The English High Court has today handed down its judgment in the Financial Conduct Authority’s crucial business interruption insurance test case.

The court found in favour of most of the main arguments that the FCA propounded. The regulator embarked on the case in order to make the rules clearer for many policyholders (i.e. financial firms in trouble) which were making business interruption claims and for the wider market. The court reached its conclusions speedily.

The Coronavirus is ravaging financial firms at the moment and many are trying hard to stay afloat. The FCA's aim throughout the court action has been to help them by increasing the chances of their claims succeeding.

Many policyholders whose businesses were affected by the Covid-19 pandemic suffered significant losses and made claims under business interruption policies.

Most policies held by small banks, funds and advisory firms concentrate on property damage and only have basic cover for business interruption as a consequence of property damage. Some policies also offer cover for business interruption from other causes, in particular infectious or notifiable diseases (‘disease clauses’) and non-damage denial-of-access and public authority closures or restrictions (‘denial of access clauses’). In some cases but not all, insurers have accepted liability under these policies. The FCA, however, found the rules far from clear.

The FCA selected a representative sample of policy wordings issued by eight insurers. It spotted 370,000 policyholders who, it thought, held policies that were likely to be affected by the outcome of the test case.

The decisions in the judgment

The judgment is complex, runs to more than 150 pages and deals with many issues. The 'magic circle' law firm of Herbert Smith Freehills acted for the FCA.

In order to establish liability under the representative sample of policy wordings, the FCA argued that the ‘disease’ and/or ‘denial of access’ clauses in the representative sample of policy wordings provided cover in the light of the pandemic, adding that "the trigger for cover caused policyholders’ losses."

The judgment says that most, but not all, of the disease clauses in the sample provide cover. It also says that certain denial-of-access clauses in the sample provide cover, but that this depends on the detailed wording of each clause and the ways in which the financial firm was affected by the Governments' response to the pandemic, for example if it was subject to a partial or total "closure order."

The judge said that "the Covid-19 pandemic and the Government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid even if the policy provides cover."
 
What this means for policyholding firms

The judge did not say that the eight defending insurers were liable in all 21 different types of policy. This means that every financial firm ought to read the judgment to gauge its ramifications for itself. Policyholders with affected claims can expect to hear from their insurers within the next seven days, however.

The test case has removed the need for policyholders to resolve some problems with their insurers under their own steam.

The test case was not intended to encompass all possible disputes. The judgment does not say how much is payable under each policy. It is possible that some or all of the insurance companies will appeal against it. Any applications to appeal will be heard at a "consequentials hearing" before the High Court. Indeed, there may be a ‘leapfrog’ appeal to the Supreme Court (rather than needing to be heard by the Court of Appeal first). If there is some sort of appeal, there is nothing to stop a policyholder from trying to settle its claim with its insurer independently.

The FCA has arranged for concerned financial firms to talk to its legal team themselves on Monday 21 September or Tuesday 22 September. Each firm that wants to do this ought to email: biinsurancetestcase@fca.org.uk, stating only the word 'Meeting' in the subject line of the email and stating its availability in the body of the text. If it wants to talk about a particular policy, it should email the policy document to the FCA along with correspondence from its insurer that sheds light on whether its claim could be affected by the test case.

Michael Frisby, a dispute resolution partner at the law firm of Stevens & Bolton, is one of the lawyers who acted for a group of businesses whose policy wording was tested in the case. He told Compliance Matters the following.

“This test case is a shining example of regulatory intervention, addressing key legal issues in a divided market. The FCA has set a new regulatory standard for times of crisis – acting speedily and effectively for the benefit of all, particularly given that many policyholders are smaller businesses fighting for survival. All regulators should take note.
 
“Today’s judgment provides much-needed clarity to policyholder and insurer alike. Whilst the judgment doesn’t determine every claim or point of confusion, it provides clear guidance to identify which claims are covered in the wake of the pandemic. It will have the effect of reducing the disputes over coverage arising from the pandemic.
 
“It’s a crucial first step towards bringing clarity to Covid-19 Business Interruption insurance. For insurers, the importance of this case is clear when you look at the numbers: it’s been estimated that members of the Association of British Insurers will pay out £1.2 billion in the wake of Covid-19 and 75% of this will be for business interruption.
 
“For the insured, without the FCA, they would have been left to fight an expensive, lengthy and complex dispute on their own. Small enterprises with few funds and little experience of litigation were pitted against deep-pocketed and experienced insurers. It really was a case of David against Goliath, but the FCA stepped up to the plate. By representing these smaller businesses, there was an equality of arms between claimant and defendant.
 
“People are now asking about an appeal. It is likely to be expedited and go straight to the Supreme Court to ensure clarity of law.”  

Before the FCA intervened

Frisby pointed out that before the FCA stepped in to help small financial firms that held policies, those firms had three options.

• To issue legal proceedings on their own, seeking declarations from a court about the true meaning of their policies and orders for payment of indemnity. Frisby's comment was that "this carried a heavy cost risk - if they lost their case, they would have had to bear their own costs as well as those of the insurers."
• To complain to the Financial Ombudsman. In such cases the insured is never bound to accept the Ombudsman's decisions, so it can pursue its claim through the courts if it dislikes the outcome. However, eligibility for these complaints is set by financial limits, so they are often only available for smaller claims and businesses. On top of all this, the Ombudsman Service has been riven with delays because of the lockdown.
• On the subject of the third option, Frisby said: “Some policyholders in dispute with the same insurer did band together. However, these group actions obtain legal expenses insurance to cover adverse costs risks as well as third party funding, which eat into the sum that the group distributes to policyholders in the event of a win."

Frisby was therefore very sanguine about the outcome: “Not only did the FCA use its resources and clout to fight the corner of SMEs in this uncertain period; it also harnessed the Financial List of the Commercial Court – the first time it has been used – and the case was heard by a Court of Appeal and a Commercial Court judge, providing both a speedy and thorough judgment."