Implications of the FCA’s Business Interruption Test Case
Does your business interruption insurance cover you for COVID disruption?
The High Court’s much-anticipated judgement on Business Interruption (BI) insurance, which could potentially affect up to 60 insurers and 370,000 policyholders, was handed down on Tuesday in the test case of The Financial Conduct Authority v Arch and Others. The test case was initiated by the Financial Conduct Authority (FCA) in the interests of concerned policyholders over three months ago to address the uncertainty surrounding non-damage BI claims arising out of the COVID-19 pandemic. Under close examination were 21 policy wordings from eight insurers, who agreed to participate in the proceedings as the defendants. The policy wordings were agreed on as representing a sample of wordings that are the most commonly used and that have given rise to considerable uncertainty. These were pulled from so-called ‘disease’ and ‘denial’ or ‘prevention of access’ clauses, as well as hybrid wordings out of the policies operated by the various insurers involved in the proceedings.
The principal issue in the case concerned the proper interpretation and correct implementation of the extensions to BI insurance policies that cover for losses incurred by a policyholder resulting from causes beyond physical damage. The length of the judgement, at 162 pages, reflects the complexity and breadth of the matters that were assessed in the case.
The court held in favour of the FCA on most of the main issues put forward before it. Indeed, for example, in relation to the so-called ‘disease’ clauses, which broadly provide cover losses “following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises” the court rejected the insurers’ interpretation that under such clauses no cover would be available where the insured business would still have been interrupted by the government’s restrictions even if there had been no local occurrence of the virus (i.e. a “but for” test). The court instead agreed with the FCA’s assertion and held that the local connection element of the clause is satisfied where there is a national response to a widespread outbreak of a disease and that “the individual outbreaks form indivisible parts.”
However, what is evident from this judgement is that there are no blanket rules or solutions that are applicable to every situation and the availability of cover will depend in large part on a range of factors, including, in particular, the specific wording of the relevant clause, but also the ways and extent to which Government guidance and legislation issued in response to the outbreak impacted businesses.
This was addressed in the context of ‘denial’ or ‘prevention of access’ clauses. Significantly, the court found that “only a total closure rather than a partial closure will amount to prevention of access.” It therefore follows that any insured restaurants which operated a takeaway service during lockdown will less likely be covered than those that were not in a position to offer such a service, since they did not suffer a “total closure” of their business. Moreover, given that it is access to the premises for the purposes of carrying on the business described in the policy schedule that must be prevented, a distinction was made between institutions, such as restaurants and theatres that started offering takeaway services and remote performances respectively at the beginning of lockdown, but did not do so before, and those that had previously operated such services, and continued to do so. As the former will have undergone a fundamental change to its business from the one described in the policy schedule, and its access for the purposes of carrying its original business will have been restricted, cover is more likely to be available, as opposed to the latter for whom access was not restricted for the purposes of carrying on an existing part of its business.
What will this mean for businesses?
The outcomes of this test case will undoubtedly bring a certain degree of relief to many insured companies, providing a potential recourse to those that have been under immense financial strain over the past six months and have suffered significant losses due to their businesses having been interrupted by the impact of COVID-19. The decision, which is legally binding on the insurers party to the proceedings, and which provides persuasive authority for the interpretation of similar policy wordings, provides much-needed certainty and will resolve many disputes that policyholders may otherwise have had with their insurer.
Nevertheless, it is important to emphasise that this is not the end of this issue. The defendants have the right to appeal the decision, which could be fast-tracked directly to the Supreme Court. Furthermore, the matters examined in the case are broad, but not all-encompassing and it is likely the body of case law in this area will increase in the months and years ahead as outstanding issues and uncertainties are revealed.
While any pay-outs will not be immediate and may not be sufficient to cover all losses for policyholders resulting from the pandemic, the prospect of some compensation will be a boost for many businesses on their road to recovery.