Coronavirus: FCA – the business interruption insurance test case

How is the FCA seeking clarity?

After a review of some 500 insurance policy wordings from over 40 insurers, the FCA is concentrating upon 17 policies that it considers to be representative of the key issues and arguments arising from the coronavirus pandemic.

The FCA’s focus is on those policies that provide cover for financial losses sustained where there has been no physical damage to the insured property. The relevant policies contain terms that are said to provide cover where restrictions are imposed as a result of an outbreak of an infectious disease (which has several different definitions) either at the property or within a specified proximity. Or alternatively that access to the premises has been prevented.

The court’s decision will be binding on those involved and on retrospective application. Whilst such a decision might be appealed, it is hoped that the court will provide guidance on how policyholders’ claims should be treated, even where a specific wording has not been included in the representative sample. The FCA’s aim is to bring about swift justice for all stakeholders without delay or further litigation.

The Test Case seeks clarity on a range of issues with two central questions being categorised as follows:

1. The coverage issue – do the non-damage extensions to policies provide cover in principle for loss arising from interruption or interference with the policyholders’ business resulting from the coronavirus pandemic?
2. The causation issue – if the answer to number 1 is yes, can the policyholders establish as a matter of law and fact the necessary causal link to any loss suffered?

The coverage issue

A crucial issue will be proof – what will policyholders be expected to do to prove their claim? And then different issues arise:

Micro-level: what happened in the local area?  Was there an outbreak in the vicinity that would trigger the policy to respond – where did it occur and how serious was it?  Was the decision to close (assuming that it was a decision and not enforced) a proportionate response? These issues will likely be determined on their facts case by case but the court’s determination is intended help guide insurers and businesses to find a means of resolution.

Macro-level: the court will be asked to examine the Government’s treatment and classification of businesses that were deemed to be “essential” or “non-essential” and how (and when) the definition changed over time. This is relevant to whether the closure of the business was enforced or self-imposed in response to “Government guidance”.  These issues will be forensically examined with hindsight. If for example a policy is narrow in scope, insurers may be unwilling to provide cover if the decision to close the business was taken freely. However, arguments are inevitable when decisions have been taken under extreme pressure and in unprecedented times which posed a risk to human life. Is that decision to be considered a fair or free choice?

The causation issue

Why is this such a big issue and probably the key battle ground? Insurers argue that the cause of the interruption to the policyholders’ businesses is not the fact that coronavirus has been discovered on the premises, within the area prescribed by the policy or has prevented access to the property, but rather because the businesses would have always faced hardship irrespective of the measures imposed by the Government because:

(1) of the coronavirus pandemic
(2) the public’s response to it (ie, reduced consumer demand), and
(3) the Government’s response to it.

Insurers are likely to highlight that, in economies such as Sweden where no mandatory closures have been enforced and people have not been required to stay at home, businesses are still suffering from significant lost revenue.

The courts will have to consider the “proximate cause of the interruption” and whether it was the localised impact of the virus or the Government’s response to it. The challenge for policyholders is that English law provides that, where there is more than one proximate cause and one is covered but the other is not, the exclusion will take precedence and that should enable insurers to decline claims. Whether the court will be prepared to, or indeed feel it is able to, relax this test is a crucial issue.

What’s next?

The insurers have now filed their defences and an 8 day trial has been listed to commence on 20 July 2020.

The fact that all parties as well as the court are willing to work to this very tight timescale demonstrates the significance and importance of this test case. It is recognised that all parties need certainty surrounding this decision urgently. That said, the sums of money involved are very significant. The Prudential Regulation Authority (PRA), responsible for the regulation and supervision of insurers, has issued a warning that the Test Case could have a potentially "significant impact" for insurers. Whilst a quick decision would undoubtedly be welcome, the stakes are such that we do not think the prospect of an appeal should be discounted by either side whatever the outcome.

We will be monitoring developments and reporting further on the potential impact of the outcome as the case develops.