The UK’s High Court has passed its long-awaited judgement on the Financial Conduct Authority’s (FCA) business interruption (BI) insurance test case, ruling in favour of policyholders on the majority of key issues.
The financial regulator brought the case forward in May to seek legal clarity on whether insurers were obligated to pay out on BI claims related to the COVID-19 pandemic.
It is thought that some 370,000 small businesses will be affected by the outcome of the court case, with analysts estimating that between £3.7 billion and £7.4 billion of claims could be on the line.
Based on the sample of policy wordings presented by the FCA, the court decided that most, but not all, of the disease clauses provide cover for losses connected to COVID-19.
It also concluded that certain denial of access clauses provide cover, depending on specific wording and how the business was affected by government measures, such as mandatory closure orders.
In addition, the test case clarified that the COVID-19 pandemic and the government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid even if the policy provides cover.
The result of the case is that insurers should pay out a lot of the claims that they have denied, although insurers will be able to appeal the judgement and this will be done on an expedited basis given the importance of the matter.
“We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market,” explained Christopher Woolard, Interim Chief Executive of the FCA.
“We are pleased that the Court has substantially found in favour of the arguments we presented on the majority of the key issues. Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders.”
Although the verdict will be welcome news for many policyholders, it did not mean the eight defendant insurers are liable across all of the 21 different types of policy wording in the FCA’s representative sample. Rather, each policy will need to be considered against the judgment to work out what it means for that policy.
It is also worth noting that the test case was not intended to address all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers.
“Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat,” Woolard continued. “Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful.
He went on: “Insurers should reflect on the clarity provided here and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgment says should be paid. They should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.”
Hiscox was one of the insurers involved in the test case, and also had particular public scrutiny on it after refusing to pay out on what policyholders saw as legitimate BI claims linked to the pandemic, becoming the target of legal action alongside other firms.
The Hiscox Action Group – a 400 member body of customers who were denied pay-outs by Hiscox – has welcomed the High Court’s decision as a “landmark victory” and says its stance has been “fully vindicated” by the outcome.
“Today’s judgement by the High Court is one of the most significant in recent years and will provide a lifeline for small businesses across the country,” said Richard Leedham from Mishcon de Reya.
“We joined the court case as we believed it was vital for businesses to have a voice in the proceedings and we are delighted they have finally been heard. We were delighted to support the FCA and its legal team.”
In addition to the losses on the primary side of its business, Hiscox has previously warned that the BI court case could have an impact on the inwards reinsurance portfolio written by its reinsurance and ILS business.
“Today’s judgement represents a huge victory for the Hiscox Action Group,” added Mark Killick, a Hiscox Action Group steering committee member. “The most important thing now is that the insurers accept this ruling and start to pay out rather than embark on a fruitless appeals process that will just cause more suffering for the very policy holders they were meant to protect.”
On the appeals process, Woolard said that it will be carried out “in as rapid a manner as possible,” and noted that any appeal does not preclude policyholders seeking to settle their claims with their insurer before the outcome is known.
Christopher Croft, CEO the London & International Insurance Brokers’ Association (LIIBA), also commented on the case: “Clients deserve clarity, and the fact that this case had to take place at all is a rebuke to our industry and the often obscure language we use. Customers deserve to understand exactly what it is they are getting in language they recognise.”
“The swift action taken by the FCA to bring clarity after the fact is to be commended. Many other countries are looking on with interest as their BI cases grind slowly through their legal systems,” Croft remarked.
“The fact that the court found in favour of the policyholders hopefully brings this action to a close. The industry’s reputation has been damaged by the debate over exactly what is or is not insured, and we need to think hard about how we redress that and introduce absolute clarity into the product our customers buy. This will include challenging the principles at the heart of these cases — principles which insurers have held dear but which we have seen make no sense to the general public.”