Clarifying business interruption policies
A test case by the financial regulator should clarify where business interruption insurance policies should pay out, says Lauren Cormack
The covid-19 pandemic has caused loss and distress to many businesses. Their activities have been disrupted by the coronavirus legislation and government guid- ance; and the income streams of many businesses have been hit. It follows that a large number of claims are being made under the terms of business inter- ruption insurance (BII) policies.
The Financial Conduct Authority (FCA), as the regulator of UK insurance companies, has noted a lack of positive responses by insurers to claims made under BII policies. It is concerned about the basis upon which claims are being rejected.
The FCA is bringing an action before the High Court seeking a declaration which will allow it to provide clarity and guidance to the industry about the types of policies under which insur- ers are and are not obliged to pay out.
The case is proceeding under the financial markets test case scheme – a scheme established under practice direction 51M of the Civil Procedure Rules.
A ‘qualifying claim’ for the purposes of the scheme is one “which raises issues of general importance in relation to which immediately relevant authoritative English law guidance is needed”. There is no need for a present cause of action between the parties for a qualifying claim to be determined. This is the first case to proceed under the scheme.
Many BII policies require physical damage to business premises to trigger cover. However, some policies provide cover when an event causes disruption to, or interference with a business even without physical damage to property.
Many of these policies do not respond to business disruption as a result of a situation like covid-19. Insurers can and do define and exclude pandemics and epidemics from their cover. However, there are policies which do not include such exclusions and should respond.
The starting point when considering whether a claim arising from the pandemic is valid, is clearly to consider the terms and wording of the relevant policy. The following should be considered:
- The insured perils – Do they include, eg the occurrence of covid-19 at or within the vicinity of the insured’s business prem- ises; and/or action taken by government which restricts access to the insured’s business premises
- Loss – Has the insured suffered loss cov- ered by the policy
- Causation – If there is a relevant insured peril and relevant loss covered, has the insured peril caused the loss? It may be that a loss would have been suffered any- way for some other reason, regardless of covid-19 and the lockdown
- Exclusions – Are there relevant exclusions to cover?
The variation in policy wordings and types of cover in existence mean it is proving difficult for insurers and policyholders to interpret whether a business has cover; and whether a valid claim can be made. There is particular uncertainty surrounding some optional policy cover extensions, for example, extensions to cover business interruption due to infectious disease or denial of access.
The uncertainty has led to numerous disputes, with many businesses who believe they have valid claims having their claims rejected by their insurer.
Focus of the test case
The FCA has identified a representative sample of policy wordings which will be examined by the High Court and it has the agreement of eight insurers who will participate in the claim as defendants.
The focus will be on policies that provide cover for financial losses sustained where the clauses in the policy wording do not require physical damage to business premises. The participating insurers did not adopt exclusions for epidemics and pandemics in the policy wording that will be examined in the proceedings.
The FCA is inviting the court to determine a number of key points of construction and principle that appear to be in dispute between insurers and policyholders; and make declarations accordingly. The aim is to resolve the contractual uncertainty around the validity of many claims. The result should help the industry identify BII policies under which insurers are and are not obliged to pay out.
When is the outcome due?
Many businesses making claims are already facing financial hardship because of a sudden loss of business as a result of the pandemic. One of the FCA’s key objectives is to ensure that the financial pressures businesses are fac- ing are not exacerbated by protracted claims assessments and slow insurance pay-outs. The uncertainty around whether businesses have valid claims needs to be resolved as quickly as possible and, to reflect this, the test case is being expedited.
The FCA started its claim in the High Court on 9 June 2020. A first case management con- ference took place on 16 June and the second took place on 26 June. During the second case management conference, two consumer action groups (the Hospitality Insurance Group Action and the Hiscox Action Group) were permitted to intervene in the test case.
The substantive hearing is listed to begin on 20 July, to take place over eight days. It will be heard by Lord Justice Flaux and Mr Justice Butcher and the court has agreed to livestream the hearing.
After a judgment is issued, the defendant insurers or the FCA may appeal to the Court of Appeal and, possibly, to the Supreme Court. This means there’s the potential for a delay of many months before a final outcome is reached.
Impact on insurers and policyholders
The result of the test case will be binding on the insurers participating in the claim as far as the interpretation of the sample of policy wordings to be considered by the court is concerned. The outcome will provide persua- sive guidance for the interpretation of similar policy wordings and can be taken into account in other court cases and by the Financial Ombudsman Service (FOS).
The outcome should enable the FCA to effectively pursue its regulatory and supervisory roles when looking at whether insurers are handling claims fairly.
While the case is ongoing, policyholders wishing to make a claim against their BII policy should still notify a claim – there can be strict notification periods under these policies. If the claim is rejected, policyholders can consider the insurer’s decision in light of the outcome of the test case.
The FCA has published final guidance on its website setting out its expectations for insurers and insurance intermediaries when handling claims and complaints in relation to BII during the test case.
The FOS has been working with the FCA and is considering the impact the test case may have for cases that could be referred to it. A policyholder who is a small business with an annual turnover below £6.5m and fewer than 50 employees, or an annual balance sheet below £5m, is likely to fall within the jurisdiction of the FOS.
For businesses that are eligible to use it, the FOS may provide a quicker, less expensive alternative to court proceedings. It may be an attractive option for small businesses looking to pursue a dispute with their insurer on claims with a value of up to £355,000.
In due course, the FOS will share details of the approach it will take in handling complaints about business interruption insurance.
Lauren Cormack is an associate at Russell-Cooke russell-cooke.co.uk