On the 15th of September 2020, the High Court handed down judgment in the COVID-19 Business Interruption insurance test case of The Financial Conduct Authority v Arch and Others. The Court found in favour of the arguments advanced for policyholders by the FCA on the majority of the key issues.
The judgment in the test case is legally binding on the insurers that are parties to the case in respect of interpreting the BI policy wordings considered by the Court. It also provides persuasive guidance for the interpretation of similar BI policy wordings and claims that can be taken into account:
• In other cases, including in Scotland and Northern Ireland.
• By the FOS, in considering BI policy complaints.
• By the FCA, in looking at whether insurers are handling claims and complaints fairly.
There were 21 sample wordings considered, but the FCA estimates that, in addition to these particular wordings, some 700 types of policies across 60 different insurers and 370,000 policyholders could potentially be affected by the test case. However, the FCA said the ruling did not find the eight defendant insurers liable across all 21 different types of policy wording in the representative sample considered by the Court. Each policy needs to be considered against the detailed judgment to work out what it means for that policy.
The FCA state:
‘The judgment says that most, but not all, of the disease clauses in the sample do provide cover. It also says that certain denial of access clauses in the sample provide cover, but this depends on the detailed wording of the clause and how the business was affected by the Government response to the pandemic, including for example whether the business was subject to a mandatory closure order and whether the business was ordered to close completely.’
Many SME policies, which this test case was intended for, are focused on property damage and only have basic cover for BI as a consequence of property damage. Some policies also cover for BI from other causes, in particular infectious or notifiable diseases (“disease clauses”) and non-damage denial of access and public authority closures or restrictions (“denial of access clauses”). There are further provisions which are engaged by restrictions imposed on the premises in relation to a notifiable disease (“Hybrid clauses”).
One of the key arguments that was put forward by Insurers was in regard to “causation”. Insurers relied on the decision in Orient Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Orient Express) for this argument. The Court was able to distinguish the Orient Express from the test case and found that the issues of causation actually followed from the construction of the wordings before it. Further, it held that, for all policies, when assessing how a counterfactual, “but for” test or “business trends” clause should be applied, one must start with the insured peril itself. The Court concluded their analysis of Orient Express by stating that if it had been necessary for the case, they would have concluded that it was wrongly decided and declined to follow it.
The issue of causation also appears in relation to the “trends” clauses which are included in several of the policies. Typically, these clauses require an adjustment of any insured business interruption loss to take account of variations in the circumstances affecting the business before and after the loss. Zurich argued that the adjustments mandated by the trends clauses necessarily require an assessment of what would have happened “but for” the insured peril.
The Court found that the Insurers’ interpretation of these clauses would result in the cover becoming largely “illusory”. As such, it agreed with the FCA that it would be contrary to generally held principles for a loss (that has been established by the policyholder following the insured peril) to be limited by the inclusion of part of that insured peril in the assessment of the position of the policyholder had the insured peril not occurred.
The judgment is a positive one for the 370,000 Policyholders that the FCA state “could potentially be affected”. Specifically, we believe the judgment will (i) help those directly where it is supportive of the wording in their Policy that the judges have opined upon; and (ii) provide arguments on construction of policy wordings for those Policyholders who might have similar wordings which are not the same as those opined upon but this will not necessarily eradicate coverage disputes.
Most of the policies being focussed on are those taken up by largely SME entities. For larger organisations, who often take out bespoke Property Damage and Business Interruption cover, a great deal will turn on the precise wording of those policies. However, it may be that Insurance Brokers, when considering bespoke policies moving forward, seek to draft in wordings which the Court has opined upon as being effective.
The Court’s opinion of the wide area damage argument brought in by the Orient Express case will no doubt be also welcomed by Policyholders. Insurers have used such arguments over the years to achieve significant discounts to insurance indemnities in coverage disputes.
Whilst the judgment is welcome and much needed clarification has been forthcoming, particularly for SME entities with the relevant wording, we do not think that it will eradicate disputes over coverage when it comes to the larger coverage disputes, unless of course some of the wordings over which the Court have opined find their way into the bespoke wordings.
Further, Insurers have asked for more time to put in an application for permission to appeal, indicating that an attempt to appeal by them is likely. Any applications to appeal will be heard at a consequential hearing before the High Court and, as with the case so far, the FCA is seeking to reach a final decision as soon as possible.
This decision considers for the first time a number of important issues in relation to business interruption policies generally, as well as specific coverage for COVID-19 related claims. There is significant detail in the judgment covering many such issues and we will be issuing further specific briefings over the coming weeks covering a number of issues, including wide area damage and the criticism of the Orient Express decision. We will also be commenting on the court procedure and the exercise of the FCA’s regulatory powers to effectively advocate cover on behalf of policyholders.