The High Court today handed down its 162-page judgment in the expedited COVID-19 Business Interruption Insurance Test Case of The Financial Conduct Authority v Arch & Others (the “test case”). The test case is seen as a success for business interruption insurance (”BII”) policyholders as the court ruled in the FCA’s favour on the majority of arguments and key issues. We summarise the key findings and how they may affect your business below.
Whilst the majority of BII policies are limited to providing basic cover for business interruption that occurs as a result of property damage, some BII polices go further and provide cover for other business interruption causes including (i) infectious or notifiable diseases (known as ‘disease clauses’), and (ii) non-damage denial of access and public authority closures or restrictions (‘denial of access clauses’).
The FCA argued that the ‘disease clauses’ and ‘denial of access clauses’ under the representative sample of 21 different policy wordings that were before the court, provided business interruption cover in the circumstances of the Covid-19 pandemic.
The court determined that in the sample policy wording considered:
— the majority, but not all, of the ‘disease clauses’ provide businesses with business interruption cover for the circumstances of the Covid-19 pandemic; and
— certain ‘denial of access clauses’ provided certain businesses with cover: whether businesses are able to rely upon their ‘denial of access clauses’ would depend upon the detailed wording of the specific clause and how the individual business was specifically affected by the UK Government’s response to the COVID-19 pandemic.
The test case also removed the need for BII policyholders to resolve a number of the key issues individually with their insurers. For example, it clarified that the Covid-19 pandemic and the UK Government and public response were a single cause of the covered loss. That itself forms a key requirement for policyholders claims to be paid by insurers if the BII policy provides cover.
Christopher Woolard, the interim chief executive of the FCA commented that the judgment is a “significant step in resolving the uncertainty being faced by policyholders.” He also encouraged insurers to reflect on the clarity the ruling brings and to consider the steps they must take to progress claims that the judgment says should be paid. This includes communicating directly to policyholders affected by the judgment within 7 days to explain the next steps.
Although the court’s interpretation of the representative sample of policy wordings it considered is currently legally binding on the insurers that are parties to the test case, those insurers and the FCA are currently considering the judgment and it may potentially be appealed. However, in the meantime the test case:
— provides clarity for BII policyholders and insurers by resolving some key contractual uncertainties and ‘causation’ issues; and
— is likely to provide persuasive guidance on similar policy wordings for the Financial Ombudsman Service and the FCA when considering whether insurers have handled policyholders’ claims fairly and may also be taken into account in other court cases including in Scotland and Northern Ireland.
Whilst the test case is seen as a ‘success’ for BII policyholders, each BII policy will need to be carefully considered in light of the judgment (and any appeal that may follow) to assess whether your business is likely to benefit from BII cover as a result of the COVID-19 pandemic and, if so, the extent of such BII cover.