restore sanity… and restore these policies to acting in a way an insured would expect them to operate’.
• The FCA referred to the matter of P&C –v- Silversea in which the Court was unable to separate losses stemming from the 9/11 attacks and subsequent travel warnings from the US Government. The FCA argues that where two causes are inseparable (e.g. the virus and the resulting restrictions) as long as one is insured and the other is not excluded then the insured should be able to recover their overall losses under the policy.
• The FCA argued vehemently that partial closure of a business should be sufficient to trigger cover prefaced on the need for a restriction, prevention or denial of use or access. Using the example of a restaurant that also provides a takeaway service the FCA pointed out that based on some of the insurer arguments, the policyholder would be better off to remain closed and pursue a claim rather than use their kitchen to mitigate their loss. Mr Edelman QC argued that this was ‘absurd’ noting that a policyholder’s ‘inability to use must mean for its intended aim or purpose, which is the insured business activities’.
• The FCA was stringently opposed to insurer suggestions that legal force was required to amount to an intervention by Government or Local Authority. This is an unreasonable position to take it was argued, as where Government advice or warnings were not backed by legislative enforcement the nature of the warnings were such that any reasonable individual would take them as an order, for example, to ‘stay at home’.
In responding insurers have argued (amongst other matters) that:
• The principles of causation are well established and the ‘but for’ test should be applied to the claims pursued by policyholders. The test in Orient Express Hotels was correctly decided.
• There was no intention on the part of the insurers to cover pandemics and if there had been this would have been specifically addressed in the policies.
• Extensions that require there to have been an occurrence of COVID-19 within a stated vicinity of insured premises only cover losses that have resulted from government restrictions imposed as a result of those specific instances of the disease. As enunciated by Mark Howard QC for QBE: ‘The government actions were not in response to the pandemic in the vicinity of the businesses’, on this basis there is no cover.
• It is possible to separate losses caused by an occurrence of the virus and losses caused by the Government restrictions. They should not be treated as concurrent and inseparable proximate causes as argued by the FCA. The judgment in P&C –v- Silversea was based on the facts and expert evidence as to what extent the 9/11 attacks and the subsequent government warnings caused business interruption. This situation is different.
• Where policies refer to a ‘danger or disturbance’ this does not provide cover for a loss as wide as a pandemic and instead suggests there is cover for a transient, localised incident.
• Prevention of access covers are straightforward. For there to be cover under most of the policies in the sample group access to the premises must be physically obstructed or rendered entirely impossible. Any Government action or restrictions must come with the force of the law and not merely be ‘guidance’. Social distancing or requirements for members of the public to stay at home and work from home do not constitute a prevention of access or use.
If the draft judgement is indeed ready in ‘mid-September’ it will not be released to the public immediately.
Legal procedure dictates that the Court will usually provide a copy of the draft judgment to the legal representatives by 4 p.m. on the second working day before the finalised judgment is to be formally released. A draft judgment cannot be made public before the formal judgment is ‘handed down’.
During this period of consideration the legal representatives have the opportunity to review the judgment, share it with the parties and potentially ask the Court to amend the wording of the judgment if it is thought to be ‘defective’ in some way e.g. that the reasons given by the Judge are unclear or require amendment.
In view of the importance of the Test Case it is certainly not implausible that legal representatives may make such representations, particularly if any reasoning is likely to be subject to an appeal to the Supreme Court. Furthermore Lord Justice Flaux and Mr Justice Butcher who are presiding over the case are likely to take particular care and the necessary time to make sure their conclusions are clear and thoroughly set out, considering the scrutiny to which their judgement will inevitably be subject.
As for the FCA, they have thus far been very quick to release Court documents on their website for public consideration. It is certainly expected that as soon as the judgment is finalised it will be released to the public on their dedicated Test Case website (opens a new window).
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.
