FCA test case appeal: Further success’ for business interruption policyholders in Supreme Court judgment
On 15 January 2021, the Supreme Court ‘substantially’ allowed the FCA’s appeal on behalf of BII policyholders’ in its 114-page The Financial Conduct Authority v Arch & Others judgment . The decision also has implications on business interruption insurance policies beyond the coronavirus (COVID-19) pandemic.
Whilst the majority of business interruption insurance (“BII”) policies are limited to providing basic cover for business interruption that occurs as a result of property damage, some BII policies go further and provide cover for other business interruption causes including (i) infectious or notifiable diseases (known as ‘disease clauses’), and (ii) non-damage denial of access and public authority closures or restrictions (‘denial of access clauses’).
The FCA argued that the ‘disease clauses’ and ‘denial of access clauses’ under the representative sample of 21 different policy wordings that were before the court, provided BII cover in the circumstances of the COVID-19 pandemic.
High Court Judgment
Our 16 September 2020 article summarised the ‘Success’ for policyholders in FCA test case for business interruption suffered during lockdown.
In essence, the High Court decided that most of the ‘disease clauses’ and certain ‘denial of access’ clauses (12 policy types from the sample of 21, issued by six insurers) provided BII cover and that the COVID-19 pandemic and the Government and public response caused business interruption losses.
However, the FCA, 6 of the 8 defendant insurers and the Hiscox Action Group, appealed the High Court judgment.
The appeals related to issues including the interpretation of ‘disease clauses’, ‘denial of access clauses’, ‘causation’, ‘trends clauses’ and ‘pre-trigger losses’.
Supreme Court Judgment
The Supreme Court judgment dismissed the appeals of the relevant insurers (only allowing three of the Hiscox Action Group’s appeals) for different reasons to the High Court and ‘substantially allowed’ the FCA’s appeal on behalf of BII policyholders.
— ‘disease clauses’ were given a narrower interpretation than that of the High Court, but the implications were limited by the Supreme Court’s approach in relation to ‘causation’ (see below);
— ‘denial of access clauses’ were given a wider interpretation than that of the High Court, including that BII cover may be available to policyholders for the partial closure of premises (as well as full closure);
— as to ‘causation’, the Supreme Court acknowledged that the “but for” test is appropriate in most circumstances. However, the “but for” test is not appropriate if it results in a narrowing, or removal, of cover, that goes against the intention of the parties when interpreting the policy as a whole;
— it reduced the circumstances in which insurers could rely on ‘trends clauses’ to attempt to reduce a pay-out, otherwise due to the BII policyholders, on the basis that the losses were caused equally by other (uninsured) events also caused by the COVID-19 pandemic;
— lost revenue calculated pursuant to certain ‘pre-trigger losses’ should be carried out based on what the BII policyholder’s revenue would have been had there been no COVID-19 pandemic; and
— in reaching its judgment, the Supreme Court also overruled the decision in Orient-Express Hotels Ltd v Assicurazioni General SpA .
The Supreme Court’s judgment completes the legal process of the FCA test case and means that more policyholders will have valid claims and some pay-outs will be higher.
Sheldon Mills, Executive Director, Consumers and Competition at the FCA, commented:
“Our aim throughout this test case has been to get clarity for as wide a range of parties as possible, as quickly as possible, and today’s judgment decisively removes many of the roadblocks to claims by policyholders… We will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible. Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps”.
Whilst the FCA test case was not intended to encompass all possible disputes, it has resolved some key contractual uncertainties and ‘causation’ issues to provide clarity for BII policyholders and insurers. The Supreme Court’s judgment does not determine how much is payable under individual policies but, helpfully, sets out much of the basis for doing so.
The FCA and the defendant insurers are also currently working as quickly as possible with the Supreme Court to enable it to distil the judgment into a set of declarations. That, and further publications by the FCA, will provide useful guidance for policyholders, insurers and their advisors. It is anticipated that the FCA will shortly publish a list of BII policy types that potentially respond to the COVID-19 pandemic and a set of Q&As for policyholders to assist them and their advisers in understanding the test case.
Whilst the FCA test case is seen as a ‘success’ for BII policyholders, each policy will still need to be considered against the detailed judgment to assess whether your business is likely to benefit from BII cover as a result of the Covid-19 pandemic and, if so, the extent of such BII cover.
In addition, BII policies may also be more responsive to other ‘wide-area damage’ business interruption events (such as storms or floods) following the Supreme Court’s decision.Back to Legal Updates →