The High Court has yesterday handed down its judgment in the test case of The Financial Conduct Authority v Arch and Others. The case, brought by the Financial Conduct Authority on behalf of policyholders and joined by two intervening action groups, relates to the availability of business interruption cover for losses arising from the COVID-19 pandemic. The guidance provided by the court favours the majority (but not all) of the arguments put forward by the FCA, in a significant decision which could benefit some 370,000 policyholders.
The expedited trial took place over eight days in July 2020 and was the first case to be brought under the Financial Markets Test Case scheme. Speaking at the outset of the case, the FCA Interim Chief Executive Christopher Woolard said: “The court action we are taking is aimed at providing clarity and certainty for everyone involved in these BI disputes, policyholder and insurer alike.” The proceedings considered a representative sample of 21 different policy wordings from eight insurers to determine how business interruption policies should be interpreted and to resolve disputes relating to causation.
Business interruption insurance typically covers physical damage to the insured premises. However, enhancements may be included to cover a wider range of ‘interruptions’. The test case selected policy wordings relating to three categories of enhancements which were present in polices purchased by many small- and medium-sized businesses to protect them from losses suffered as a result of a closure of their businesses:
A) Denial of Access: cover for business interruption by an action of a competent authority preventing access to the insured premises due to an emergency or danger within a certain distance radius of the premises;
B) Notifiable Disease: cover for business interruption triggered either by an outbreak of a notifiable disease at the premises itself or within a certain distance radius; and
C) Hybrid clauses, which link denial of access to the occurrence of an outbreak of disease.
The court determined that the COVID-19 outbreak and the government’s response to it can be considered a single outbreak for the purposes of insurance policies. The court made determinations on each policy wording used in the test case, and many of its conclusions are specific to the policy wording in question (having regard to the relevant definitions, extensions, and exclusions). In relation to each of the three main categories of clauses, the general findings were as follows:
A) Denial of Access: the majority of clauses did not provide cover because they relate only to localised events, and anything short of complete closure would not constitute prevention of access. However, the court differentiated policies which referred to a ‘hindrance’ to access.
B) Notifiable Disease: COVID-19 is to be considered as a disease outbreak in all parts of the UK and is not confined to a local occurrence of the disease. Policy restrictions in terms of localisation therefore did not apply, and the insurers’ argument that the cover was limited only to occurrences of a notifiable disease that were wholly within a particular area was rejected. The majority of the sample clauses considered was found to provide cover for losses caused by the pandemic.
Hybrid Clauses: restrictions on access which followed the nationwide outbreak of COVID-19 constituted access restrictions which followed an occurrence of a disease outbreak.
SIGNIFICANCE OF THE DECISION
The case provides a helpful reminder on the general principles of contractual construction and the factors that the court will take into account when interpreting the provisions of a contract. Continuing the approach adopted in recent times, the court focused on the precise language used in each of the policy wordings, and made clear that the subjective intentions of the parties were not relevant when retrospectively considering the scope of the policies.
The insurers that are party to this test case are legally bound by this decision in respect of the specific policy wording examined the by the court. Subsequent cases with similar wording will likely defer to this decision as providing guidance. However, given the specific application of the general principles to each of the policies that were considered, there is likely to be further action from policyholders and/or insurers in the near future, particularly as insurers may well receive more claims by policyholders in other business interruption related clauses.
The decision also acts as persuasive guidance for the FCA when determining whether an insurer has acted fairly to clients during the pandemic. Following the judgment, Christopher Woolard stated that: “Insurers should reflect on the clarity provided here and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgment says should be paid”.
It is thought that the insurers will appeal the decision, as indicated by their request for an extension of time to apply for permission to appeal. The appeal would likely ‘leapfrog’ the usual route for appeals, and proceed directly to the Supreme Court without first being heard by the Court of Appeal. A separate hearing will determine the scope of the declarations to be made by the court as a result of the judgment.