Covid-19 and business interruption: judgment in the FCA test case and its implications

Background

BI insurance provides cover for financial losses when a business is impeded by an unexpected event falling within the scope of cover under the given policy. Standard BI cover only responds to losses caused by physical damage and, accordingly, would not cover Covid-19. However, disputes arose between policyholders and insurers as to whether, and in what circumstances, certain extensions to standard cover would cover Covid-19 related losses. The extensions in question concern:

• business interruption caused by certain infectious diseases (often, diseases required to be notified to public authorities), usually requiring a case of that disease to have occurred at or within a given radius of the premises or in the “vicinity” (“disease clauses”);
• business interruption caused by access and/or use of the premises being prevented and/or hindered by certain steps taken by a public authority in response to a “disturbance”, “emergency endangering life” or “incident” (“denial of access clauses”); and
• some “hybrid” of these extensions, requiring interruption to have been caused by an occurrence of an infectious disease within a certain area, which has occasioned a public authority to take steps restricting the access/use of the business premises (“hybrid clauses”).

In light of these disputes and the risk to the financial viability of businesses unsure if they had a valid claim, the FCA pursued a case under the Financial Market Test Case Scheme, seeking to resolve the uncertainty. It identified a sample of 21 policy wordings from eight insurers, intended to represent the issues commonly in dispute, and adopted the position of policyholders in bringing a claim against those insurers, seeking declarations from the court as to the cover available in principle for Covid-19 related losses under the sample policy wordings.

The judgment – a snapshot

The judgement considers each of the sample policy wordings in turn, to establish the meaning of key provisions within the context of that policy as a whole, and the implications for Covid-19 cover. As a result, the judgment is lengthy and complex, and much turns on its detail. However, certain broad themes can be identified, as follows.

• Most sample “disease clauses” were found to provide cover, as long as at least one case of Covid-19 had occurred within the relevant geographical area specified by the policy, for losses that flowed from the incidence of Covid-19 both within and outside that policy area (and not only, as the insurers contended, for losses directly flowing from the incidences of Covid-19 within the policy area, which would preclude cover for losses caused by national lockdown measures or general public trepidation). The judges appear to have been influenced by the notion that a wide policy area (typically a 25-mile radius, being almost 2,000 square miles) and the nature of the diseases covered, suggest that the parties contemplated cover for widespread disease outbreaks. The exceptions were policies which were expressed to cover “events” and which had a more restrictive policy area, such as a one mile radius, which the court took to indicate as intention only to provide cover for localised responses to something happening in a particular time, at a particular place (and hence, not for the effects of the nationwide outbreak as a whole).
• Prospects for recovery under “prevention of access” or “hybrid” clauses are more limited. For example: some policies were found only to provide cover where it was impossible to use the premises for any of the business ordinarily carried on there (rather than use merely being hindered); certain policies were found to require that measures impeding access were mandatory, with the force of law – not mere guidance issued in public announcements; and some policies were found only to cover restrictions flowing from a local incident (such as a bomb scare, or gas leak), and not a broader “state of affairs” like a nationwide pandemic.
• The judges’ approach to policy construction allowed them largely to sidestep issues of causation which may have arisen; by concluding that the peril insured was a “composite peril”, indivisibly comprising the nationwide outbreak of Covid-19 and the resulting government and public response, they were not required to consider causation issues that arise where there are two concurrent or simultaneous effective causes of loss (which had the potential to nullify otherwise valid claims – for example because, even if a business’s access had not been prevented by government actions, loss would have resulted from Covid-19 deterring footfall in any event).

Implications for the Parties

Insurers will now need to consider their approach to handling policyholders’ claims in light of the judgment, including those previously refused. Since the judgment, the FCA has issued a “Dear CEO” letter setting out its expectations, stating that it stands ready to use “the full range of [its] regulatory tools and powers” to ensure insurers meet those expectations. The letter asks insurers to:

• assess and settle claims quickly, making interim payments where appropriate if a claim is accepted in full or part (in line with its previous guidance);
• take a pragmatic approach over remaining evidence requirements in individual claims and not create additional barriers or delays in paying valid claims;
• reassess claims in light of the judgment (including those affected by any part of the judgment subject to any appeal, so they may be settled promptly after any appeal judgment);
• consider the appropriateness of any deductions to claim payments for any government support given to businesses (noting that it does not consider that the tax treatment of such support is a suitable basis for determining any such deductions); and
• communicate directly and as soon as possible with affected policyholders on the implications of the judgment.

Policyholders will need to review their policy wording closely to determine how their prospects for recovery are affected by the judgment. As we note above, the judgment will tend to pose more challenges for policyholders under prevention of access or hybrid clauses than disease clauses. The case has a bearing on BI policies outside those included in the sample, as well as certain other contracts (similar wording can be found, for example, in the “delay in start-up” section of some construction insurance policies, and BI policy wording can interact with “rent cesser” clauses in some commercial leases). However, in such cases, it would be necessary to demonstrate that the wording is relevantly similar to that which the judges ruled on.

Policyholders will also need to consider the best evidence available to prove an occurrence of Covid-19 within the relevant geographical area covered by the policy. Being a test case, the judgment also does not address all issues that may be in dispute for a given policyholder, such as quantum of loss, aggregation of losses and any issues of conduct that may debar recovery.

