Put to the test

Put to the test

There are as many opinions as there are experts: issues to consider when drafting reasoned legal opinions

Michael Frisby examines how the FCA sets a new standard for regulatory intervention with its BI case.

The test case on business interruption (BI) cover brought by the UK Financial Conduct Authority (FCA) should be welcomed by insurers and policyholders alike. It represents a decisive move by a regulator that acted quickly to address a major issue affecting the profession and sets a new standard for all regulators.

The question of coverage for BI insurance arising from the pandemic was a difficult one for the profession. With Chancellor Rishi Sunak’s announcement in March that government action was sufficient to allow BI policyholders to claim, expectations were set. However, many insureds found that insurers felt their policies did not respond.

The Association of British Insurers has estimated that 75% of the £1.2bn its members are anticipated to pay out for claims relating to Covid-19 will be for BI. The downside for insurers held liable is clearly significant and, as a result of the national lockdown, many of the declined insureds were SMEs facing an existential threat and needed to have their disputes resolved quickly.

Options for insureds

Insureds had limited options to seek redress. Essentially, they could either issue legal proceedings or take the complaint to the Financial Ombudsman Service. Legal proceedings entail costs and adverse costs risk, as the loser bears the winner’s costs usually. While third-party funding and litigation insurance might be available, whether the insured sued alone or as part of a group, the costs would eat into any recovery.

The ombudsman can investigate and make a decision that is binding on the insurer but which the insured is not bound to accept. Also, eligibility is determined by financial limits, so is only open for relatively small claims by smaller businesses.

The FCA took decisive action and is now seeking to resolve contractual uncertainty regarding the meaning and effect of BI insurance. Designed to provide a speedy judgment, the case was heard by a Court of Appeal judge and a Commercial Court judge together and in September, judgment was given. The statements of case and parties’ arguments were posted on the FCA website and affected insureds could provide feedback. The hearing itself
was streamed.

What now?

The judgment gave declarations on the various policies and issues raised, clarifying the law in relation to key points of dispute that commonly arise. Some aspects of the judgment are now likely to be appealed directly to the Supreme Court for a final and authoritative determination of the issues. While this introduces delay, it will provide finality and it is hoped any appeal will be expedited.

Overall, the test case is good for the profession. The regulator and insurers have moved swiftly to try and resolve differences affecting insureds and to bring some clarity on key legal issues for the benefit of insurers and insured alike. It has been done in a way that removes the cost risk an insured taking action might otherwise run in taking action itself and has been done in a transparent manner, so affected parties can be assured the issues have been fully explored in argument.

The test case proceeded speedily – much faster than the parties could have otherwise achieved. Being brought by the FCA, there was an equality of arms as between claimant and defendant. The FCA and insurers are to be commended for the action taken in participating in this test case.

Republished with the kind permission of the Chartered Insurance Institute.

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