Update in relation to business interruption test case being brought by the FCA against insurers

• United Kingdom

• Financial services disputes and investigations
• Insurance and reinsurance
• Litigation and dispute management
• Financial services - Insurance market

02-07-2020

Further to our update on 1 June 2020 we set out below the latest position in relation to the test case which the FCA is bringing on behalf of policyholders against various insurers in which it is seeking to determine the extent to which policyholders may be entitled to coverage in relation to COVID-19 related business interruption losses.

The FCA served Particulars of Claim on 10 June 2020 against the eight insurers have agreed to participate in the test case as defendants, being:

• Arch Insurance (UK) Limited
• Argenta Syndicate Management Limited
• Ecclesiastical Insurance Office PLC
• Hiscox Insurance Company Limited
• MS Amlin Underwriting Limited
• QBE UK Limited
• Royal & Sun Alliance Insurance Plc
• Zurich Insurance Plc

All insurers have served Defences and the FCA is due to serve a Reply by 3 July. A second CMC took place on 26 June (at which two action groups successfully applied to join the proceedings) and the trial is due to commence on 20 July 2020 with a time estimate of 8 days.

Specifically, the Court will be asked to decide, against a matrix of agreed/assumed facts, whether there is cover under certain “non-damage” extensions to business interruption policies, namely:

1.    Clauses, which provide cover for interruptions to businesses (variously) “caused by”, “following” or “consequent upon” certain types of disease either being contracted or occurring within the vicinity of premises (but not extensions requiring the disease to be at the premises)

2.    “Denial of Access” clauses, which provide cover where some form of authority acts so as to prevent or restrict access to insured premises

The thrust of the FCA’s case is that the response of the UK government in the form of advice, instructions and legislation was a single body of public authority intervention which prevented and hindered access to premises and cause interruption within the meaning of the representative policy wordings, and this applies to those businesses which were ordered to close or not (in that businesses which remained open were also affected by the lockdown). Further, those policies which provide cover only where there was the presence of a disease in the vicinity of premises were triggered by early/mid-March 2020 given the widespread prevalence of the virus at that date.

The overall gist of insurers’ Defences are that the FCA cannot prove that losses suffered by policyholders resulted from an outbreak of the virus at or in the vicinity of the premises, because the FCA is unable to establish that any such outbreaks occurred and, further, that any interruption was caused by the national lockdown rather than local outbreaks.

Judgement is expected to be handed down late summer and this will be of direct impact on those policyholders who have business interruption policies with non-damage extensions of the type being litigated over in the test case. It is important to note that the claim also directly affects policyholders with these type of extensions, even if they are insured with insurers other than those who are Defendants, since similar clauses appear in policies issued by other insurers.

The Court’s decision may also be of relevance to policyholders with other types of business interruption insurance which contain similarly worded extensions such as landlords and tenants with loss of rent cover or employers on construction projects with delay in start-up cover.

Any policyholders who have not already done so, should notify their insurers to protect their position in case the FCA’s claim is successful. Insurers issuing policies in the UK with these types of clause are unlikely to be paying any claims until judgement is handed down, and the FCA expects insurers to re-assess claims which have already been rejected by insurers if the judgement indicates the rejection was wrong. We would be very happy to discuss with clients the steps they should be taking to notify claims and to preserve evidence (e.g. in relation to losses which may be recoverable).

It’s also important to note that the test case will leave unresolved a number of issues related to business interruption losses, such as:

1.    Whether the presence of the virus at insured premises amounts to “physical damage” for the purposes of triggering cover where this is not available under non-damage extensions

2.    Is there cover for those policyholders who can actually identify that the disease has occurred at the insured premises; and

3.    Causation issues in loss of rent claims

We would also be interested to hear from any clients with potential claims whose circumstances fall outside of the ambit of the test case.