FCA’s Business Interruption Test Case : proceedings have been started in the High Court

On 10 June the Finan­cial Conduct Autho­ri­ty (FCA) upda­ted the infor­ma­tion on its web­page on the High Court test case in rela­tion to busi­ness inter­rup­tion (“BI”) insurance. 

The coro­na­vi­rus pan­de­mic has led to wides­pread dis­rup­tion and busi­ness clo­sures resul­ting in sub­stan­tial finan­cial loss. Many cus­to­mers have made claims for these losses under their BI insu­rance poli­cies. There has been wides­pread concern about the lack of cla­ri­ty and cer­tain­ty for some cus­to­mers making these claims, and the basis on which some firms are making deci­sions in rela­tion to claims.

Accor­ding to Chris Woo­lard, inter­im CEO of the FCA, most BI poli­cies don’t cover Covid-19. He decla­red to the press : “Around 90 percent of those [poli­cies] cover what we might term fire and flood, so they are very basic poli­cies about damage to the pro­per­ty that they may be using to run their busi­ness”. He added that a num­ber of poli­cies were taken out to cover ill­ness on or around the pre­mises, or if autho­ri­ties shut the pre­mises, and that the FCA’s test case hoped to bring cla­ri­ty to the situation.

The varia­tion in the types of cover pro­vi­ded and wor­dings used mean it can be dif­fi­cult to deter­mine whe­ther cus­to­mers have cover and can make a valid claim. There are genuine doubts over the appro­priate inter­pre­ta­tion of the wor­ding in some cases. This has led to uncer­tain­ty and dis­putes, with many cus­to­mers who believe they have valid claims having these rejec­ted by their insu­rer. Woo­lard said : “Some of those BI poli­cies are paying out in the pan­de­mic but there are others that are in dis­pute and obvious­ly those dis­putes mat­ter incre­di­bly to the poli­cy­hol­ders, but obvious­ly the insu­rers also have the right to defend their own wording.”

The­re­fore, the FCA intends to obtain court decla­ra­tions as part of a test case, aimed at resol­ving the contrac­tual uncer­tain­ty around the vali­di­ty of many BI claims. The regu­la­tor expects 8500 claims could fall under the test case poli­cy wor­dings, while the total value of these claims could be £1.2bn

What the test case will decide

The test case involves eight insu­rers : Arch, Argen­ta, Eccle­sias­ti­cal, His­cox, MS Amlin, QBE, RSA and Zurich. For the pur­pose of the case, the FCA is adop­ting the role of the insureds.

The Court will have to deter­mine what was the exact cause of the losses to busi­ness, and whe­ther they were sus­tai­ned direct­ly as a result of the inci­dence of Covid-19, or to wider condi­tions trig­ge­red by the pan­de­mic, inclu­ding lock­down, self-iso­la­tion and social dis­tan­cing. Lydia Savill, a senior asso­ciate at Hogan Lovells, said : “The FCA, on behalf of the poli­cy­hol­ders, is taking a broad approach towards cau­sa­tion and you can see from insu­rers’ point of view that this might be an area of challenge.”

In an article publi­shed on 17 June 2020, The Insu­rance insi­der reports that the High Court will focus as well on poli­cy wor­dings which respond only if there is a disease within par­ti­cu­lar vici­ni­ty. The FCA endor­sing the role of poli­cy­hol­ders, it will argue that the wides­pread of Covid-19 should be a suf­fi­cient trig­ger, rather than insu­reds having to iden­ti­fy a spe­ci­fic local out­break. “As an alter­na­tive to pro­ving indi­vi­dual cases of Covid-19 in indi­vi­dual loca­tions, pre­sence can be pro­ven by sta­tis­ti­cal evi­dence, espe­cial­ly for urban areas.”

The result of the test case will be legal­ly bin­ding on the insu­rers that are par­ties to the test case in res­pect of the inter­pre­ta­tion of the repre­sen­ta­tive sample of poli­cy wor­dings consi­de­red by the court. In res­pect of non-par­ties, the result will form per­sua­sive gui­dance for the inter­pre­ta­tion of simi­lar poli­cy wor­dings and claims.

The test case is not inten­ded to encom­pass all pos­sible dis­putes, but to pro­vide cla­ri­ty to poli­cy­hol­ders and insu­rers. It will not deter­mine how much is payable under indi­vi­dual poli­cies, but will pro­vide the basis for doing so.

Start of pro­cee­dings in the High Court

The FCA has upda­ted the ini­tial list of affec­ted insu­rers and the poli­cy wor­dings they use to reflect the changes to the Repre­sen­ta­tive Sample of Poli­cy Wor­dings. This list is not exhaus­tive, the FCA intends to publish a list of all the rele­vant insu­rers and wor­dings that may be impac­ted by the test case in ear­ly July.

Since 1 June the FCA has recei­ved more than 270 sub­mis­sions from poli­cy­hol­ders and other sta­ke­hol­ders, and has conduc­ted more than 45 consultations.

The FCA said today the court hea­ring would take place bet­ween 20 – 23 July and 27 – 30 July.

Enga­ge­ment with poli­cy­hol­ders and insu­rance intermediaries

The FCA deve­lo­ped a Poli­cy­hol­der Enga­ge­ment Sta­te­ment for poli­cy­hol­ders and insu­rance inter­me­dia­ries which sets out its approach to the High Court test case for BI insu­rance poli­cies, with the key points as follows :

  • The FCA will put for­ward poli­cy­hol­ders’ argu­ments to their best advantage.
  • The inten­ded action will not prevent poli­cy­hol­ders from pur­suing issues through nego­tia­ted set­tle­ment, arbi­tra­tion, court pro­cee­dings as a pri­vate par­ty, or taking eli­gible com­plaints to the Finan­cial Ombuds­man Service.
  • Ensure that poli­cy­hol­ders and insu­rance inter­me­dia­ries are pro­per­ly enga­ged throu­ghout the test case process.
  • Infor­ma­tion pro­vi­ded by poli­cy­hol­ders in res­ponse to the FCA’s requests will be trea­ted as confi­den­tial and cove­red by the FCA’s liti­ga­tion privilege.
  • The FCA expects to make public all the ‘plea­dings’ in the test case

Source : https://www.fca.org.uk/firms/business-interruption-insurance