As a firm, we have provided regular updates on the FCA Business Interruption (BI) test case - you can link to our published articles here.
- Proceedings were brought by the FCA
as regulator of BI insurers to resolve issues regarding the scope
of BI policy coverage and causation. The FCA was supported in the
litigation by two action groups - Hiscox Action Group and
Hospitality Insurance Group Action, who both presented arguments on
behalf of policyholders in addition to those presented by the FCA.
The eight Defendants in the test case were:
- Arch Insurance (UK) Ltd
- Argenta Syndicate Management Ltd
- Ecclesiastical Insurance Office Plc
- MS Amlin Underwriting Ltd
- Hiscox Insurance Company Ltd
- QBE UK Ltd
- Royal & Sun Alliance Insurance Plc
- Zurich Insurance Plc
- The policyholders concerned are mostly small/medium sized businesses. 21 sample policy wordings were considered in the proceedings. Ultimately, however, the findings in the test case could affect up to 370,000 policyholders across 60 different insurers.
- The court considered a range of
different BI policy wordings with various specific non-damage BI
insurance extensions, the majority of which were either:
- Disease wordings, providing cover for losses following/arising from/as a result of the occurrence of a notifiable disease within a specified radius (e.g. within 25 miles/1 mile/the "vicinity" of the premises/insured location); or
- Prevention of access wordings, providing cover for loss arising from the prevention/denial/hindrance of access to the property, due to actions/advice/restrictions of/imposed by order of a government/local authority/police/other body.
The Disease Extensions
- The Insurers sought to argue that most policyholders' losses were actually caused by the wider impact of COVID, not any issues local to the policyholder or its business premises, as required by their policies. Insurers contended that the policies were clearly worded to provide cover for outbreaks within a specified distance - 25 miles, 1 mile, the "vicinity" of the premises or the insured location.
- The Court agreed with the FCA's contrary position that local outbreaks form indivisible parts of the notifiable disease - the outbreak of Covid 19 within the UK was the "occurrence". As such, cover should not be limited to outbreaks wholly within the relevant -limited - policy area. Cases within the policy area are not distinguishable from cases outside, as the effects of both on the business are the same.
- The Court felt that to adopt Insurers' position would give rise to an illogical situation where there would be no effective cover if the local occurrence were a part of a wider, more serious, outbreak.
- The Court took a different approach to two of the QBE wordings, finding that the wording used (in particular the words "in consequence of" together with "events") meant that cover was limited to matters occurring at a particular time, in a particular place and in a particular way. Together with a limited radius of 1 mile, this pointed to an intention on the part of the parties for there to be cover only for specific and localised events. Insureds would only be able to recover if they could show that the case(s) of disease within the relevant policy area, as opposed to nationally, were the cause of the business interruption. This may be relevant for some of the local lockdowns the country is now experiencing. But in the context of the overall sample of wordings considered, this is thought to affect only a relatively small proportion of policyholders.
Prevention of access extensions
- The term 'vicinity' was given a much more restrictive meaning in a Prevention of Access context. The Court concluded that it pointed to something happening at a particular time in the local area; the type of scenario contemplated by this cover is a bomb scare or localised flooding. As such (and in stark contrast to the disease extensions) these extensions were intended to provide cover for only localised events.
- Whether or not there is cover in a particular case will depend on the precise wording/terminology used - much will turn on whether wordings refer to access being hindered by 'actions' or 'advice' and whether prevention of access is 'imposed'.
- Also important is whether or not the business was directly forced to close or was affected by the general 'stay at home' requirements.
- The position for those relying on 'denial of access' extensions is not clear, and is likely to need a careful review of the background facts in each case. However, the general view is that it will be much harder for policyholders with this sort of policy language to recover their losses.
- Insurers relied on the decision in Orient Express Hotels Ltd v Assicurazioni Generali SpA  to argue that, if policyholders had been able to open their premises during the pandemic, the lack of passing trade (caused by the wider lockdown) would nevertheless have left them open to suffer the same losses.
- The Judges took a different view and went so far as to state that, in their view, Orient Express was incorrectly decided. Their logic was that, if the rationale in Orient Express were correct, it would produce a perverse outcome whereby the more widespread and significant the problem, the less likely the policyholder would be to recover its losses.
- Ultimately, whether looked at locally, nationally or internationally it is COVID as a whole that is the insured peril here, and its consequences are all to be viewed as one.
- The judgment is, provisionally, good news for many policyholders, especially those with Disease wordings similar to those considered in the test case. For those policyholders with Prevention of Access type wordings, the availability of cover is much less clear - it will depend on the particular facts/circumstances of the each case. There is certainly likely to be further disappointment for many policyholders who might have initially thought from the headlines that this decision had gone in their favour.
- In the short term, the judgment might well be welcome news for consumers. However, in an insurance market that is already seeing reductions in underwriting capacity and rapidly escalating prices, the ramifications of this case on those seeking insurance cover into the future cannot be underestimated. Cover will be harder to obtain, policies will be drafted ever more technically and restrictively, and prices will rise further, possibly markedly so. Regulators need to be careful when they intervene in a free market; the FCA's intervention here - which potentially puts the future viability of several insurers in doubt - has undoubtedly upset the balance, and the long-term effects for the consumer are unlikely to be as positive as recent press releases might assert.
Finally, we must not forget of course that either the FCA, Insurers or both may appeal against the judgment. Indeed, it is anticipated that the case may well 'leapfrog' directly to the Supreme Court for final determination of an Appeal. As such, ultimately the outcome of the test case could be vastly different - it is certainly too early to draw any rigid conclusions as to its long term effect. We are waiting with interest to see whether the FCA may require insurers to make interim payments to policyholders pending an appeal. There is certainly likely to be more to come, and further uncertainty for affected policyholders.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.