In this article, we provide you with an update on the test case brought by the UK’s Financial Conduct Authority (FCA) against eight insurers (Arch, Argenta Syndicate Management, Ecclesiastical Insurance Office, Hiscox, MS Amlin, QBE, Royal & Sun Alliance and Zurich, each an Insurer and together the Insurers). The test case was brought by the FCA to resolve uncertainty in the interpretation of business interruption (BI) policies in the context of the COVID-19 pandemic.
In our previous alerts, we provided detail on the statements of case and supporting documentation made publicly available on the FCA’s website. The case covered 17 sets of policy wordings (including variations) that provide cover, in principle, for ‘standalone’ BI losses (i.e., without the need to first establish proof of physical damage to the insured premises).
The trial commenced on 20 July 2020 before Mr Justice Butcher and Lord Justice Flaux, lasted eight days and judgment is expected in mid-September.Read on below for more detail about the hearing. The case will have significant consequences for insurers, brokers and policyholders alike and we will be reporting on the judgment in due course.
To cover or not to cover?
In our previous alerts, we set out our views on the perceived ‘key battlegrounds’ in the test case. In this article, we revisit the main ‘battlegrounds’ in more detail.
Pandemics not compatible with BI cover
Insurers argued that BI policies were not intended to cover the ramifications of a pandemic. The FCA countered that, as a result of the legacy of pandemics (for example, SARS), the Insurers should have expressly excluded cover for pandemics should they not have wanted to cover them. Insurers submitted that this argument was circular and that it was not necessary to exclude risks that were not covered to begin with.
Interpretation of key terms
The test case focused on the proper interpretation of BI policies, with arguments from the various Insurers as to the interpretation of their policy wordings. The policy wordings differed across Insurers and, therefore, while their arguments overlapped, each Insurer took distinct lines of attack as to the interpretation of key terms and, in particular, set out why they did not classify the COVID-19 pandemic as triggering the non-damage BI policy clauses in issue.
Broadly speaking, the FCA argued for a very wide approach to the interpretation of policy terms, so as to include cover for COVID-19 related losses. Insurers disagreed and sought to confine the interpretation of key clauses as narrowly as possible, in order to prevent the triggering of cover for COVID-19 related losses.
In the section below, we look at some of what we consider to be key terms discussed before the court. The court’s decision as to the interpretation of these key terms is likely to have a wide impact on the insurance market – not just the set of wordings that have been included in the test case. Insurers who were not involved in the case will nonetheless have similar policy wordings and thus be caught by the judgment.
A. ‘Orders’ and ‘Prohibitions’ of public authorities
The FCA reasoned that, if a BI policy required a public authority ‘prohibition’ to trigger cover, such a ‘prohibition’ did not require legal force. The two-metre social distancing rule was never given legal force but a ‘reasonable citizen’ understood the UK government’s guidance to mean that they were prohibited from being within two metres of one another.
Insurers did not agree that government guidance constituted a ‘prohibition’ or ‘order’. In Insurers’ view, the social distancing measures were not mandatory and, thus, did not fall within the scope of a ‘prohibition’ such that cover would be triggered under a BI policy.
B. ‘Prevention’ or ‘hindrance’ of access to or use of premises
The FCA argued for a wider interpretation of the words ‘prevention’, or ‘hindrance’ of access to or use of insured business premises.
Insurers said that many insureds were not required to shut down their businesses and could still operate, either fully or partially, to supply essential goods and services. In the FCA’s view, the word ‘prevention’ did not require total prevention. The FCA contended that even if businesses could stay open, they still experienced a ‘prevention’ of use and access because of the government’s instructions to self-isolate, restrict travel, work from home where possible and socially distance. These measures, on the FCA’s case, resulted in a prevention of people accessing businesses. Lord Justice Flaux commented on this argument to the effect that, if parties had intended a looser concept, then more policy wordings would have used the term ‘hindrance’. Insurers raised different arguments in relation to what amounted to ‘prevention’, such as that a total closure of premises amounts to a prevention, or that a physical obstruction is required, or that prevention meant a legal prohibition. The common theme between them, however, appeared to be that ‘prevention’ related to the insured’s inability to access or use the premises for the purposes of its business, not the ability or otherwise of customers to visit them.
The FCA countered that the UK government’s requirement that people stay at home during lockdown was effectively a ‘hindrance’ as it amounted to something that made access to or use of the premises more difficult. Insurers denied that this was the correct interpretation of the word ‘hindrance’ arguing that it was too broad. Again, Insurers took varying approaches but, in overview, said that a ‘hindrance’ required there to be a physical or legal impossibility or difficulty of the insured reaching or using the premises.
C. In the ‘Vicinity’
In some of the policy wordings being considered in the test case, an occurrence or incidence of COVID-19 was required within a specified radius or vicinity to the insured premises to then trigger certain public authority action, advice or orders that subsequently interrupted or interfered with the insured’s business at its premises.
This raised the question as to whether COVID-19, which is rampant across the UK, both inside and outside of the specified vicinity or radius of the insured’s premises, qualified to trigger coverage under the BI policies in issue.
Insurers argued that cover was limited to purely localised incidents, emergencies or dangers that occurred close to the insured premises. Insurers said that policy wordings were designed to respond to a specific incident, such as a terrorist attack, when an insured premises is either damaged or, if not damaged, not able to operate as a result of the particular incident.
Insurers submitted that the UK government’s actions were in response to the nationwide presence of COVID-19 and not as a result of an incident of the disease in a specific vicinity.
The FCA rejected the Insurers’ argument that the causative incidence of COVID-19 had to be a localised incident. The FCA said that any requirement for the incident to occur within a specific vicinity or radius did not mean that it was not possible that the presence of COVID-19 within the vicinity of the insured premises might be a part of a greater problem. The FCA said that if, in addition to the disease being present within the vicinity of the insured premises (which is required by the BI policies), the disease can also be found outside of the relevant vicinity, then this should not prevent insureds from being covered.