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Everything you need to know about the FCA’s business interruption insurance test case

Disputes / 16 September 2020

Tomorrow, the High Court is expected to hand down its long-awaited judgment in respect of the Financial Conduct Authority’s (FCA) test case, seeking legal clarity on the meaning and effect of certain business interruption (BI) insurance policy wordings. In this mini-series of updates, we discuss (i) the background and procedural steps of this test case and what it will decide (below), (ii) a summary of the judgment (due tomorrow) and (iii) implications for policyholders and insurers and the next steps you might need to action.  

Background and procedural steps
In the midst of strict lockdown in the UK, we reported on beginnings of the FCA’s application for a court declaration in respect of specific BI insurance policy wording. This was a novel, proactive and self-funded approach from the FCA in response to an unprecedented need for certainty, and fast. Such critical action was in direct response to the widespread disruption and business closures caused as a result of the COVID-19 pandemic. This has resulted in significant levels of financial loss for many businesses, particularly for SMEs.

The aim of the test case was to resolve contractual uncertainty around the validity of many BI insurance claims related to the COVID-19 pandemic and to ensure policyholders are treated fairly by insurers and insurance intermediaries.

Upon a request to the court, the FCA applied for urgent declaratory relief under Practice Direction 51m, the “Financial Market Test Case Scheme”. The court admitted this case to the scheme and set an expedited trial. In a test case that would normally have taken years, in view of the overriding urgency to protect the interests of many, it came to trial within a mere 52 days from the date of issue. The procedural achievements relating to this case have been described by many legal professionals as remarkable. The key elements of these proceedings involved are:

—  being issued on 8 June 2020 against multiple insurers and interveners, the majority with different legal representation;

—  21 insurance policies to be considered;

—  the issues are believed to affect over 370,000 policyholders;

—  two case management conferences with statements of case totalling more than 500 pages and skeleton arguments amounting to over 1,000 pages; and

—  an eight-day virtual trial that ended on 30 July 2020, that was live-streamed to thousands attracting monumental interest nationally and globally.

What will the test case decide?
Not only will the court’s interpretation of the representative sample of policy wordings be considered legally binding on the insurers that are parties to the test case, but the test case is also anticipated to provide persuasive guidance on similar policy wordings for the Financial Ombudsman Service and the FCA when considering whether insurers have handled policyholders’ claims fairly, and may also be taken into account in other court cases including in Scotland and Northern Ireland.

Whilst the test case aims to provide clarity for policyholders and insurers by resolving some key contractual uncertainties and ‘causation’ issues, it is not intended to resolve all possible disputes relating to this issue and will not determine how much is payable under individual BI policies.

We therefore eagerly await the publication of the judgment tomorrow and will provide you with a concise summary as soon as we can.

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