Business interruption insurance; FCA test case update

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Posted by Susan Hopcraft on 19 June 2020

Susan Hopcraft - Professional Negligence Lawyer
Susan Hopcraft Partner

Welcome to Wright Hassall’s podcast with Susan Hopcraft and Laura Heeley in which we aim to provide you with an update on the FCA test case concerning coverage for Covid-19 related losses and therefore claims against business interruption insurance policies.

Susan is a Partner in the commercial litigation team at WH and specialises in Insurance Disputes. 

The FCA commenced court proceedings in the High Court last week and the first Case Management Conference took place on Tuesday 16 June 2020.

What is the purpose of the test case?

The response from insurers to claims for business interruption has largely been to decline cover, adopting an argument, amongst others, that it was not the intention of the policy of insurance to cover a pandemic scenario of the severity we have experienced.

This stance by the insurance industry has resulted in the Financial Conduct Authority (‘FCA’), as the regulator, stepping into the shoes of insureds to challenge the arguments raised by insurance companies and to seek a court decision that the wording of the selected policies, which are the subject matter of the proceedings, should respond to these claims.

The FCA has carefully selected the list of defendants in order to obtain a decision which is as far reaching in its application across the common business interruption clauses as possible so that the decision can offer clarity on cover to as many insureds as possible.  The 8 defendant insurers are:

  1. Arch Insurance (UK) Limited
  2. Argenta Syndicate Management Limited
  3. Ecclesiastical Insurance Office Plc
  4. Hiscox Insurance Company Limited
  5. MS Amlin Underwriting Limited
  6. QBE UK Limited
  7. Royal & Sun Alliance Insurance Plc; and
  8. Zurich Insurance Plc

This is a welcome step taken by the FCA to take the fight forward for insureds in the swiftest and most cost effective manner possible.

The timetable for a decision

On Tuesday, the court confirmed that the case will be expedited, meaning it will be dealt with urgently, and set a timetable for what will happen next.

The FCA has started the claim and filed its particulars of claim which set out the case on behalf of insureds.  The insurers are to file their defences by 23 June and a further Case Management Conference has been scheduled for 26 June 2020 to deal with any further procedural issues to ensure the case can be heard by Lord Justice Flaux and Mr Justice Butcher over the course of a two-week court hearing starting on 20 July 2020.

We can hopefully expect to see a decision from the High Court in August. That decision can of course be appealed to the Supreme Court by either party and we would hope that any appeal decision would be received quickly as well, perhaps in September 2020.

This is an extremely fast timetable, with claims of this nature usually taking approximately 18 months to be determined.  Encouraging steps are therefore being taken to obtain clarity for insured and insurers as quickly as possible.

What arguments are insurers raising?

It appears from the Case Management Conference this week that the case is going to be hotly contested and in particular 2 very technical arguments are being debated.

The first question for the court to decide is to what extent individual insureds will be required to prove incidents of the virus within their geographical location and whether a standard and accepted methodology should be used to calculate this and whether expert evidence is going to be required.  The concern here is that individual insureds will not have the resources to present this kind of evidence on a case by case basis and the FCA is asking the court to permit the insureds to rely on a standard methodology for calculating the virus presence in their area.  The other issue is that the existence of the virus in any specific area should not really be relevant to claims for business interruption – the country went into lockdown, people were told to stay at home, and consequently many businesses were forced to close or lost a significant amount of business.

The other highly complex issue is what the measure of indemnity for insureds will be if cover under the policies is triggered.  Here an argument is being raised by insurers that there should be a distinction between the situation businesses found themselves in as a result of the pandemic itself and the situation that was caused by the restrictions that were put in place by the UK government.

Essentially insurers are arguing that whilst the risk of a potential pandemic could have been foreseen by the parties to the insurance contract, it could not have been predicted that the UK government would take the draconian measures it did in response to the pandemic.  Insurers are seeking to adduce evidence as to historical reactions to pandemics such as the ‘Asian Flu’ (H2N2 virus) pandemic in 1957and in relation to COVID-19, the Swedish experience given the significant differences in the response measures taken by the Swedish government.

The Hiscox arbitration

We have also seen in the news today that there is now a separate arbitration in relation to Hiscox policies, alongside the test case.  We have limited information about this and it is unclear why Hiscox insureds have taken this additional step. Arbitration is a separate and private process in which an elected arbitrator will consider the arguments and issue a decision. The decision will not be made public and will be private between the parties.  It could be that the parties are testing the wording through a private process to obtain some indication of the likely stance that may be taken by the courts, however, it is difficult to see how any arbitration proceedings could be dealt with quickly enough to provide any helpful direction for the test case. 

What should insureds do whilst they are awaiting the outcome of the test case?

Insureds should:

  • Ensure they have made a claim for business interruption against the policy. Insurance policies have strict and short notification periods which still need to be adhered to. 
  • Continue gathering evidence to collect the information needed to show the losses they have suffered
  • Watch this space for an update on the test case decision

Once a decision is received from the court, and if in favour of Insureds, they will then be in a good position to proceed with their claim under the policy and to liaise with brokers / loss adjusters to seek a pay-out.

The High Court decision of course will only be in respect of the insured’s liability to pay and therefore Insureds will still need to be ready to show the extent of their losses and to agree an acceptable payment figure with the loss adjusters.  If insureds meet obstacles in this respect, assistance can be provided by solicitors such as presenting the claim and making any necessary arguments as to why the policy should respond and in what amount.

Even for insureds that do not have a policy with one of the name defendants, it is likely that the wording of their policy will be at least similar to that of the test policies and therefore the decision is likely to be at least persuasive in respect of their ability to claim cover.

We will endeavour to provide updates on the position as soon as they become available.  Further detail can be found on the FCA website.

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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