FCA test case – the judgment is in!

Summary

The High Court has found in favour of the Financial Conduct Authority (FCA) on the majority of the issues in the test case, The Financial Conduct Authority v Arch and others, relating to Business Interruption (BI) claims which means that many claims for COVID-19 related BI which were rejected by insurers may now be paid. Those business forced to close could, subject to an appeal and the terms of their policies, be entitled to be compensated by insurers involved in the test case.

Overview

There has been widespread disruption to businesses as a result of the COVID-19 pandemic resulting in substantial losses and business closures. Many policyholders have sought to claim under BI insurance policies in order to recoup losses and many of the claims have been rejected by insurers. These policies are complex and present uncertainty for both insurers and policyholders and have the potential to create ongoing uncertainty for a long time.

The FCA recognised that, in light of the pandemic, this uncertainty needed to be resolved as quickly as possible and so brought proceedings for a declaratory judgment on the meaning of a representative sample of the policy wording in order to help resolve the uncertainty around the validity of the BI claims.

Many SME insurance policies only have basic BI cover as a consequence of property damage. The test case does not cover these policies and only covers the meaning of non-damage BI policy wording that are representative of those widely used by the insurance industry.

The test case was not intended to cover all possible disputes but was intended to resolve some key contractual uncertainties and causation issues and provide some guidance and clarity for insurers and policyholders.

Policyholders must not assume that the inclusion of their BI policy wording in the test case and the court’s findings thereon will mean that they are able to claim for COVID-19 related BI under their policies.

Judgment

The test case was held over eight days and the judgment which runs to 162 pages and covers 21 policy wordings has been handed down today and the full judgment has been published on the FCA website here.

The key findings are as follows:

• Disease wording – Insurers argued that this cover was for the local occurrence of a notifiable disease. The court disagreed and found that the proximate cause of the BI was the notifiable disease of which the individual outbreaks form indivisible parts or alternatively each of the individual occurrences was a separate but effective cause of the national actions. The wordings in issue insured the effects of COVID-19 both within the specified radius and outside of it and were not limited to a local occurrence;
• Prevention of access / public authority wording – The court concluded that, generally speaking, these clauses were to be construed more restrictively than the disease clauses, although they found that these clauses provide cover for some insureds under some wording; and
• Hybrid wording – These clauses are a blend of disease wording and prevention of access / public authority wording. As with disease clauses the court rejected insurers arguments that the only cover was in respect of losses flowing from a local outbreak but construed some of the prevention of access wording as requiring something more than an impairment of normal use.

What this means?

The judgment will have a widespread impact on the insurance industry. The FCA asked insurers to review relevant non-damage BI policies to determine whether the outcome on claims generally might be affected by the final resolution of the case. The FCA produced a list setting out those policies where the relevant insurer had found that, in their view, the test case might affect the outcome of claims generally. The policies on the list cover approximately 370,000 policyholders.

Comment from the FCA

Christopher Woolard, the interim chief executive of the FCA, has said that the ruling removed ‘a large number’ of roadblocks to successful claims, as well as clarifying those that might not be successful. Mr Woodland went on to say on behalf of the FCA that:

‘We are pleased that the court has substantially found in favour of the arguments we presented on the majority of key issues. Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders. Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat’.

Is this the end?

The outcome of the test case is far from the end and the case has not determined how much is payable under individual BI policies, but has determined the basis for doing so. Each policy will need to be considered against the detailed judgment to decide what it means for that policy.

The judgment is complex but will now be analysed by insurers over the coming days and insurers will decide whether to launch an appeal which will be subject to the normal procedural rules for seeking permission for and making appeals. If this happens the parties to the test case have agreed that they will seek to have any appeal heard on an expedited basis which would include exploring the possibility of a ‘leapfrog’ appeal to the Supreme Court with the appeal not being heard by the Court of Appeal first as would be the usual procedure. A hearing will shortly be fixed with the High Court where any applications for appeal will likely be made.

It is the view of the insurance team at BDB Pitmans that an appeal is inevitable in light of the judgment handed down today. Watch this space!