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On Tuesday 15 September 2020, the High Court handed down its much anticipated judgment in the business interruption insurance test case. The judgment in The Financial Conduct Authority (FCA) v Arch Insurance (UK) Ltd & Ors  EWHC 2448 (Comm) (“the FCA test case“) clarified important issues relating to what the wording of certain business interruption (BI) insurance policies and matters relating to what policy holders will need to prove in order to show that that they have suffered loss that is covered by their insurance.
The case was brought by Financial Conduct Authority (the “FCA”) as regulator of the eight defendant insurers in the case. The eight insurers were Arch Insurance (UK) Limited, Agenta Syndicate Management Limited, Ecclesiastical Insurance Office Plc, Hiscox Insurance Company Limited, QBE Limited, Royal & Sun Alliance Insurance Plc and Zurich Insurance Plc (“the Defendant Insurers“).
The Defendants were joined in the proceedings, following the second Case Management Conference, by the two intervening parties: the Hiscox Action group and the Hospitality Insurance Group Action. The FCA represented the numerous SME businesses insured under the defendant insurers’ policies. The case was brought under CPR 51M, the Financial Markets Test Case Scheme, and heard before Butcher J and Flaux LJ on an expedited basis.
The parties to the proceedings had agreed to be bound by a Framework Agreement which was underpinned by an understanding that “the parties have a mutual objective of achieving the maximum clarity possible for the maximum number of policyholders and their insurers, consistent with the need for expedition and proportionality.” Further to the Agreement, the parties put forward a representative sample of the standard form business interruption policies issued by the defendant insurers. The case proceeded on the basis of agreed facts and concerned issues of construction relating to the sample policies. In essence the Court was concerned with what the policy wording meant.
The judges found in favour of the majority of the FCA’s positions advanced for the policyholders concerning the construction of the relevant clauses. Those clauses concerned three primary types, namely: (1) “Disease” clauses; (2) “Prevention of Access” clauses; and (3) Hybrid clauses referring to both the incidence of disease and the restriction of access to insured premises.
Dependent on the wording of a policy holder’s insurance policy the case may clarify what the policy wording means and what is covered by the policy. Policy holders are going to generally find themselves in one of two categories:
Policy holders of the Defendant insurers where the court has already determined what the policy wording means and where, if the Court considered that the insurance should respond, the only question is likely to be the level of losses suffered under the policy. These cases ought to be capable of swift resolution. Policy holders who have the same policy wording should also be in a similar position.
Policy holders of the other insurers whose wording has not yet been considered by the Court. In these cases an assessment will likely need to be made in respect of whether or not these policies will respond. The judgment in the FCA test case will likely provide of assistance in construing the policy wording but insurers may still contest liability under the insurance policies. Further policy holders will still need to show the level of losses suffered under the policy.
1). Disease Clauses
The disease clauses considered by the Court were in policies underwritten by each of RSA, Argenta, MS Amlin and QBE. The Court was primarily concerned with the questions of whether the clauses responded to the effects of a pandemic, whether the clauses responded to occurrences of the disease within the vicinity of insured premises or within a prescribed radius and, if the latter, was the cover only intended for local disease outbreak, rather than national.
All, bar two, of the disease clauses were found to provide cover to the insured for interruption or interference with the business, as a result of the occurrence of COVID-19 within the relevant vicinity of the insured premises.
Occurrence and Causation
When considering the requirements of an “occurrence” the Court found that this was satisfied when one individual within the relevant radius of the insured premises was infected with COVID-19. The Court stated that “We do not consider that it is necessary for there to have been an “occurrence” of the disease that the case should have been diagnosed” .
On the question of causation, the Court found that “the test can be regarded as satisfied on the basis that the occurrence of the disease within the area was a part of an indivisible cause, constituted by COVID-19. Or alternatively, that each of the cases of the disease was an independent cause, and they were all equally effective in producing the government response” .
The Insured Peril
The insured peril under the disease clauses was found by the Court to be “composite”, as it comprised a number of linked elements – interruption or interference to the insured business, following the occurrence of COVID-19 within the stated radius of the insured premises. The result of this is that it is not necessary to prove that the interruption or interference to the business is proximately caused by the occurrence of COVID-19.
Vicinity and Radius
On the question of the occurrence of a notifiable disease within the specified radius of an insured premises, the Court found that cover was not limited to the effects of outbreaks within that area alone. Cover was found to be for notifiable disease which had come within the vicinity of the insured’s premises, rather than being only for isolated/discrete local occurrences. The Court reasoned this finding as being because notifiable diseases include those which are capable of widespread and rapid dissemination, which will require territorially far-reaching responses.
2). Prevention of Access Clauses
The Prevention of Access clauses considered by the Court were in policies underwritten by each of Arch, Ecclesiastical, Hiscox, MS Amlin, RSA and Zurich. Certain of the wordings were found to provide cover for loss arising from prevention/denial/hindrance of access to insured premises due to the actions of a government/local authority body due to an emergency or incident within a specified area.
The Court considered the operative parts of the Prevention of Access clauses and their related meanings.
