London’s High Court has handed down its judgment in the Financial Conduct Authority’s (FCA)’s business interruption insurance test case. After considering the arguments advanced by the FCA, the Court found in favor of the policyholders on the majority of the key issues. The case is The Financial Conduct Authority v. Arch and Others.
In bringing the test case, the FCA’s objective was to clarify key issues of contractual uncertainty for policyholders and insurers. In order to do this, the FCA selected a representative sample of policy language from eight volunteer insurers. The FCA estimated that 700 types of policies across at least sixty different insurers and 370,000 policyholders could be affected by the outcome of the test case. The FCA’s aim was to argue the policyholder’s side to their best advantage in the public interest.
Test Case Origins
Hundreds of policyholders who owned businesses worldwide were affected by the COVID-19 pandemic. Many suffered significant losses, resulting in large numbers of claims under business interruption insurance policies.
In the UK, most of the insurance policies at issue are called small or medium enterprise (SME) policies. Most of these SME policies focus on property damage and only contain minimal coverage for business interruption as a direct consequence of property damage. Some policies, though, also cover business interruption from other causes including infectious or notable diseases, known as “disease” clauses, and non-damage denial of access and public authority closures or restrictions, known as “denial of access” clauses. Some of the insurers accepted liability assigned under the policy, but others disputed liability even in cases where their insureds considered coverage existed. The disputes lead to widespread concern about a lack of clarity and certainty.
To establish liability under the sampling of the twenty-one wordings from various insurers, the FCA argued that the “disease” and “denial of access” clauses in the sample wordings provided coverage in the COVID-19 pandemic circumstances and that COVID-19 losses triggered coverage. The court found in favor of the FCA on a majority of the key issues, particularly on coverage triggers under most disease clauses, certain denial of access/public authority clauses, and causation and ‘trends’ clauses. Whether or not coverage was provided depended specifically on the wording of the clauses and how the business was affected by the governmental pandemic response i.e. if the business was subject to a mandatory closure, or was forced to close completely.
The judgment in the test case also clarified that the COVID-19 pandemic and the public and government response were a single cause of loss.
The judgment might seem like a win for policyholders but failed to say that the defendant insurers were liable across all of the different types of wording that were considered. Each policy still needs to be considered individually.
The purpose of the test case was to resolve key contractual uncertainties and causation issues to provide clarity to insureds and insurers. The judgment has provided policyholders with, essentially, an expert legal team to provoke the court to decide some of the more hairy issues that have arisen in insurance policies.
The judgment from the test case may potentially be appealed, but until decided an appeal does not preclude policyholders from seeking to settle claims.