The statements of case (pleadings) and supporting documentation have been made publicly available on the FCA website and reveal some important points regarding the timing of the process and the key policy wording battlegrounds on which the FCA is seeking legal clarification.
The scope of the case covers 19 sets of policy wording offered across eight insurance companies and managing agents of Lloyd’s syndicates which provide cover in principle for “standalone” business interruption losses (i.e. without the need to first establish proof of physical damage).
The first case management conference (CMC) took place on 16 June 2020 and the insurers’ defences are due by 24 June 2020. A second CMC is then scheduled for 26 June. Read on below for more detail and stay tuned for further updates regarding this important test case.
Expedited Proceedings - The Need for Speed
At the CMC held on 16 June 2020, the FCA sought court approval to treat the proceedings as a test case under the Financial Markets Test Case Scheme (the Scheme). The Scheme allows an interested party, like the FCA, to bring a costs-neutral test case on issues of general public importance that require resolution. Cases brought under the Scheme will be determined by a specialist panel comprising two Financial List Judges and a Justice of the Court of Appeal, thereby giving greater weight to the decision. The court approved the application to treat the proceedings as a test case under the Scheme.
At the CMC, the FCA also sought court approval for significant expedition of the test case process. The court approved an expedited timetable, and an eight-day trial will commence on 20 July 2020 with two justices (Lord Justice Flaux and Mr Justice Butcher).
On any analysis, it is an extremely rapid process given the volume of issues and the scope of the policy wordings concerned. However, the FCA justified expedition on the basis that the pandemic and lockdown has severely impacted small and medium-sized enterprises (SMEs)1 and that those who may benefit from business interruption cover require urgent clarification of policy terms in order to resume business once the government lifts the lockdown. Figures relied on by the FCA in evidence suggest 650,000 jobs may be affected by coverage issues.
Policy Wording – The Key Battlegrounds
The documents published by the FCA include the claim form and particulars of claim, a set of assumed facts, a list of issues and the questions for determination by the court. You can find a full list of the documents at FCA.org.uk.
The scope of the case covers 19 sets of policy wording offered across eight insurance companies and managing agents of Lloyd’s syndicates which provide cover in principle for “standalone” business interruption losses (i.e., without the need to first establish proof of physical damage).
The FCA is advancing the position that, subject to proof of loss (policyholders would be required to establish the losses actually suffered) and individual policy points such as sub-limits, business interruption policies included in the test case should respond to the claims for business interruption losses as a result of the COVID-19 pandemic.
The participating underwriters and managing agents are of the view that any such losses resulting from the COVID-19 pandemic may not be covered and that, as a matter of law and fact (and in the light of the policy wordings), there are issues of causation as to any losses suffered by policyholders, including the impact, if any, of any “trends” clauses or similar/equivalent provisions.
The central focus of the test case is to identify what constitutes, in the case of each relevant policy, the appropriate triggers for coverage of COVID-19 business interruption losses and the scope of such triggers. We set out below the broad key themes that will be considered as part of the test case.
- Coverage: whether, in principle, the construction of the sample policy wordings do cover the pandemic and whether the necessary causal link(s) to the losses claimed under policies can be established based on the assumed facts.
- Objective intention: whether or not the intention of business interruption policies was to exclude losses caused by disease amounting to a pandemic or government action in relation to the same is a matter of construction of the policy wordings.
- Disease definition: whether COVID-19 meets the policy definitions of an infectious/notifiable disease and the scope of any conditions.
- Locality/geographical limits: the circumstances in which COVID-19 should be regarded as occurring/manifesting/existing within a particular defined locality (such as the “vicinity” or within a specified radius) and the required evidence of such presence. In addition, whether policies respond to interruption or loss caused by a wide area pandemic, rather than by isolated locally occurring events.
- Prevention/interruption: whether government regulations or actions amount to the prevention/hindrance/interruption of access to premises, including in circumstances where a business continued to operate in a reduced form (e.g. a restaurant offering takeaway only). This theme also extends to a consideration of interruption/ restriction/interference with a policyholder’s business activities at, or use of, its insured premises (as well as physical access to those premises).
- Authority: the extent to which actions, guidance and regulations made by central government constitute advice/actions/restrictions within various definitions of “authority” in the policy wordings, including where reference is made in a policy to a local authority.
- Causation: issues relating to:
- The correct causation test for policy wordings such as “resulting from” and “due to” as well as the arguably restrictive “solely and directly” in both access and disease clauses and the required link between interruption and loss.
- The place of the “but for” test and whether loss should be assessed on the basis that there had been no COVID-19 or UK government action, or if it should be assumed that the pandemic would have progressed without government intervention.
- Trends clauses and whether these are extendable to non-property damage and can, in any case, reduce losses downwards.
- Exclusions: the proper interpretation and applicability of contractual exclusions, in particular those relating to pollution or contamination.
The purpose of this test case is to provide clarity on the common coverage and causation issues in dispute between insurers and policyholders arising from the claims for business interruption losses as a result of COVID-19. The correct interpretation and effect of the terms within the sample policies relevant to those issues will also be explored. For policyholders with insurance policies which also cover losses incurred by a named insured outside of the UK, this test case may be of limited application, since some of the issues will be specific to the situation in the UK; for example, the scale and reach of emergency measures implemented – whilst these were imposed nationally in the UK by the government, this was not the case in other countries like China and Italy, where there was a mix of local and national measures.
As explained in our previous alert, the policies examined by the test case will be bound by the court’s decision. However, the findings as to the correct interpretation of a policy wording will always need to be applied to the specific facts in question. Most of the findings by the court will only have a general application to claims under policy wordings which were not considered in the test case. Accordingly, policyholders not subject to the test case should not take any favourable findings by the court as to coverage and causation as a guarantee of indemnity. Much will depend on whether a policy wording is directly affected by the test case, and if so, to what extent.
Other, more specific issues flowing from the determination of the disputed issues (such as aggregation, additional causation issues specific to loss of rent and similar claims under a property owner’s policy, and the quantum of any particular claim) will not be considered by the court. Claims will continue to be assessed and determined according to the claims process of the particular insurer underwriting the risk. We envisage that, even after much-needed clarification is provided by the court in the test case, the coverage battle between insurers and policyholders will continue in relation to the level of indemnity for losses incurred as a result of COVID-19.
Next Steps
The FCA published guidance on 17 June 2020 setting out their “expectations for insurers and insurance intermediaries when handling claims and complaints for business interruption policies during the test case brought by the FCA”.
In the meantime, for those policyholders with wording that is the subject of the test case, this may be an opportunity to gather relevant information on loss. When the court renders its decision on cover (and assuming its decision is favourable), policyholders will want to be prepared to present the losses in an articulate manner to insurers to assist in swift recovery.
In its engagement statement, the FCA has committed to engage with policyholders throughout the test case process. There will be a further opportunity for policyholders to comment once insurers have filed their defences (which they must do by 24 June 2020) so that the FCA’s legal team can incorporate policyholder views into further submissions.
If you would like to input into the process or have queries as to how you may be affected by the outcome of the test case, please reach out to one of the lawyers in the insurance recovery team at Reed Smith, the details for whom are set out below.
Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you may face related to COVID-19.
For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at COVID-19@reedsmith.com
- Whilst the test case has been brought primarily for the benefit of SME’s (hence why the assumed facts produced to assist the court do not address issues such as loss of rent or multiple insured locations), any ruling by the court will also have value for larger commercial organisations.
Client Alert 2020-391
