Tuesday 13 October 2020

It depends...

The Commercial Court has given its judgment in the business insurance (BI) test case initiated by the Financial Conduct Authority (FCA). 

The judgment indicates there is BI insurance cover in principle under a proportion (but not all) of the wordings considered by the Court.

The decision was not a clear cut ‘cover’ or ‘no cover’ outcome. This is not surprising, given that the case involved eight insurers directly, affected 60 insurers, 700 wordings, and potentially 370,000 policyholders.

Permission has been granted to all parties for a ‘leapfrog’ appeal to the Supreme Court, where instead of appealing to the Court of Appeal, as is usual, the parties are able to appeal straight to the country’s highest court. The Supreme Court therefore may reach a different decision to the commercial court.

Policyholders who have made a claim that may be affected by the decision should have received a communication from their insurer with an update on what happens next. 

What the next steps entail will vary depending on the insurer and policy wording concerned, however, judging by comments from the FCA there may be some scope for settlement. There are: ‘continuing discussions with insurers and action groups to find a solution that avoids the need for appeal and enables pay-outs on eligible claims as quickly as possible.’

Member organisations may wish to discuss the scope of their BI cover with brokers to ensure it continues to meet their needs.

What did the Court decide?

The policy wordings fell into three broad categories:

  1. Disease clauses
  2. Denial of access clauses
  3. Hybrid clauses, which feature elements of one and two.

With regard to disease wordings, the Court considered the disease ‘occurs’ when the illness is sustained, which means someone is already suffering from it: not on diagnosis.

An ‘occurrence’ of COVID-19 within an area is defined when at least one person was infected. An ‘area’ is defined by the individual policy, with some stretching to a 25-mile radius from the insured business.

This would trigger BI cover written as ‘following’ such an occurrence. It was not necessary to establish proximate causation here since: ‘a looser link should be used in recognition of the fact that [occurrences of the disease in the area] would not of themselves directly cause interruption to or interference with the business, but would in almost every case have such an effect only via the reaction of the authorities.’

Denial of access clauses turn on prevention of access to or use of the premises as a consequence of government or council actions or restrictions. As a general point, the Court accepted the insured peril here is discrete regulatory action barring access and not, as the FCA attempted to argue, the overall national emergency due to the pandemic.

Hybrid clauses feature restrictions imposed by public authorities and an occurrence of a notifiable disease. It was clear to the Court that using ‘imposed’ in this context meant: ‘something which is mandatory ... something that has the force of law... Guidance, exhortation and advice given by the Government, including by the Prime Minister, including as to social distancing, do not count as ‘restrictions imposed’ by a public authority.’

The meaning of ‘occurrence’ here, which is the national outbreak of COVID-19, could qualify as an ‘occurrence’ under such clauses.

How should the BI loss be assessed?

The FCA argued that the correct counterfactual was one in which the legal restrictions and the underlying pandemic must be stripped out or disregarded. In effect the loss would be the normal trading revenue, subject to any relevant policy limit.

Insurers argued that only the restrictions should be disregarded, meaning that the loss would be much lower and measured on what the business might have turned over had it been able to operate during the pandemic.

The Court did not accept the arguments of the insurers, noting that the authority that insurers relied on (Orient Express Hotels) would mean 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.’

The counterfactual to be applied depends on which category the relevant clause fell into.

The prevalence of COVID-19

The question of prevalence concerns what evidence a policyholder might need to establish the presence of the disease and therefore satisfy the burden of proof in any BI claim.

Prior to the hearing of the test case in July 2020, the FCA and insurers were able to proceed on agreed facts, with insurers accepting that NHS and Office of National Statistics (ONS) data on deaths and reported cases were, in principle, capable of proving prevalence.

The question is still unresolved and the Court refused to offer even ‘in principle’ guidance, finding that it was: ‘not possible for us to provide any generally applicable guidance as to what evidence may prove actual prevalence in varying factual contexts and for the purposes of different policies.’ 

The Court expressed the hope that insurers will be able to agree on any issues of prevalence that arise and are relevant to particular cases.

Rosemary Scott, Associate, BLM (rosemary.scott@blmlaw.com)

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