WHAT DOES IT MEAN FOR POLICYHOLDERS? 

WHAT IS THE TEST CASE?

The action by the FCA has been prompted by widespread concern regarding the lack of clarity and certainty for policyholders making claims for losses under their BI insurance policies due to Covid-19. 

FACTUAL BACKGROUND

The FCA, having written to insurers in April 2020 explaining that it believes most BI policies do not provide cover for Covid-19 related losses, has now launched a judicial determination 'test case'. 

The purpose of the test case is to obtain court declarations in order to resolve contractual uncertainties around the validity of many BI claims arising from Covid-19 and the controls imposed by the UK government. The test case invites the English Court to determine the effect of certain policy wordings in that context.

The FCA, adopting policyholders' position for the purpose of testing the issues, contends that, subject to proof of loss and individual policy points, the contested wordings should respond to the events of Covid-19. 

The FCA has acknowledged that the test case will not encompass all possible disputes; its aim is to resolve "some key contractual uncertainties" and "causation issues" in the interests of providing some clarity to both policyholders and insurers. 

KEY LEGAL POINTS

What will the test case decide?

The action will focus on BI claims under coverage extensions which are not dependent on physical damage, commonly including 'denial of access' [to premises] and 'notifiable disease' extensions. The test case will therefore be of particular interest to policyholders who have the benefit of such extensions.

The test case uses a sample of disputed policy wordings, issued by a selection of major insurers including Arch, Hiscox and Zurich. These samples will be assessed by court. 

In particular, the action will address causation issues, including uncertainty around the operation of 'business trends' clauses. 

The FCA has also asked the court to consider whether Covid-19 amounts to a "danger" and what is required for it to be within the "vicinity" and whether exclusions for pollution and contamination apply to Covid-19 related loss.  

The FCA challenge does not address loss of rent claims expressly, and it will not determine how much is payable under individual policies. However, the ruling by the court will have value in interpreting whether there is an insured risk from which a loss of rent claim can then flow and the basis for paying out under relevant cover. 

What stage are proceedings at?

The hearing commenced on 20 July 2020. 

In the FCA's Skeleton Argument, the FCA has submitted that "Nothing in the [sample] Wordings or in the law entitles the insurer to deny cover, or requires the Court to find a lack of cover or reduce the indemnity, by reason of loss not being caused by the insured peril but because it was caused by COVID-19 more generally".

The FCA has also submitted that the facts at issue in the test case can be distinguished from the finding in Orient Express Hotels Ltd v Assicurazioni Generali Sp.A [2010] EWHC 1186 (Comm), [2010] Lloyd’s Rep IR 531, and that decision should be revisited.

COMMENTARY

What does this mean for policyholders?

The results of the test case will be binding only on those insurers who are parties to the action, in respect of the interpretation of the tested policy wordings underwritten by those insurers. Although it is anticipated that any initial decision is likely to be appealed; in the interests of resolving the test case swiftly any appeal will be made straight to the Supreme Court.

The case may however provide persuasive guidance for the interpretation of similar policy wordings and claims. For instance, the test case is based on a menu of potential fact patterns / assumed facts, which are a set of illustrative factual assumptions, e.g. concerning particular types of affected business. As such, the findings may be persuasive in cases with substantially similar wordings and fact patterns (although this will of course depend on the relevant policy and what happened in any given case). 

The FCA has acknowledged that many BI claims will already be the subject of negotiation or other dispute resolution processes. The proposed action is not intended to impact on this normal claims process, or prevent policyholders from pursuing claims through other means. In practice, policyholders may wish to consider carefully how they seek to advance any claim before the resolution of the test case. 

In the meantime, policyholders should ensure that they have complied with any notification requirements for policies which may provide cover for BI losses arising from Covid-19, particularly if the policy is coming up for renewal. Going forward, the indications are that insurers will be imposing widely drafted exclusions for Covid-19 related losses.

Laura Payne and Natasha Weisfeld