High court rules in favour of FCA/policyholders in blow for insurers

The UK High Court has handed down judgment in the Financial Conduct Authority’s (FCA)’s  COVID-19 business interruption insurance test case, which considered 21 lead sample wordings from eight insurers.

While the judgment is said to be "complex" with different conclusions reached in respect of each wording, the court found in favour of the FCA on the majority of the key issues - particularly in respect of coverage triggers under most disease and ‘hybrid’ clauses, certain denial of access/public authority clauses, as well as causation and ‘trends’ clauses, according to Herbert Smith Freehills which represented FCA in the case.

The test case was aimed at resolving the lack of clarity and certainty in relation to COVID-19 business interruption claims for both the policyholders and the insurance industry.

"Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders," said Christopher Woolard, interim chief executive of the FCA. "We are grateful to the court for delivering the judgment quickly and the speed with which it was reached reflects well on all parties.

"Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful," he said.

Although the judgment brings welcome news for many policyholders, the FCA noted that it did not say that the eight defendant insurers are liable across all of the 21 different types of policy wording in the representative sample considered by the court. The judgment also does not determine how much is payable under individual policies, but will provide much of the basis for doing so.

Each policy will need to be considered against the detailed judgment to work out what it means for that policy. Policyholders with affected claims can expect to hear from their insurer within the next 7 days, the FCA said.

Furthermore, the judgment said that most, but not all, of the disease clauses in the sample provide cover. It also said that certain denial of access clauses in the sample provide cover, but this depends on the detailed wording of the clause and how the business was affected by the Government response to the pandemic, including for example whether the business was subject to a mandatory closure order and whether the business was ordered to close completely.

The test case also clarified 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.

"Insurers should reflect on the clarity provided here and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgment says should be paid," Woolard said. "They should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps."

It is possible that the judgment will be appealed. Any applications to appeal will be heard at a consequentials hearing before the High Court. The FCA said that it is seeking to have a consequentials hearing as early as possible.

"If any parties do appeal the judgment, we would expect that to be done in as rapid a manner as possible in line with the agreement that we made with insurers at the start of this process," Woolard explained, further emphasising that many small firms and potentially hundreds of thousands of jobs are relying on this.