The financial services regulator (the FCA) has today (1 June) set out the detail of its test case strategy to address the dispute about business interruption insurance and Covid-19. In just over a month it has secured a representative sample of policy wordings which it is seeking to test in the High Court in mid-July.
The ongoing dispute in the insurance industry is whether Business Interruption (“BI”) losses due to the COVID-19 pandemic are covered by commercial insurance policies following the government’s nationwide lockdown on the 23 March 2020 which forced the closure/restriction of many businesses.
Insurers delivered an early answer to this question on their own terms, with the consistent response from the industry in late March being that most typical commercial policies do not cover these risks. Insurers explained that they did not intend to cover losses consequent upon a pandemic and, at the time the policies incepted, that the COVID-19 disease was unknown and thus not identified in relevant insuring clauses or extensions. This has led to insurers generally declining cover for BI losses (other than in the instance of specialist policies) caused by the current pandemic.
On 1 May the FCA sought sample policy wordings from insurers, following which it asked policyholders and brokers for views and points of dispute. The regulator’s overall aim is to capture the arguments, ventilate the issues fully and secure an early declaratory judgment from the High Court as to whether typical BI policies and insuring clauses do or do not provide coverage for Covid-19 related losses. Declaratory judgments are rulings in a civil case that declare the rights, duties or obligations of each party in a dispute. They do not include any provision for enforcement. Instead, they state whether the parties may seek or are entitled to relief.
Today, 1 June, the FCA has identified the basket of policy wordings it is seeking to test and is inviting views from the market as to whether these are fairly representative of the key issues. And, as in early May, it is providing an opportunity for policyholder and broker feedback at this new stage. The very high level of activity reported by the FCA over the last month is indicative of the critical importance of the matter: it approached 56 insurers initially and it received over 1,200 submissions from policyholders and intermediaries.
But what is BI insurance in the COVID-19 context?
BI insurance generally provides indemnity to policyholders against losses consequential upon property damage caused by defined perils, such as fire or flood. BI sections of a policy may include endorsements which extend the cover further. The commonly found extensions at issue during the COVID-19 outbreak relate to losses arising from non-damage denial of access, specified infectious/notifiable diseases and from public authority closure/restrictions.
Whether or not there is BI cover for COVID-19 related losses will depend on a number of factors and in particular the specific policy wording.
The COVID-19 business interruption coverage conundrum
Although COVID-19 is an infectious disease, one must look closely at the specific wording of the insuring clause(s) and exclusions in the policy. Some wordings offer cover for closure/restriction of the business premises by a public or local authority following occurrence of an infectious disease. Often such a decision might be taken by local environmental health officials, whereas the current lockdown restrictions were announced by central government in Westminster. The question is whether that action would or should trigger the type of clause described here?
Without the courts providing a legally binding decision to the questions posed by BI policy wordings and COVID-19, the interpretation and applicability of wordings would continue to be scrutinised and legally disputed. Different and uncoordinated cases could lead to divergent outcomes and further confusion. Several large groups of policyholders have already been reported to be considering collective claims. Lloyd’s has warned that compensation due to COVID-19 related claims could cost up to £3.5 billion, a figure which exceeds sums paid out after the 9/11 terrorism incidents.
The regulator’s test case strategy outlined
On 1 May 2020 the FCA announced it would step in and coordinate legal proceedings to secure a declaratory judgment on representative wordings and key issues. The intended judicial determination was welcomed by the British Insurance Brokers Association and the Association of British Insurers.
[ Read BLM’s article here on the FCA seeking a judicial decision on BI coverage warns of the inherent risk of declaratory judgments.]
The courts may consider that matters boil down to the language of the policy wordings and to whether exclusions are applied either narrowly and strictly or purposively and widely. A gloss on this literal approach is that there are other legal rules which require consideration, for example, that the terms of any commercial insurance contract must make “business common sense”.
A further angle is that small and medium sized business (SMEs) can refer insurance disputes to the Financial Ombudsman Service (“FOS”), which is not bound by precedent – unlike the civil courts – and will resolve disputes according to what is “fair and reasonable in the all circumstances of the case” and its decisions are binding on insurers (although challenge by way of judicial review of the FOS’s decision-making process is possible). FOS does offer a viable dispute resolution alternative for policyholders. However, if the FCA is successful in obtaining a declaratory judgment in coordinated litigation before the High Court it will surely be difficult for the FOS to ignore that ruling.
In the latest developments, the FCA today announced that it has approached 56 insurers and reviewed more than 500 relevant policies across 40 carriers. From this sample the FCA has identified 17 policy wordings that it states address “the majority of the key issues that could be in dispute”.
The FCA reports here that 16 insurers use at least one of the policy wordings in the representative sample and that it has asked Arch Insurance, Argenta Holdings, Ecclesiastical, Hiscox, MS Amlin, QBE, Royal & Sun Alliance (RSA) and Zurich to support it by participating in the High Court test case. Although other major insurers may not be actively participating, the FCA has made it clear that “given the representative nature of the policies and wordings we have selected, we expect the test case to provide guidance for the interpretation of many other BI policies that are not in the representative sample. This means that other insurers will also be affected by the test case and its conclusions.”
The regulator also outlined a rapid timetable, subject to court consent. According to that, the legal process is formally due to begin on 9 June when the FCA files the claim form and particulars of claim and, following written pleadings and submissions from the insurer and policyholder interests respectively, that it is looking to secure a window for the crucial hearing on the substance of the case, estimated at 5 to 10 days, in the second half of July.
As with all parts of the UK economy, COVID- -19 has caused major disruption in the insurance sector, where it is leading to an inevitably big-ticket argument about whether trading losses arising from the national lockdown should be indemnified by standard commercial insurance policies. This is a binary question – simply yes or no – the answer to which will be financially critical for all stakeholders. In addition, the industry’s response to this debate and its wider customer engagement during the pandemic, raise significant reputational issues for commercial and personal lines insurers alike.
Unsurprisingly, similar disputes are playing out in other jurisdictions. In France, for example, the Commercial Court in Paris on 22 May found in favour (albeit in a summary decision) of BI coverage for a restaurant group insured under an AXA policy on the basis that the policy wording used did not exclude pandemic risk. The court also dismissed a generalised argument that pandemic risk was uninsurable, preferring instead to resolve the case by close scrutiny of the contractual clauses.
In the longer term, there may be some prospect for developing a new approach in the UK, given the early consideration of the idea of a public-private fund so far referred to as ‘Pandemic Re’. Whether that flies or not is very much for the future. In the here and now the regulator is fast-tracking a resolution of the current BI coverage dispute. If its indicative timetable released today can be adhered to there would look to be a fair chance of a decision before the summer break.
Alistair Kinley – Director for Policy & Government Affairs, BLM
Elliot Black – Trainee, BLM