On 15 September 2020, the High Court issued its judgment in The Financial Conduct Authority (FCA) v Arch Insurance (UK) Ltd & Ors [2020] EWHC 2448 (Comm), the FCA’s business interruption (BI) test case. There have been disputes between insurers and their insureds about the coverage of BI claims responding to the COVID-19 pandemic. The FCA brought the test case so that the court could determine a number of principles relating to BI to bring some clarity to the law, with the intention that these principles could then be applied across the market to hopefully bring a quicker resolution to individual disputes.
The court was asked to consider disease clauses (business interruption as a result of infectious or notifiable diseases) and prevention of access clauses (denial of property access and public authority closures or restrictions) in various policies. Essentially the court found that most, but not all, of the disease clauses they looked at did provide cover. Only a few of the prevention of access clauses however provided cover – these clauses were to be construed more restrictively, so that cover depended 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 court was also asked to look at trends clauses, which provide that if there is cover, the insured is to be put in the same position as it would have been had the insured peril not occurred. Insurers sought to rely on the case of Orient-Express Hotels Ltd v Assicurazioni General SA (UK Branch) (t/a Generali Global Risk) [2010] EWHC 1186 (Comm) to limit the amount it would have to pay out to insureds if the court decided there was cover. This case held that although a New Orleans hotel that had been damaged by Hurricane Katrina did have BI cover, it was not entitled to recover all its losses because the devastation to the area around the hotel caused by the hurricane had been so great that it would have suffered business interruption losses in any event even if the hotel itself had not been damaged by the hurricane. Insurers sought to argue in the FCA test case that this meant that even if an insured business had itself not been affected by the pandemic, the rest of the country had been affected by it and so the insured business would have suffered business interruption losses in any event. The court held that the Orient Express case did not apply to the situation in the FCA test case, but that even if it did, it doubted that it had been correctly decided.
Michael Frisby, dispute resolution partner, who acts for a group of businesses with policy wording disputes being tested in the FCA COVID-19 insurance test case, said:
“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.
"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 £1.2bn in the wake of COVID-19 and 75% of this will be for Business Interruption.
(Michael's comments appeared in various newspaper and industry press reports, including in an article in Insurance Times).
The insurers adversely affected by the judgment have now appealed to the Supreme Court, who heard the appeal on 16-19 November 2020, and it is hoped that judgment will be handed down late 2020 or early 2021.
Michael Frisby