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FCA provides update in relation to business interruption test case against insurers

  • United Kingdom
  • Real estate sector

03-06-2020

On 1 June 2020 the FCA issued an update in relation to the test case which it is bringing against certain insurers in which it is seeking a declaration as to the extent Covid-19 business interruption losses are covered under insurance policies.

By way of recap, the FCA, as the conduct regulator of insurers in the UK, is taking a representative sample of cases to court in which it will put forward policyholders’ arguments to their best advantage in the public interest, with the objective of seeking clarity and certainty for all parties involved in potential disputes as to whether losses are insured. The FCA have said that, in their view, most commercial insurance policies are focused on property damage (and only have basic cover for BI as a consequence of property damage) so, at least in the majority of cases, insurers are not obliged to pay out in relation to the coronavirus pandemic. The test case is focused on the remainder of policies that could be argued to include cover.

Since the FCA made its last announcement on 1 May, it has approached 56 insurers, reviewed over 500 relevant policies from 40 insurers and says that it has identified a sample of 17 policy wordings that capture the majority of the key issues that could be in dispute. Eight insurers who underwrite the representative policy wordings have agreed to participate in the High Court test case and have entered into a framework agreement setting out the process and timetable for test case.

The framework agreement sets out the key issues in relation to insurers’ liability to pay claims are whether:

1.   Policies which, in principle, provide coverage for non-damage business interruption losses in fact cover Covid-19 related losses; and

2.   As a matter of law and fact the necessary causal link to any loss suffered by customers which is the subject of claims under the policies can be established.

For the purposes of resolving these issues the FCA will attempt to agree with the insurer defendants certain facts and assumed facts such as the date of any steps taken by the UK government in relation to the pandemic, which have been published by the FCA. Further, the FCA has published representative terms from insurance policies where there is doubt around coverage which it will ask the Court to rule upon. The framework agreement sets out a process for agreeing these issues.

The framework agreement acknowledges that not all issues of fact or law will be resolved by the test case but the stated mutual objective of the FCA and the insurers is to set a precedent which will reduce the number of disputes around the coverage of Covid-19 related business interruption losses. Issues around aggregation or certain causation issues specific to loss of rent will not be determined in the test case.

Further, many insurers who use the representative terms in their own policies are not defendants to the claim but the FCA expects that the case will provide guidance for insurers in interpreting other policies.

Pursuant to the timetable, the FCA aims to file Particulars of Claim by 5 June 2020 in the Commercial Court with directions thereafter for service of defences, a reply and a Case Management Conference. The defendant insurers have agreed to support an application that the case is expedited with a view to being tried in a 5-10 day hearing in the second week of July.

The framework agreement preserves the parties’ rights to appeal any decision of the Commercial Court and states that the FCA and insurers have each agreed to bear their own costs.

Impact on Real Estate Sector

The test case being brought by the FCA is an unprecedented attempt to resolve they key coverage issues arising out of Covid-19 and it is laudable that the FCA and the insurer defendants have been able to agree a framework which will hopefully enable these issues to be resolved, and resolved quickly as well. The test case will be determined by the Commercial Court pursuant to existing legal principles and it will be very interesting to see whether the case leads to a development of the law in any way.

Needless to say the impact of the pandemic on the real estate sector has been severe with many tenants suffering significant downturns in income due to consumer spending in areas such as retail and leisure being depressed. This has led to many tenants being unable to pay rent in whole or part, which in turn has caused landlords to scrutinize whether they are insured under “rent receivable” sections of business interruption policies.   Tenants too will also have been reviewing their own insurance policies to see if they pay out to cover rent whilst the tenants are unable to trade from the premises, but the current view of the insurance market is generally that policies will not cover coronavirus related business interruption losses, unless specific cover has been purchased.  

Whilst causation issues in relation loss of rent claims are excluded from the scope of the test case, landlords and tenants which have had business interruption claims rejected by insurers will nevertheless be closely monitoring the decision in the FCA’s case. This is because the test case is likely to resolve the central issue as to whether there is cover under the representative samples of non-damage business interruption clauses, which are often the same or similar as to the clauses found in many loss of rent policies.

Whilst the test case involves wordings from SME policies, this wording often mirrors that in the policies of larger businesses so the findings of the Court are likely to be of winder application. Organizations will want to consider the “agreed facts” and “assumed facts” in the test case, as well as their own policy wordings to assess whether their particular circumstances are likely to be clarified by judgement in the test case. Such policyholders may be best advised to wait before pursuing claims if the reasons their claims have been declined are similar to those to be determined in the test case. However, those whose issues fall outwith the scope of the test case may want to pursue claims without waiting for the outcome, especially if access to insurance funds is business critical.

If any of the coverage issues are determined in favour of policyholders, this should lead to insurers swiftly adjusting and paying related claims, hopefully without the need for policyholders to incur legal costs. If the Commercial Court upholds the insurers’ interpretation of coverage, then at least disappointed policyholders will not have incurred costs challenging insurers.