FCA Insurance Policy “Test Case”

As a result of the first national lockdown – imposed in March 2020 – in order to mitigate the spread of COVID-19, many small and medium-sized businesses have seen a significant level of financial loss. This saw an increase in claims for those losses under business interruption insurance policies (“BIIP”). There quickly became widespread concern over the lack of successful claims under those policies, and the myriad of reasons given by insurers to explain why business were seeing their claims rejected.

In May 2020, the Financial Conduct Authority announced that it would be launching a test case in the High Court, with the aim of obtaining an understanding of the effect of certain BIIPs so far as they related to claims for losses as a result of COVID-19 – a sample of 21 insurance policies and a total of 28 clauses were considered. As the well-known watchdog for financial services in the UK and the regulator of the Defendant insurers, it wanted to quickly secure the Court’s judgment in order to provide certainty over BIIP cover and to ensure policyholders are treated fairly.

The FCA started its claim on 9 June 2020 and obtained an early success in ensuring its claim was “expedited”, meaning their case was heard urgently. This culminated in an eight-day trial at the end of July 2020, with judgment being handed down mid-September 2020.

The High Court’s judgment said that most of these policies (12 of the 21 samples used) will provide cover in the circumstances of COVID-19. Six insurers appealed the High Court’s findings on 11 of the 21 samples used, but the Supreme Court has dismissed those appeals.

The Supreme Court was asked to consider a number of issues, which included interpreting disease clauses (i.e., those which can be triggered by the occurrence of COVID-19) and prevention of access clauses (i.e., those triggered by public authority intervention preventing access to, or use of, premises as a result of COVID-19), in addition to what must be evidenced to show business loss flows from COVID-19, and losses incurred before insurance cover was triggered.

The Supreme Court’s guidance covers a wide range of BIIPs and clauses and has provided a favourable account for many businesses: it unanimously dismissed the appeals and allowed all four of the FCA’s appeals. Principally, the appeal concerned whether the “disease” and “prevention of access” clauses in the sample of policies included provide cover in the circumstances of COVID-19, and therefore triggers the cover for those losses.

It is important to remember that most new policies (or policies in renewal) will have updated policy wording to include – or not – COVID-19 as a notifiable disease. Insurance policies are often lengthy and technical – the example provided to the Supreme Court by Royal & Sun Alliance Insurance PLC was no fewer than 93 pages. The FCA has stated that they will be working with insurers to ensure that they now move quickly to pay claims that the Supreme Court judgment says should be paid, and make interim payments wherever possible, which is welcome news to many business who continue to face financial pressure from COVID-19.

The insurers relied heavily on a case decided in 2010 called “Orient Express”, but the Supreme Court has ruled that the case was wrongly decided. This has wider implications beyond the COVID-19 pandemic, and is more likely to apply to other types of claims including storms or floods.

For further advice please contact Daniel Tetsell on 0345 20 73 72 8 or dtetsell@thursfields.co.uk