Nuanced outcome to FCA business interruption insurance test case

The Commercial Court gave judgment yesterday in the BI insurance test case initiated by the Financial Conduct Authority (FCA), whose CEO has said that they “are pleased that the Court has substantially found in favour of the arguments we presented on the majority of the key issues”.

The FCA’s aim in taking these proceedings was to secure clarity on behalf of policyholders about how non-damage business interruption insurance policies should respond following the Coronavirus outbreak and the associated operating restrictions. The sheer breadth of the case – eight insurers directly involved, 60 insurers affected, 700 wordings and 370,000 policyholders potentially in scope – suggested from its outset that a binary ‘cover’ or ‘no cover’ outcome looked highly unlikely.

The court has delivered a careful and nuanced decision dealing with the policy wordings at issue. That is summarised in the body of this piece, but the next section deals with the more immediate implications.

What the decision means and likely next steps

  • The judgment indicates there is BI insurance cover in principle under a proportion – but by no means all – of the wordings considered by the court.
  • Subject to issues being raised on appeal, we would expect insurers and policyholders to proceed towards claim settlement discussions reasonably quickly.
  • In that regard the FCA has advised that any policyholder who has made a claim potentially affected by the decision should receive a communication from their insurer within seven days (this stipulation will lead to significant activity across the industry given the numbers of policyholders potentially involved).
  • The FCA has also already arranged two sessions next week at which policyholders can discuss the decision with its legal team.
  • The prospect of an appeal looks fairly likely, as does any such appeal being expedited and/or proceeding by way of ‘leapfrog’ to the Supreme Court.
  • All these issues will become clearer in a matter of weeks, particularly at the so-called ‘consequentials hearing’ which is being arranged to deal with outstanding procedural and administrative issues and which, as with the test case trial itself, will be accessible via a live-stream feed from the court.

What the court decided in general terms

The BI policy wordings fell into three broad categories: (i) disease clauses, (ii) denial of access clauses and (iii) hybrid clauses, which feature elements of (i) and (ii).

An orthodox approach to policy construction

Before considering each of those, the court not only set out the chronology of the evolving legal restrictions imposed during the second half of March in particular but it also reaffirmed the correct approach to construction of contracts such as insurance policies. The proper approach, based on recent case law is that:

“The court must ascertain what a reasonable person, that is, a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the contracting parties to have meant by the language used: Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 at [14]. This means disregarding evidence about the subjective intentions of the parties: Rainy Sky at [19] [and] commercial common sense should not be invoked retrospectively, or to rewrite a contract in an attempt to assist an unwise party, or to penalise an astute party.”

A broad analysis of the three categories of wordings

In general terms with regard to disease wordings, the court considered that the disease “occurs” when the illness is sustained, which means someone is suffering from it – and not on diagnosis. Thus there would have been an “occurrence” of COVID-19 within an area defined by the policy (and some stretched to a 25 mile radius from the insured business) when at least one person infected with COVID was in the relevant area.

BI cover written as “following” such an occurrence would be triggered and it was not necessary to establish proximate causation here since “a looser link should be used in recognition of the fact that [occurrences of the disease in the area] would not of themselves directly cause interruption to or interference with the business, but would in almost every case have such an effect only via the reaction of the authorities.” The court added that if this analysis is correct, “then the issues as to causation largely answer themselves.”

Denial of access clauses turn on prevention of access to or use of the premises as a consequence of government or local authority actions or restrictions. As a general point, the court accepted the insured peril here is discrete regulatory action barring access and not, as the FCA attempted to argue, the overall national emergency due to the pandemic. Further, the ‘prevention’ would need to be prevention for the purposes of carrying on the insured business and it would need to be complete prevention (although a different outcome would be likely if a ‘hindrance’ wording had been used).

Hybrid clauses – as might be expected – feature restrictions imposed by authorities and an occurrence of a notifiable disease. It was clear to the court that using “imposed” in this context meant “something which is mandatory … something that has the force of law … Guidance, exhortation and advice given by the Government, including by the Prime Minister, including as to social distancing, do not count as ‘restrictions imposed’ by a public authority.” As regards the meaning of “occurrence” here, that could not mean each single case of a disease and “there can be ‘an occurrence’ of a notifiable disease for the purposes of the clause if there is an outbreak of such a disease.” It followed that the national outbreak of COVID could qualify as an “occurrence” under such clauses.

After setting out these general points, the court then analysed in fine detail how each of the particular wordings at issue in these cases would respond to BI claims. This analysis takes up much of the 150 page judgment and we do not propose to summarise it here.

Assessing the counterfactual

The counterfactual is, in effect, the alternative world to be considered when attempting to value the BI loss, i.e. what would the business have turned over but for being unable to trade? The FCA argued that the correct counterfactual was one in which the legal restrictions and the underlying pandemic must be stripped out or disregarded; so in effect the loss would be, more or less, the normal trading revenue (subject to any relevant policy limit). Insurers argued that only the restrictions should be disregarded, meaning that the loss would be much lower and measured on what the business might have turned over had it been able to operate during the pandemic.

There was controversial authority for the latter in an English case (Orient Express Hotels) that related to restrictions imposed after Hurricane Katrina. In the present test case the judges were troubled by the decision, noting that “In our view, the consequence which flows from the Orient Express decision, that the worse the fortuity which befalls the insured and the vicinity of the insured’s premises, the less the insurance responds, cannot have been intended.” The judges said in clear terms that they would have concluded that it (Orient Express) was wrongly decided and would have refused to follow it if it had applied to their decision on the counterfactual in the test case. They did not go quite that far, however, as it was distinguishable on the facts from the present context.

The prevalence of COVID

The question of prevalence concerns what evidence an insured might need to establish to the presence of the disease and therefore satisfy the burden of proof in any given BI claim.

At one point, the dispute on this aspect meant that it had been at risk of being held over for a second trial later in the autumn. In the run up to the hearing in July, however, the FCA and insurers were able to proceed on agreed facts, with insurers accepting that NHS and ONS data on deaths and reported cases were, in principle, capable of proving prevalence.

Nevertheless, the question is still unresolved and the court refused to offer even ‘in principle’ guidance, finding that “It is not possible for us 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 … The concessions which have been made by the insurers are important. It is our hope and expectation that in the light of them insurers will be able to agree on any issues of prevalence which actually arise and are relevant to particular cases. Further than that, however, we are not able to go.”


This is a hugely important case for the industry and its customers and, as the judges said: “It was and is evident that a tremendous amount of hard work went into the preparation and presentation of the case at trial”. From the outside, it certainly appears that the case was conducted with professionalism, flexibility and innovation by all involved.

The subject matter is critical to the survival of certain businesses as well as to the reputation of the insurance sector. It is simply too early to estimate the longer term prognosis for either of those topics, especially given the very real prospect of an appeal. It is also too early to assess any possible wider ramifications of the regulator initiating adversarial civil proceedings against a significant cohort of its regulated community. We will of course provide a further update following the consequentials hearing.

The link to the FCA press release following the judgment can be found here.

Alistair Kinley, Director of Policy & Government Affairs

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