On 10 June the Financial Conduct Authority (FCA) updated the information on its webpage on the High Court test case in relation to business interruption (“BI”) insurance.
The coronavirus pandemic has led to widespread disruption and business closures resulting in substantial financial loss. Many customers have made claims for these losses under their BI insurance policies. There has been widespread concern about the lack of clarity and certainty for some customers making these claims, and the basis on which some firms are making decisions in relation to claims.
According to Chris Woolard, interim CEO of the FCA, most BI policies don’t cover Covid-19. He declared to the press: “Around 90 percent of those [policies] cover what we might term fire and flood, so they are very basic policies about damage to the property that they may be using to run their business”. He added that a number of policies were taken out to cover illness on or around the premises, or if authorities shut the premises, and that the FCA’s test case hoped to bring clarity to the situation.
The variation in the types of cover provided and wordings used mean it can be difficult to determine whether customers have cover and can make a valid claim. There are genuine doubts over the appropriate interpretation of the wording in some cases. This has led to uncertainty and disputes, with many customers who believe they have valid claims having these rejected by their insurer. Woolard said: “Some of those BI policies are paying out in the pandemic but there are others that are in dispute and obviously those disputes matter incredibly to the policyholders, but obviously the insurers also have the right to defend their own wording.”
Therefore, the FCA intends to obtain court declarations as part of a test case, aimed at resolving the contractual uncertainty around the validity of many BI claims. The regulator expects 8500 claims could fall under the test case policy wordings, while the total value of these claims could be £1.2bn
What the test case will decide
The test case involves eight insurers: Arch, Argenta, Ecclesiastical, Hiscox, MS Amlin, QBE, RSA and Zurich. For the purpose of the case, the FCA is adopting the role of the insureds.
The Court will have to determine what was the exact cause of the losses to business, and whether they were sustained directly as a result of the incidence of Covid-19, or to wider conditions triggered by the pandemic, including lockdown, self-isolation and social distancing. Lydia Savill, a senior associate at Hogan Lovells, said: “The FCA, on behalf of the policyholders, is taking a broad approach towards causation and you can see from insurers’ point of view that this might be an area of challenge.”
In an article published on 17 June 2020, The Insurance insider reports that the High Court will focus as well on policy wordings which respond only if there is a disease within particular vicinity. The FCA endorsing the role of policyholders, it will argue that the widespread of Covid-19 should be a sufficient trigger, rather than insureds having to identify a specific local outbreak. “As an alternative to proving individual cases of Covid-19 in individual locations, presence can be proven by statistical evidence, especially for urban areas.”
The result of the test case will be legally binding on the insurers that are parties to the test case in respect of the interpretation of the representative sample of policy wordings considered by the court. In respect of non-parties, the result will form persuasive guidance for the interpretation of similar policy wordings and claims.
The test case is not intended to encompass all possible disputes, but to provide clarity to policyholders and insurers. It will not determine how much is payable under individual policies, but will provide the basis for doing so.
Start of proceedings in the High Court
The FCA has updated the initial list of affected insurers and the policy wordings they use to reflect the changes to the Representative Sample of Policy Wordings. This list is not exhaustive, the FCA intends to publish a list of all the relevant insurers and wordings that may be impacted by the test case in early July.
Since 1 June the FCA has received more than 270 submissions from policyholders and other stakeholders, and has conducted more than 45 consultations.
The FCA said today the court hearing would take place between 20-23 July and 27-30 July.
Engagement with policyholders and insurance intermediaries
The FCA developed a Policyholder Engagement Statement for policyholders and insurance intermediaries which sets out its approach to the High Court test case for BI insurance policies, with the key points as follows:
- The FCA will put forward policyholders’ arguments to their best advantage.
- The intended action will not prevent policyholders from pursuing issues through negotiated settlement, arbitration, court proceedings as a private party, or taking eligible complaints to the Financial Ombudsman Service.
- Ensure that policyholders and insurance intermediaries are properly engaged throughout the test case process.
- Information provided by policyholders in response to the FCA’s requests will be treated as confidential and covered by the FCA’s litigation privilege.
- The FCA expects to make public all the ‘pleadings’ in the test case