On 15 September the High Court handed down its judgment in the Financial Conduct Authority’s COVID-19 business interruption insurance test case. While there are mixed results in relation to a large number of questions, the court has ruled in favour of the policyholders’ arguments on most of the issues.
The FCA has claimed the judgment as a victory. In a statement it said:
“…The Court found in favour of the arguments advanced for policyholders by the FCA on the majority of the key issues…We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market. We are pleased that the Court has substantially found in favour of the arguments we presented on the majority of the key issues. Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders…”
The trial was heard over eight days in July by Lord Justice Flaux and Mr Justice Butcher. The case was brought by the FCA as a test case to determine issues of principle in relation to policy coverage for business interruption losses under certain policy wordings in the context of the COVID-19 pandemic. The FCA represented the interests of a large number of policyholders who purchased the relevant policies, many of whom are small to medium sized entities.
The defendants were eight insurers who had agreed to participate. Two policyholder groups were also permitted to intervene. The court considered 21 “lead” policies. The FCA estimated that, in addition to the policies chosen for the test case, some 700 types of policies across 60+ different insurers and 370,000 policyholders could potentially be affected by the test case.
The relevant policies all contained non-damage “extensions” to “standard” business interruption cover. The “standard” cover is contingent on the occurrence of physical or material damage. The court was reviewing whether certain extensions of cover, which are not contingent on physical or material damage having occurred, provide cover in the context of the COVID-19 epidemic.
The court reviewed the policies on the basis that the relevant provisions of the lead policies fell into three categories:
- “Disease clauses” – these contain provisions which, in broad terms, provide cover in respect of business interruption in consequence of or following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises.
- “Hybrid clauses” – these refer both to restrictions imposed on the insured premises and to the occurrence or manifestation of a notifiable disease.
- “Denial of Access clauses” – these provide cover where there has been a prevention or hindrance of access to or use of the insured premises as a consequence of government or local authority action or restriction.
The court ruled that a significant number of the clauses provide cover in principle, although in relation to the Denial of Access provisions, whether there was cover was more dependent on the precise wording and the facts of the claim.
The insurers had made lengthy submissions about the principles of causation. Underlying their submissions about the “but for” test for causation was the argument that various different potential causes should be isolated; and that the losses were caused by the pandemic and would have been suffered whether or not there had been any government action. The court, however, ruled that the issues of causation resolve themselves as part of the process of construction of the specimen wordings, mainly by the correct identification of the insured peril. The insurers had relied heavily on the decision in the Orient Express case. The court decided that Orient Express was distinguishable from the test case and was not concerned with the type of insured perils in the specimen wordings. The court found that the insured perils in many of the specimen policies were “composite” or “compound”, involving interconnected elements, including the pandemic itself. Once the court took a broad view of the insured perils, it followed, in the court’s view, that the causation issue was resolved.
The issue of causation is also relevant to the construction of “trends” clauses and similar provisions. These provisions are aimed at quantifying the insured loss by taking account of relevant factors that would have affected an insured business in any event. The court provided guidance on how these types of provision should be applied. First, they do not delineate the cover; and, second, the object of such clauses is to put the insured in the same position that it would have been in if the insured peril had not occurred. If this guidance is followed, the application of a trends clause will make no material difference to the quantum of recoverable loss.
Certain of the policies (at least on the FCA’s case) require proof of the occurrence or manifestation of COVID-19 within a specified geographical area which includes the insured premises (the “prevalence” issues). The FCA had been offered an additional trial to address the prevalence issues (largely regarding the types of methodologies that could in principle discharge the burden of proof), but the FCA had decided against a second hearing. The result is that some of the potential issues have not been decided. The court said that it was not possible to provide any generally applicable guidance as to what evidence may prove actual prevalence in varying factual contexts and for the purposes of different policies. Having considered the questions to be addressed and the concessions made by the insurers, the court expressed the hope that the insurers would be able to agree on any relevant issues of prevalence that arise.
The court was reviewing only those 21 wordings before it and was not applying its judgment to any specific claim. The test case is aimed at providing guidance in relation to general issues so that insurers and policyholders can review their own position in the context of their specific wording and the particular facts.
The parties are currently considering whether to appeal. They have agreed that they would seek to expedite any appeal and it is expected that they would apply to “leapfrog” the Court of Appeal and take issues straight to the Supreme Court.