Judgment in FCA Business Interruption Test Case provides hope to thousands of businesses

September 15, 2020

By Jonathan Lowe

A few months ago I wrote a few articles about a test case brought by the Financial Conduct Authority (please see here). The test case was brought in an effort to bring clarity and re-assurance to businesses which had not only been decimated by the Covid 19 pandemic but had also been refused any cover by insurers when making claims under their business interruption insurance policies.

The FCA, with co-operation from a number of insurers who wrote a large number of policies providing business interruption cover, chose 17 different wordings which covered the majority of issues that could be in dispute between insurers and their policyholders, and sought a declaratory judgment as to the effect of the various wordings.  The wordings were split into 3 broad categories as follows:

  • Disease wordings which provide BI cover arising from, in consequence of, or following the occurrence of a notifiable disease within a specified radius of the business premises or within the vicinity of the premises
  • Prevention of Access/Public Authority wordings which provide cover in circumstances where access to the business premises had been hindered or prevented as a consequence of government or other public authority action
  • Hybrid wordings which include provisions involving restrictions imposed on business premises in relation to a notifiable disease

Today the judgment has been handed down in The Financial Conduct Authority v Arch and Others [2020] EWHC 2448.  It is a long and complicated judgment, and will require a good deal of consideration, and no quick article can do justice to the detail, but the very brief headlines to allow an overview are as follows.

The Disease Wordings

Insurers argued that cover was only provided where there was a local occurrence of a notifiable disease, rather than the wider disease spread.  In doing so they attempted to require the wordings to restrict the proximate cause of the loss to being a local event.

The FCA argued that the test of proximate cause of loss for the purposes of the clauses was satisfied where an outbreak in the policy area was an indivisible part of the pandemic as a whole and therefore cover was not limited to the effect of any local occurrence.  In the alternative it was argued that the disease being in many individual places amounted to many different effective causes.

The court agreed with the FCA:

Cover was triggered when there were diagnosable, rather than diagnosed, cases of the disease in the relevant policy area.

A national response to a widespread outbreak of disease provides the causal link between the 2 parts of the insured peril (1) the interruption to the busines and (2) the occurrence of the notifiable disease in the insured area.

Cover was not restricted to outbreaks wholly within the insured area.  The wordings did not require that the disease should only occur in the insured area, only that there was a notifiable disease that had come close to the business premises.

For those wordings that included the requirement that the occurrence of a notifiable disease had come within the “vicinity” of the business premises, vicinity was taken to be England and Wales.

Two of the QBE wordings included cover for loss in consequence of an event. Those wordings were found to be more restricted and contemplated cover being provided in response to a more specific localised event rather than a national response.

Prevention of Access/Public Authority Wordings  

The wordings under consideration which fit into this category were in policies underwritten by Arch, Ecclesiastical, Hiscox, MS Amlin, RSA and Zurich.

Whereas cover will be provided in some cases, there is not as much obvious comfort to be taken by policyholders from the court’s findings in relation to these wordings.

The conclusions in relation to a number of wordings are that these wordings are to be interpreted rather more restrictively so that in many cases it will be considered that the cover was intended to respond to the actions of the authorities in response to localised incidents.

It will be important to consider closely the actual wording of the policy, the nature of the actions of the authority and their effect, so that, for instance, if a wording requires there to have been prevention of access the premises will have been required to be closed such that they would have needed to be subject to an order requiring them to close.  Other wordings may not, however, be so strict.

It will need to be considered exactly what effect the action of the authority in question had on the particular business premises. For instance, the government’s announcements on 16, 20 and 23 March were considered by the court to be advice rather than orders, however the Regulations issued by the government on 21 and 26 March were more than advice and therefore may lead to cover being provided.

In short, each case will need to be considered closely and care taken to analyse the policy wording, the steps taken by the authorities and the effect that any such steps had on the policyholder’s business premises.

Hybrid Wordings

Not surprisingly when seeking to apply these wordings the court allowed a wider interpretation of the disease section of the wording but a narrower application of the prevention of access requirements, in keeping with its conclusions as discussed above.

Evidence of Occurrence

The burden is on the policyholder to prove to the extent required by any particular wording that there was an occurrence of the disease.

However, the insurers made various concessions which should hopefully allow that burden to be discharged in a significant proportion of cases.

For instance, insurers accepted that specific evidence, NHS Deaths Data, ONS Deaths Data and reported cases are all in principle capable of establishing the presence of the disease, and they did not suggest that a policyholder will require to establish presence of the disease in the insured area with absolute precision.

Conclusions

Whereas there are a number of encouraging findings in the judgement for policyholders, particularly for those with policies which include the disease wording, each case will turn on its own facts and will need to be considered closely and in detail and the specific wording, facts and evidence applied in the context of the guidance and clarification provided by the court.

It is, of course, open to either the FCA or the insurers to seek to appeal but any such appeal will be fast-tracked.

 

Before transferring to the Bar in 2008 Jonathan Lowe was Head of Commercial Insurance at Keoghs. He has a broad commercial practice but in particular has over 25 years’ experience in insurance law.