In January this year, we reported on the business interruption (BI) test case brought by the Financial Conduct Authority and the judgment subsequently handed down by the Supreme Court – The Financial Conduct Authority (FCA) v Arch Insurance (UK) Ltd & Ors  EWHC 2448 (Comm).
Proceedings had been brought by the FCA, in the hope that the courts would provide some clarity on the relevant legal principles facing insurers and policyholders during the COVID-19 pandemic. Four months later, we look at the practical implications of the judgment and consider how future disputes may be treated as a result.
The Test Case: a recap
At first instance, the High Court was tasked with considering the correct interpretation of:
- Disease clauses – which allow insured parties to recover losses that result from the occurrence of a notifiable disease within a specified distance of any insured premises
- Prevention of access clauses – which allow recovery of BI losses where a public authority intervention has prevented access to or the use of business premises
- Trends clauses – which provide a method of quantifying BI losses by way of comparison to earlier periods of trading
The court reviewed 28 clauses from 21 leading BI policies and in most instances, favoured the FCA’s broader interpretation of the relevant policy wordings, a welcome outcome for policyholders.
The insurers appealed the High Court’s judgment (the FCA also appealed certain aspects) and the Supreme Court handed down its judgment on 15 January 2021. The insurers’ appeals were dismissed in their entirety and the FCA’s appeals were allowed (two on a qualified basis). In summary:
- Policyholders must show at least one case of COVID-19 within the geographical area to trigger a disease clause whilst insurers could not exclude losses caused by the wider pandemic
- Prevention of access clauses would be triggered by instructions issued by public authorities, such as the government’s early advice to “stay at home”, rather than requiring a legislative step to have been taken, as the High Court had originally envisaged
- Loss of access to only part of a premises would meet the prevention of access threshold
- The traditional “but for” test for causation was held not to be determinative, with regard of the cover provided to be had and protection afforded even where the COVID-19 occurrence in the area may not, of itself, have caused the loss
- Trend clauses were described as "part of the machinery for quantifying loss" and, correctly applied, should only adjust losses wholly outside the insured peril, not losses that are inextricably linked to it (that is to say those caused by the same underlying or originating event)
Whilst the Supreme Court ruling was a largely positive outcome for policyholders, not all BI policies will guarantee the insured a pay-out in the event of interruption caused by COVID-19.
In Rockcliffe Hall Ltd v Travelers Insurance Company Ltd  EWHC 412 (Comm), insurers were successful in obtaining a summary judgment against a policyholder’s BI claim on the basis that the policy in question contained a "closed list" of specified diseases, which did not include COVID-19.
Such a closed disease clause, listing specific diseases was not among the clauses considered by either the High Court or Supreme Court in the test case but it is likely that the decision in Rockcliffe would have been followed given the general approach to interpretation of such exhaustive clauses.
Whilst the ruling is unlikely to cause great controversy, it does provide further guidance to policyholders considering BI claims under policies that contain "closed list" disease clauses.
Impact in practice
Whilst the test case provided much sought-after clarity for the insurance industry, many BI claims still experienced delays, with policyholders reporting that they are being asked to re-submit claims, despite providing the required information.
Shortly after January’s judgment, the FCA issued a “Dear CEO” letter, encouraging insurers to reassess and settle claims as quickly as possible and make interim payments where possible. Reports from the FCA indicate that Hiscox have been making such payments and it is hoped that this trend continues.
Data published by the FCA on 12 May shows that the value of final settlements now total £433.2m, across 13,895 claims (an increase of almost £80m on the previous total released in early April). Meanwhile, more than £268m worth of interim or initial payments have been made across the 3,632 accepted but currently unsettled claims. Nevertheless, whether certain premises were in fact subject to the UK government’s mandatory closure directives or not continues to be something of a sticking point, with many policyholders reporting receipt of rejection letters that advise their business was not one that required to close.
As with any developing area of law, further judicial clarification will likely be required at some point in the future. It was simply not possible for the court to consider all forms of business interruption policy and disputes as to the proper construction of more unique policies will arise.
Nonetheless, the impact of the test case cannot be overstated. The clarity provided by the courts has made things a great deal easier for stakeholders on both sides, who can now consider claims against a full set of well-articulated legal principles.
As Rockcliffe shows, it is certainly not a case of “one size fits all”, with the policy in question ultimately being determinative. However, the judgment handed down by the Supreme Court has significantly narrowed the issues in dispute and should allow future claims to be dealt with quicker.
The issue of BI coverage during a pandemic was a challenging one for the insurance industry to grapple with but one that has been made a lot easier by the bringing of the FCA test case. For this alone the efforts of the FCA, insurers and the court must be applauded.