The High Court has ruled today (15 September) in a closely watched test case brought by the City regulator against the insurance industry over business interruption insurance during the Covid-19 pandemic.
The FCA had asked the court to clarify the extent to which business interruption insurance covers losses arising from the Covid-19 pandemic and to prevent insurers from rejecting claims outright.
It is a case that potentially affects around 370,000 policyholders who, due to complicated wording, are unsure whether or not they are entitled to claim.
The judges hearing the case were Lord Justice Flaux and Mr Justice Butcher, and they handed down their detailed and complicated 162-page ruling earlier this morning.
As the case sought clarification and resolution on a variety of different wordings used across the industry, the ruling does not expressly come down on one side or the other.
However, in a statement on its website, the FCA said the judges backed the arguments brought by lawyers representing policy holders “on the majority of the key issues.”
Broadly, the ruling says that most, but not all, of the disease clauses used in the trial provide cover for the circumstances of the current pandemic.
“We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market,” FCA interim chief executive Christopher Woolard said in a statement.
“We are pleased that the court has substantially found in favour of the arguments we presented on the majority of the key issues. Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders. We are grateful to the court for delivering the judgment quickly, and the speed with which it was reached reflects well on all parties.”
The FCA brought the test case against insurers including Hiscox, Zurich and Royal & Sun Alliance, seeking a determination of a number of key points of contractual construction and principle relating to insurance coverage and causation during the pandemic.
The case, however, has not left the High Court just yet.
The judges did not make any orders in the ruling. Instead, they said there should be another hearing in which the legal teams, with the benefit of the judgment, can make submissions about what orders should be made.
It also could be taken to the Court of Appeal.
Even so, the ruling will provide insurers with guidance for the interpretation of similar policy wordings and claims that can be taken into account in other court cases, including in Scotland and Northern Ireland.
“This judgment is overwhelmingly in favour of the policyholders,” said Stephanie Reeves and Ted Powell, lawyers in Irwin Mitchell’s commercial dispute resolution team.
“Not many in the industry will have predicted this outcome. In particular, the Court found that the Covid-19 pandemic, the resulting restrictions and the impact on public confidence should all be treated as one single cause. This will make it significantly easier for businesses to show that Covid-19 caused the losses they suffered.”
They said that the ruling was “really positive” for businesses hit by the pandemic.
“Businesses with any of the 21 sample policies considered will need to determine exactly what the judgment says on their policy wording to determine whether they are entitled to cover.”
“Those with policy wording that was not considered in the test case will still be able to use the judgment persuasively when making a claim by identifying what the judgment says on similar wording in the sample policies considered.”
“Policyholders should act quickly though as it is very likely that the judgment will now be appealed by the insurers given the significant financial impact of the judgment. However, an appeal would not prevent policyholders from settling their claims before the appeal is determined,” they said.
However, Anthony Lennox, head of reinsurance and insurance at Bryan Cave Leighton Paisner, pointed out that the court ruling was followed by a spike in UK insurers’ share prices.
“Whilst the test case is being hailed as a victory for policyholders by the FCA, it is perhaps telling that insurer share prices soared immediately after the decision was handed down,” he said.
“The reality is likely to be that many of those in the real estate sector find it difficult to succeed in bringing a claim against their insurers. Whilst the judgment overcomes the causation hurdles raised by insurers in relation to business interruption claims and establishes cover under many policies with notifiable disease extensions it is going to be more difficult to establish cover for policies with business interruption cover triggered by restrictions on the use of premises.
“In our experience many of the policies for those in the real estate sector, including construction all risks policies as well as policies protecting property portfolios, contain denial of access clauses whereas notifiable disease polices are less common (and many of those specifically exclude losses arising from a coronavirus type pandemic,” he said.
The FCA started the ball rolling on the case on 19 March by contacting insurance firms setting out their expectations of them. In mid April it sent a “Dear CEO” letter urging insurers to settle claims swiftly.
Then, on 1 May the regulator stated it intended to seek a court ruling, and asked insurance companies to provide details of their BI policies and wordings.
The case was heard over eight days in July, and the ruling was handed down remotely today, under the court’s Covid-19 protocol.
Similar cases are also going through courts in the US, Australia and across Europe.
Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2020] EWHC 2448 (Comm)
High Court (Lord Justice Flaux, Mr Justice Butcher) 15 September 2020
Picture © Jonathan Goldberg/Shutterstock
