A victory for the FCA but is it a clean sweep?
However, yesterday’s judgment does not represent an outright win for the FCA and policyholders. The High Court's ruling on the FCA's test case, while broadly welcomed, was focussed on just 21 sample policy wordings from eight participating insurers and centred around some common issues faced by policyholders attempting to claim for COVID-19 related business interruption (BI) losses.
While the eight insurers (Lloyd's of London, Hiscox, Arch, Argenta, MS Amlin, RSA, QBE, Zurich and Ecclesiastical) are certainly among the largest in Europe, the fact remains that most insurers and their BI policy wordings did not form part of the legal action.
It's important to bear in mind that the High Court ruling applies to situations where there was a lack of clarity about what is and what is not covered in certain BI policy wordings. The vast majority of UK business insurance policies focus on property damage and only have basic business interruption cover. And, while some do extend to interruptions from other causes, such as infectious or notifiable diseases, many had wordings that clearly excluded COVID-19 or its economic fallout and are unaffected by the Court’s decision. Sadly, for many businesses, this judgement changes nothing.
Nevertheless, the FCA has said that the Court's findings, while based on its examination of the sample policy wordings, should be used to interpret the BI policy wordings of other insurers. All eight insurers involved in the test case have the right of appeal.
The ruling offers clarity on some key points of dispute
The FCA's test case, however, has achieved clarity on some key points that, while relating to the 21 policy wordings scrutinised by the Court, extend beyond the scope of the legal action and affect other, similar policies.
These can be summarised as follows:
Notifiable Disease Cover
The Court upheld that in most instances, those policies that were examined in the course of its proceedings should provide cover for notifiable diseases and their consequences. This finding, however, only extends to those policy wordings that are similar to those submitted and examined in the court case.
The Court's focus was on whether a localised outbreak of COVID-19 and a national outbreak (and subsequent lockdown) were to be treated in the same way by insurers. And if so, whether policies should respond to insurance claims if COVID-19 is an insured disease in their wordings. The ruling is that in most cases they should respond.
Hybrid Clause Cover
This is a particular type of clause commonly found in specific Hiscox wordings and is a 'hybrid' mix of disease wording and prevention of access/public authority wording. The Court ruled that cover provided by this 'hybrid' wording must apply whether the claim involves prevention of access as a result of a local lockdown or a national lockdown, rejecting the insurers' argument that the wording only referred to instances of local lockdowns.
Prevention of Access Clauses
While certain denial of access clauses will be covered, this will depend on the policy wording and whether the denial of access was as a consequence of a mandatory closure. Loss caused by a reduction in the movement of people (footfall, for example) as a result of restrictions imposed by the Government or a local authority is not covered. The Court did not uphold the view that this constituted denial of access because access was not prevented in these instances.
The exception to this reasoning is where a policy wording uses the terms "hindrance" or "interference", in which case the policy should respond and provide cover. Again, this affects only a limited number of insurers.
It’s early days but insurers and observers are already weighing in
We expect a great deal of expert commentary and debate on this landmark ruling in the coming days, and we will update you as the more nuanced aspects of the High Court's ruling are analysed in more detail.
In the meantime, insurers have seven days to contact affected policyholders (those that they have already approached regarding submitted, closed, or pending claims) to propose their next steps, following this complex judgement.
There is some speculation over possible appeals by insurers against the ruling, but we are unlikely to know this until October.
If you have any questions relating to the FCA Court Case, the judgment, or its implications, get in touch below.