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Business interruption insurance; FCA latest

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Posted by Susan Hopcraft on 07 July 2020

Susan Hopcraft - Professional Negligence Lawyer
Susan Hopcraft Partner

The insurers have now filed their defences to the FCA’s claim and the FCA has today filed its reply. 

All the pleadings are available on the FCA’s website. 

We now explain the high-level themes emerging.

The insurers’ defences

The defences set out complex arguments over the interpretation of and intention behind the policy wording. Insurers’ key points are:

  • that insurance cover for business interruption does not usually cover losses suffered as a result of a pandemic (it is limited to local issues), and that in the absence of a specific exclusion, cover for a global pandemic should not be inferred;
  • that the global pandemic is separate to the government reaction to that pandemic – insurers compare the reaction of the UK government against that of the Swedish Government despite the disease being present in both countries;
  • there is a difference between an order made by the Government and the guidance that was issued in light of the pandemic. They say that there was no mandatory requirement from government and therefore clauses that seem to cover losses flowing from a public authority closure are not triggered;
  • that any loss has been caused by the pandemic and the impact of that situation on the economy generally, not by any specific shutdown or specific incident or illness;
  • policy references to geographical limits indicate that widespread pandemics are excluded from cover and insureds will, therefore, have to prove that the disease was both present in the specified vicinity of the business and that the disease specifically caused government restrictions imposed and the losses suffered;
  • that some businesses were not forced to close by the government restrictions and were allowed to continue to trade by perhaps offering takeaway services, operating social distancing or trading virtually;
  • that the policy wordings are not ambiguous and should not, therefore, be interpreted against insurers; and
  • that in some instances the insured’s brokers are liable to the insureds for failing to advise on the suitability of the insurance being obtained.

The FCA reply

The FCA’s reply provides a good dose of common sense against some of the more technical insurer arguments.

It sets out the reality of what the Government was telling businesses, in effect, to close (albeit with some slight variations across sectors). 

  • The essence of the Government’s message, whether termed an ‘instruction’, ‘advice’, ‘rule’ or however else expressed in accessible English was a requirement to close.
  • The FCA explain how the data available on Covid-19 cases is not, and cannot sensibly ever be, the definitive answer on whether there were cases to trigger cover. 
  • They also say that occurrences of disease must include unreported or undiagnosed cases and reject insurers’ stance that only a diagnosed case could trigger cover.
  • They make the important point that the policies being considered were insurers’ standard policies imposed on, typically SME, insureds. If the policy does not say what the insurer intended then that is something insurers are stuck with. The wording should be construed against the person who provided it.  
  • The FCA point out that some insurers have used a specific pandemic exclusion in other policies with the same insuring clauses; if the policies being considered do not contain that exclusion, then cover must be included.

They explain that there can be more than one cause of loss, but the COVID outbreak nationally is the same as local cases and the Government’s response to the situation. 

  • Loss caused by these is all recoverable without making a false distinction between causes for policy purposes.

What’s next

The trial is scheduled to commence on 20 July and is set to last two weeks. The Court has a mammoth task in dealing with all of the various clauses for each of the eight defendants and in attempting to issue clear declarations in respect of each of the policy wordings.

Hopefully, the Court will be able to provide clear guidance on what each insuring clause means and that judgment might be provided as early as late August. There is then the possibility of any party who ‘loses’ on any point making an appeal to the Supreme Court. If allowed, that would in all likelihood be fast-tracked for a hearing in September or October if that can be accommodated. 

It is possible that whatever the outcome of the test case, there will still be arguments over cover based on the specific circumstances of each insured because, regardless of the meaning of each policy clause, it may be impossible to avoid a factual analysis of the individual insured’s circumstances on a case by case basis. It is likely to depend on which clause an insured is relying on, the financial picture of the business before and during the pandemic, and the nature of the insured’s business, looking at whether it could have continued to trade through offering take away/virtual services or by implementing the appropriate social distancing measures. This can all be dealt with by way of loss adjustment, and insurers can nonetheless make possibly interim payments if the cover in principle applies.

The trial is going to be live-streamed, and we will be watching developments with keen interest.

About the author

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

Susan Hopcraft

Susan is a disputes and professional negligence lawyer, mainly in the financial services sector.

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