Vicinity and Radius
The Court somewhat departed from the findings under the disease clauses in respect of vicinity and radius and found that cover was only available where something specific had happened at a specific time in a specific area. It followed that there was only limited localised cover for the insured businesses, where the actions of the relevant authority were in response to a localised occurrence of COVID-19.
The advices of the Government on 16, 20 and 23 March 2020 were deemed to be “advice” by the Court and fell short of being an “order” or mandatory instruction. Only an action with legal backing could prevent access fully. In that context, only the 21 and 26 March 2020 Regulations issued by the Government were capable of cover.
The capacity and standing of the intervening authority was considered by the Court, which found that a “competent local authority” would include government, as well as localised authority with the requisite level of competence.
The position under Prevention of Access clauses is more nuanced than under the Disease clause claims, and a close inspection of the precise terms of the policy in question will be required, together with an examination of the impact on the insured business under the Government’s regulations of 21 and 26 March 2020.
3). Hybrid Clauses
The Hybrid clauses were in policies underwritten by Hiscox and RSA and are, as the name suggests, a hybrid of disease clause wordings and prevention of access clause wordings. Similarly, to disease clause wordings, the Court did not find that cover was only available in the instance of losses arising from the local occurrences of COVID-19. However, the Court followed the reasoning employed in respect of the prevention of access clauses and applied the “restrictions” imposed by an authority in a strict fashion, such that only mandatory directions to cease business would trigger cover under the policies.
As with the prevention of access clauses, a rigorous examination of the terms of the policy and the impact on the insured’s business will be required before policy coverage can be determined.
The judgment did not address the issue of additional damages for late payments under the policies which were found to be responsive and providing cover to the insureds. However, in light of the judgment, the FCA has recently sought to engage with the eight insurers to agree the interpretation of the judgment in key areas such that small businesses with eligible claims may receive an expedited pay-out under the responding policies. The Insurance Act 2015 provides at section 13A that there is an implied term of insurance contracts that the insurer will pay claims within a reasonable period of time. Additional damages may be claimed for claims paid late. This could include, for example, additional finance costs or the loss of the value of a business if a company ends in an insolvency process.
Claims against insurers can be pursued in a number of different ways. Making the right choice as to how claims are pursued and funded will be critical to businesses with COVID business interruption claims.
1. If the business is eligible to use the Financial Ombudsman Scheme (“FOS“) a complaint may be made to the insurer followed by a complaint to FOS. To proceed with this option, businesses will need to check the wording of their policy(ies) to see what cover is provided. If the business has arranged cover through a broker, they may wish to consult with them too. If the policy does not include pandemic or disease cover, it may still provide alternative cover for loss of income as a result of people not being able to access the business. Records of communications with insurers seeking confirmation of coverage should be maintained and provided to FOS when submitting a claim. The advantage of FOS complaints is that they are informal and cost effective. They can, however, take a number of months to resolve dependant on how busy the FOS are. Further insurers will often be professionally represented in respect of FOS complaints, legal costs are not generally recoverable and there is a limit on what FOS can award up to £355,000. There are certain limits on whether a business can make a complaint to FOS. The business most employ few than 10 people and have a turnover or annual balance sheet that does not exceed €2m.
2. A business can set out details of its claim to the insurer by way of a letter before action in accordance with the Practice Direction – Pre-Action Conduct and Protocols (which are the court pre-action rules). The insurer will be obliged to respond, usually within 14 or 28 days, setting out its position in respect of the claim. If the insurer disputes the claim or disagrees with quantum of the claim the insurer may be willing to engage in alternative dispute resolution such as mediation with a view to resolving it without the need for Court proceedings. If the case cannot be resolved without court proceedings many of the claims will be suitable for the Shorter Trials Scheme operated in the London Circuit Commercial Court where businesses can expect to receive a judgment within a matter of months.
3. Businesses may find that they continue to face declinature of liability on the basis that their policy wording is said not to respond where it was not one considered in the FCA test case. In these cases business may be better to await a decision of the Court following a claim brought by another policy holder or to join a group of other policy holders who have a claim against the same insurer. A group action will significantly reduce the overall costs of the claim for businesses as they will be able to share the cost with other policy holders. Individual claims may, however, be held up by the progress of the overall group.
The choices a business makes about funding their claim will determine how much of the proceeds of their claim they retain. Businesses may be offered “no win no fee” agreements which generally fall into two categories.
1. Conditional fee agreements or CFAs- this is an agreement whereby those acting on the claim charge an hourly rate for their services. This will either only be payable if they win the claim or a discount will be provided with a higher hourly rate payable if they win the claim. Very often a success fee is also payable in the event that the business wins the claim. The success fee will not be recoverable from the insurer if the business wins the claim.
2. Damages based agreements or DBAs – this is an agreement whereby those acting on the claim charge a percentage of what they recover from the insurer. This does not correlate to the amount of work that they have carried out in respect of the claim but rather is a flat percentage of recoveries made.
If a business is offered a CFA or DBA they need to carefully check the terms before entering into the agreement. They need to assess whether the hedging of the risk and deferral of payment that is a benefit of these agreements is worth the additional costs that will be incurred.