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Business Interruption Insurance - An Update on the Financial Conduct Authority's Test Case

Following his article in June on COVID-19 and Claiming on Your Business Interruption Insurance, David Mallinson, Head of Dispute Resolution gives an update on this important test case which seeks to provide clarification for Business Interruption (BI) insurance claims in a pandemic situation.

For many small to medium sized SME’s it has been a frustrating experience awaiting the final outcome of the FCA’s action seeking declarations in respect of unresolved claims arising out of business interruption (BI) insurance policies. The test case brought by the Financial Conduct Authority (FCA) stems from the refusal on the part of a number of mainstream BI insurance providers to accept COVID-19 related claims on the basis of the policy wording.

COVID-19 legislation and Lockdown

The landscape for BI insurance claims changed dramatically and entirely unexpectedly in March 2020 with the Government’s introduction of a series of measures in order to combat the transmission of COVID-19. Those measures comprised a collective of informal 'announcements' and both primary and secondary legislation through Parliament and its devolved administrations. As businesses sought to grapple with the debilitating effects of ‘lockdown’ there was growing dissatisfaction at various levels with the refusal of insurers to accept BI claims arising out of the various measures based on their interpretation of a series of standard policy wordings.

The FCA test case

The FCA’s claim concerns a total of 16 insurance companies and the wording/s of their relevant BI policies, with eight ‘nominated’ insurers invited to participate as the named Defendants to the proceedings. Both the Financial Ombudsman Service (FOS) and FCA had given clear notice that they would take account of the terms of the Court’s decision in assessing BI policy claims and related complaints handling on the part of the affected insurance companies.

The original claim/s came before the High Court in July 2020. Judgment was finally handed down on the 15th September 2020 with orders being sealed on the 18th October. Both the Hiscox Action Group and the Hospitality Insurance Group Action had been given permission to 'intervene' in the proceedings on behalf of specified policyholders and present formal submissions on behalf of affected businesses, in addition to the (lengthy) written submissions presented to the Court by the FCA and the defendant insurers.

The judgment

In its 150 page judgment the Court, with some notable exceptions, broadly favoured the approach of the FCA in its ‘preferred’ interpretation of a number of the relevant sample policy wordings which were being tested. In other words the judgment does not deal directly with individual claims but is intended to provide clear guidance as to how the policy provisions should be interpreted in a pandemic situation. To provide clarification and assistance in understanding the Court’s decision a number of documents have been published (available on the FCA website) including a detailed table which sets out the current status of the subsequent appeal [see further below], the relevant declarations and paragraph references within the judgment which in turn relate to the particular insurer’s policy wording, examples of the wordings that the Court was being asked to consider and details of the specific declarations.

Supreme Court appeal

Since the High Court’s decision was handed down we have unfortunately now experienced a further period of lockdown, again impacting severely on many businesses that are still to receive payments arising out of the first lockdown. The fact that these decisions affect around 8500 outstanding and unresolved BI claims valued at approaching £1.2 billion has perhaps inevitably lead to 'leapfrog' appeals to the Supreme Court. Six of the original eight defendant insurers have pursued appeals in respect of a number of the findings of the High Court, as well as both the FCA and the Hiscox Action Group who are appealing some of the specific rulings made in respect of the 21 ‘sample’ policy wordings.

The appeal was heard by the Supreme Court over four days commencing on the 16th November before Lords Reed, Hodge, Briggs, Hamblen and Leggatt. The six insurers appealing various aspects of the original judgment are Hiscox, Arch, QBE, Argenta, MS Amlin and RSA. In respect of each of the appellant’s the FCA has prepared an agreed statement of facts and the written cases for the appeals, in the name of each of those insurers listed above, are all available on the FCA website (although reading the entire suite of papers is perhaps not for the faint hearted).

Supreme Court judgment

The decision of the Supreme Court is keenly anticipated although it is presently unclear as to whether the Court’s final judgment will be handed down before Christmas 2020, or early January 2021.

The final outcome of these proceedings is potentially of huge significance for many businesses affected by the COVID-19 pandemic. It will clearly have a direct bearing on the interpretation of the relevant BI policy wordings in individual cases and will no doubt be carefully considered in the context not only of as yet unresolved claims but also those cases which have previously been rejected by insurers on the basis of either identical or at least substantially similar policy terms.

FCA guidance

The FCA guidance is quite clear in setting out its expectations to any BI insurance provider that the judgment should be applied in both assessing and reviewing outstanding and/ or previously rejected claims. It is likely that adversely affected policyholders whose claims had already been rejected will be carefully monitoring the situation in order to see whether to lodge a formal complaint based on the final judgment of the Supreme Court.

On the 18th September the FCA published a 'Dear CEO' letter which referred to the High Court decision as bringing greater 'clarity and certainty' for all concerned (referring to policyholders, insurers and intermediaries alike) and encouraged BI insurers to discharge their obligations in respect of successful claims in full and at the earliest possible opportunity. Whilst therefore the outcome of the appeal is as yet unknown the clear expectation will be for outstanding / unresolved claims to be dealt with quickly and, perhaps most importantly, fairly by the relevant BI insurance providers, based on the final Supreme Court judgment.

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The prospect of further litigation

Whilst the Supreme Court judgment should deal with the raft of interpretation issues with the necessary degree of finality and result in the majority of claims being processed in the early part of next year, there still remains the prospect for further litigation on the part of individual aggrieved policyholders to enforce their rights. One can only hope that satellite litigation will be confined to claims with more substantial values and that the vast majority of individual claims which have been made by small to medium sized SME’s will be resolved and paid out to provide much needed assistance in what for many may prove to be a difficult start to 2021.

If you are in dispute and need legal advice, please contact David Mallinson to discuss your situation.

Girlings has offices in Ashford, Canterbury and Herne Bay.

Before relying on this commentary please read the Reliance on information posted section in our Terms of Website Use in our Legal section. Please note that specialist advice should be taken in relation to any specific queries and the information above is provided for general information purposes only.


David Mallinson

Head of Department
Dispute Resolution


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