The FCA Business Interruption Test Case Judgment

rradar solicitor Grace Connor provides an overview.

On 15th September 2020, the High Court handed down judgment in a test case brought by the Financial Conduct Authority (the FCA) in conjunction with certain insurers and groups representing policyholders.

The test case concerned certain business interruption insurance policies and their interpretation in connection with losses associated with COVID-19. The action was taken by the FCA to obtain clarification in light of the urgency associated with indemnifying policyholders with valid claims, given the current climate and also to protect the reputation of the insurance industry.

Prior to the commencement of the action, many businesses had sought to claim under their business interruption insurance for losses associated with COVID-19 and the nationwide lockdown. However, few had been indemnified.

This note is not intended to provide a full analysis of the Court’s decisions but instead provide a broad overview of the key decisions reached.

The High Court decision is largely being interpreted as favourable to policyholders – the Court looked at 21 different types of specific lead policy wording (and likely to affect in the region of 700 types of policy), which can broadly be categorised as:

• Disease: these policy wordings are intended to respond to losses suffered by a business in the case of an event of a notifiable disease occurring within the vicinity of the business premises or within a specified radius

• Prevention of access/public authority restriction of use: these policy wordings are intended to respond to losses suffered by a business where they are prevented or restricted from accessing or using their premises as a result of restrictions implemented by local authorities or government

• A hybrid of the two: these policy wordings are intended to respond to business losses where access or restrictions to premises are imposed in response to a notifiable disease.

In respect of the disease wording, the High Court generally agreed with the FCA’s arguments that these wordings would cover outbreaks of COVID-19 and the cause of the business interruption would be the incidences of COVID-19, which was a notifiable disease. The High Court also found that where a policy required an incident of a notifiable disease within a specified distance from a policyholder’s premises, in light of the nationwide lockdown and the widespread nature of COVID-19 incidents, that all incidents would be treated as being indivisible from one another.

With regard to the prevention of access wordings, the High Court’s approach was more restrictive and recognised that much would turn on the particular facts of circumstances of each claim and how restrictions and guidance imposed and provided by the government applied to the particular policyholder’s business.

Insurers also sought to raise arguments in connection with the interpretation of “trends clauses” sometimes included within policies. Theses clauses allow certain adjustments to be made to the way in which loss is calculated to take into account any “trends” affecting the business – essentially limiting the loss to what would have been sustained if the triggering event hadn’t occurred and in light of the trend. The arguments concerned placing a narrow view on what would be an event triggering cover e.g. a localised lockdown/local outbreak of COVID-19 and thereafter considering the wider effect of the “trend” of a widespread lockdown or restriction such that where “but for” the narrow event, the policyholder would still have suffered losses due to a general reduction in footfall and passing trade due to the COVID-19 crisis. The High Court had little sympathy with arguments raised by insurers that the wider effect of the pandemic should be taken into account as a “trend” against the background of a narrower focus on local incidences of COVID-19 and in particular considered that it would seem contrary to principle that where a policyholder has established a loss by reference to a notifiable disease event, its losses should then be limited by reference to the wider effect of that same notifiable disease.

Of course, whilst this may bring some clarity and hope to policyholders seeking to recover losses under the terms of business interruption insurance, it is widely anticipated that this decision will be appealed and expedited to the Supreme Court.