Handed down on 15th September, the ruling relates to a test case orchestrated by the Financial Conduct Authority (FCA). It provides policyholders with hope that they may be able to recoup some of their COVID-19 related damages through business interruption policies.
Quick Facts
- The High Court’s ruling on the FCA’s business interruption test case is a positive sign for policyholders who have suffered losses related to interruptions caused by the pandemic.
- The ruling can still be appealed, but if an appeal is filed, the process will be expedited in order to reach a resolution as quickly as possible.
Insolvency Measures
For many UK businesses, the coronavirus pandemic and resulting lockdown measures forced extended closures. Even with the government attempting to reduce restrictions and restart the economy, for many organisations, the damage has already been done.
But, while there may never be a way to completely make up for the financial losses that the pandemic wreaked upon businesses, there may be a new reason for optimism after a recent ruling by the High Court in relation to business interruption insurance.
Background
Business interruption insurance is a type of cover that provides organisations with relief should they be unable to maintain normal operations due to an unexpected event, such as a fire, flooding or essential equipment breaking. In this instance, the question at hand related to the pandemic, and whether business interruption policies should apply to issues related to lockdown.
The FCA first announced the intent of its test case in May with the goal of obtaining more clarity on certain aspects of business interruption cover in relation to the current pandemic and resulting stoppages of operations. Proceedings officially began 9th June, and the case was heard throughout July with the FCA representing policyholders and eight insurer defendants agreeing to participate in the case. The test case considered 21 sample wordings, but it is estimated that the ruling could affect approximately 700 policies types, 60 different insurers and 370,000 policyholders.
High Court Conclusions
The High Court’s ruling on the test case eventually consisted of over 150 pages. The 21 sample wordings considered during the test case were aimed specifically at issues that have relevance to the current pandemic situation, such as those involving diseases, government-imposed restrictions, prevention of access or public authority wordings, hybrid wordings and trends clauses.
Disease Wordings
These wordings pertained to situations in which businesses were interrupted or interfered with due to, or following, an occurrence of a notifiable disease within various distances of a relevant policy area. Defendants in the test case argued that these wordings pertain only to local outbreaks of disease. As such, only local effects of the pandemic that are able to be distinguished from wider effects should be covered. Meanwhile, the FCA made the argument that the correct causal test would be met due to the fact that the local COVID-19 outbreak could not be divided from the rest of the pandemic, and that there were many different causes due to COVID-19 being a threat in many different locations.
The court agreed with the FCA’s reasoning and ruled that clauses mentioning the ‘occurrence’ of a disease would have been triggered as soon as COVID-19 cases appeared in the area. In addition, it was ruled that policies using the word ‘following’ as a causal link cover indirect effects of an outbreak. As such, the national response to a widespread disease would suffice. The ruling also stated that cover was not restricted only to outbreaks within relevant policy areas, due to the widespread and varied infectious capabilities of many diseases, and the potential resulting response by government authorities.
Prevention of Access and Public Authority Wordings
These sample wordings pertained to policies that contain language related to premises being unable to be reached due to actions, advice, restrictions or orders by police, the government or other authority due to a life-threatening emergency, an issue with a neighbouring property or an incident within a relevant policy area. The ruling stated that such wordings should be met with more scrutiny than those mentioned in the aforementioned disease wordings, but that some policyholders should still be able to recoup funds.
Specifically, the court stated that wordings pertaining to an incident or emergency within a relevant policy area must refer to a specific issue occurring both at a specific time and in the immediate, local area. The court also judged that, in order for clauses hinging on a ‘prevention’ of access to be activated, premises must have been closed for the purposes of the organisation carrying on.
The court went on to rule that government announcements made 16th March, 20th March and 23rd March were to be construed as ‘advice’ as opposed to being ‘actions’ or ‘orders’, and clauses with such language should be treated accordingly. However, the court noted that cover may be triggered by the official regulations issued by the government 21st March and 26th March. In addition, it was ruled that, in most cases, a complete stoppage of all operations was not required in order to qualify as an ‘interruption’.
Hybrid Wordings
These samples contained wording related to both disease and prevention of access or public authority. For different pieces of these clauses, the court took similar approaches as it had with separate wordings dealing with the subjects. As such, the ruling stated that disease-related clauses did not rely upon a local outbreak in order to be activated. Meanwhile, the court maintained its position on language mentioning ‘restrictions imposed’, stating that something requiring mandatory compliance must be involved. Similarly, clauses mentioning ‘inability to use’ were deemed unable to be triggered simply due to normal operations being impaired.
Trends Clauses
The court began its deliberations on this key subject by recognising that the purpose of a trends clause is to return policyholders to the position that they would have been in had an issue not arisen in the first place. Defendants argued that policyholders are only insured for effects of the pandemic on a local level, and that widespread effects—such as government measures—could be seen as a business trend, and therefore result in a reduction of claims.
The court ruled that any clauses related to the following must be stripped from the counterfactual argument regarding the situations policyholders would have found themselves in if not for the pandemic:
- Clauses related to the effects of COVID-19 at both a local and widespread level.
- Wordings pertaining to the interconnected elements of access to premises being prevented or hindered by the action of an authority due to an emergency or incident that endangers human life.
- Hybrid wordings involving an inability to use premises due to imposed restrictions by a public authority following an occurrence of a human infectious or contagious disease.
Prevalence
The ruling further stated that it will be determined on a case-by-case basis whether a policyholder will be required to prove that COVID-19 has occurred in a specific area. Insurers did make the concession that evidence brought forth by the FCA—such as reported cases and fatality data from the NHS and Office for National Statistics—are capable of demonstrating the presence of COVID-19 in principle. It was also suggested that a policyholder’s burden of proof could be discharged by a distribution-based analysis or an undercounting analysis. Insurers also did not suggest that absolute precision would be required in order for a claim to be successful.
What’s next?
The FCA’s test case has helped clarify a number of key issues that policyholders may have had with their insurers, but it does not encompass all possible disputes. While the ruling may be a good sign for the hundreds of thousands of policyholders hoping to recoup some funds lost due to the coronavirus, it is important to understand that each individual case and policy will still need to be judged and analysed on its own merit.
In general, the ruling may lead to insurers beginning to pay out claims that they have previously denied, but policyholders should be aware that insurers do have the right to appeal the High Court’s judgment. If an appeal is filed, the FCA and defendant insurers have agreed that the process will be expedited in order to provide as prompt of a resolution as possible.
Many industry experts are viewing the ruling as a victory for most business interruption insurance policyholders, including Hiscox Action Group steering committee member Mark Killick.
‘Today’s judgment represents a huge victory for the Hiscox Action Group. The most important thing now is that the insurers accept this ruling and start to pay out rather than embark on a fruitless appeals process that will just cause more suffering for the very policyholders they were meant to protect’, Killick said.
For more information on how the High Court’s ruling may affect your business interruption cover, contact us today.