Policyholders and insurers may also need to consider implications of the judgment for recoverability of loss arising from the ongoing impact of Covid-19, such as local lockdowns or new national measures.

Insurers will also need to consider their approach to drafting future BI policies in light of the judgment. This may involve adjusting terms to clarify the wording used (given the meaning ascribed to certain words by the judgment) and/or adding express exclusions. The FCA previously stated that insurers should ensure they treat customers fairly and if “changing their policies to exclude coronavirus, we expect them to make it very clear, in a prominent position, to those consumers whose policy is due to renew, that their policy has changed, and of the exclusion - both before renewal”. As the FCA has also noted, consumer policyholders will have additional protections under the Consumer Rights Act 2015 in relation to the fairness and transparency of mid-term adjustments to consumer insurance policies.

Financial Market Test Case Scheme – more to come?

This is the first case to operate under the Financial Market Test Case Scheme, which allows issues of "general importance" which require "immediately relevant authoritative English law guidance" to be heard without the usual requirement of a current cause of action between the parties (such as the claim of a particular policyholder against a particular insurer). The scheme was due to end in September 2017 but was expanded and extended for a further three years – in part, in anticipation that speedy market-level test case determinations may be required in relation to issues arising out of the Brexit process.

Arguably, the test case has been a good advert for the scheme. Judgment was achieved on an expedited basis by September on proceedings brought in June. It allowed issues across multiple affected policies to be decided, which may otherwise have resulted in multiple proceedings (in relation to different policies, insurers, policyholders and groups), difficulties coordinating interested parties, delays, and uncertainty as to the overall position of policyholders and insurers. While the decision itself did not favour insurers on various points, a market-wide decision may have assisted them in more swiftly establishing the overall impact of Covid-19 on this business line, confirming the scope of their reinsurance cover, and responding to the result. Indeed, some insurers have reported that their anticipated losses following the judgment are lower than those previously anticipated in a “worst case scenario” and saw their share price rise as a result. It will be interesting to see if the Financial Market Test Case Scheme is now used, as anticipated, to resolve issues arising out of the Brexit process, or in other disputes relating to bulk consumer contracts.

Wider Insurance Implications

As noted above, the judges’ contended that most causation issues raised by the parties fell away upon concluding that the nationwide outbreak of Covid-19 and the resulting government and public response formed a “composite peril” – precluding arguments to the effect that a policyholder’s loss was not caused by (for example) (a) the prevention of access, but by (b) the emergency as a whole; or not by (a) Covid-19 occurring in the relevant policy area, but by (b) Covid-19 occurring everywhere else nationwide – on the basis that, in each case, these were elements of the composite insured peril.

The court did, however, comment unfavourably on the decision in Orient Express v Generali [2010] EWHC 1186 (Comm). In that case, (applying a “but for” test which, on a reading of the trends clause, it was taken that the policy required) damage to a New Orleans hotel following Hurricane Katrina was found not to have caused loss, when the damage to the surrounding area and resultant evacuation would have resulted in the same loss in any case. The judges considered that, in Orient Express, the insured peril has been misidentified; the policy, in their view, “did not insure against Damage in the abstract but Damage caused by a covered fortuity, here the hurricanes”, and as such, in setting up the “but for” counterfactual, the court was wrong to only remove the damage to the hotel, leaving the impact of the damage the hurricane caused to its surroundings. The judges commented that “the consequence … that the worse the fortuity which befalls the insured and the vicinity of the insured’s premises, the less the insurance responds, cannot have been intended… Given a hurricane would inevitably cause widespread damage, the analysis would render the cover illusory” and the court should have been asking itself whether the correct construction of the policy required such a counter-intuitive result.

The judges’ approach to the BI policy wording allowed them to distinguish, rather than overrule, Orient Express, on the basis that unlike those BI policy wordings it did not concern a “composite peril”. However, it might be argued that the basis on which the judges distinguished the case is, in essence, the same basis on which they consider it to have been wrongly decided, that is, the (mis)identification of the insured peril. As such, it may suggest an approach to causation issues of this kind that might be applied in other similar contexts to avoid applying the result in Orient Express.

The judgment, in resting largely on nuanced points as to the meaning of various choice words within a given context, is a salutary reminder of the importance of clear and careful drafting. In that vein, the judgment may also provide a useful indication as to the meaning likely to be attributed to certain words in similar contexts in future. By way of example:

• in one policy, “following” was found to require a looser causal link than the normal “proximate causation” test in insurance;
• use of words like “event” or “incident” may be effective in restricting cover to localised incidences; and
• words such as “prevent” or “inability to use” connote impossibility, not mere hindrance.

What Next?

The Court will hear submissions of the parties at an additional hearing on 2 October, as to the appropriate declarations to be made following its ruling. At that hearing, the court will also consider any applications to appeal its ruling. Given the significance of the decision and the impact delay may have on businesses looking to rely on cover, it would not be surprising if an appeal “leapfrogged” the Court of Appeal to be heard directly by the Supreme Court. Indeed, this was anticipated by the parties’ framework agreement for the conduct of proceedings. It is to be expected that insurers will now be exploring the prospects for such an appeal.