On 1 May 2020 the Financial Conduct Authority (FCA), as conduct regulator of insurers in the United Kingdom, announced its intention to bring a test case seeking legal clarity on coverage for Covid-19 claims made in respect of business interruption (BI) insurance policies that are not linked to property damage (FCA link here). The FCA updated the market on 1 June 2020 on the progress of the court action (FCA link here).

In the intervening period, the FCA considered over 1,200 submissions from policyholders who were in dispute with their insurers over the terms of their BI policies, and from 56 insurers as to how they proposed to handle more than 500 claims.

The FCA’s recent update includes drafts of:

• proposed assumed facts for the test case;
• proposed representative samples of policy wordings that the judge hearing the test case will be asked to consider;
• proposed questions for determination by the court; and
• guidance setting out the FCA's expectations for insurers and brokers when handling claims, or complaints, relating to business interruption policies between now and the date of the judgment in the test case.

What is business interruption insurance?

For most policyholders, BI insurance provides an indemnity for losses suffered as a consequence of damage to property. As a result, this cover is usually written as part of a combined property damage and BI policy or is included within a composite commercial combined policy that covers property damage, public liability, employer's liability and BI.

As noted above, in its usual form, as a prerequisite to making a claim for business interruption, there has to be some loss of or material damage to property. However, as with all questions of insurance coverage, to understand exactly what is insured, policyholders need to examine the specific wording of their policies.

Based on the FCA's findings, it would appear that a significant number of policies are written on terms where it could be credibly argued that they should respond to losses caused by the pandemic crisis.

What prompted the FCA's involvement?

The FCA was concerned about the uncertainty created by differences of opinion between insurers and policyholders as to whether their BI policies responded in the current emergency. The FCA's decision to bring the test case is in line with its strategic objective to ensure that relevant markets function well; and its operational objectives to ensure protection for policyholders and market integrity.

The FCA has emphasised its belief that the circumstances of the current Covid-19 emergency and its effect on businesses holding BI policies mean that, in the public interest, the lack of clarity and uncertainty for the policyholders making BI related claims needs to be resolved, as quickly as possible.

The test case

The aim of the test case is to place before the court a sufficiently representative sample of the most frequently used wordings that are giving rise to the current uncertainty. The decision will provide a legal precedent which the FCA considers will aid, to a substantial degree, the resolution of legal uncertainties arising from Covid-19 interruption to, or interference with, the policyholder’s business. The FCA expects the test case to provide guidance for the interpretation of many other BI policies that are not in the representative sample, because the key arguable issues will have been put before the court.

The FCA’s stated aim is to put forward policyholders’ arguments to their best advantage in the public interest in respect of BI wordings that appear to provide cover, where there has been no physical damage to the insured property.

Insurers and the FCA have agreed a list of assumed facts that will form the basis of the test case. The assumed facts set out illustrative factual assumptions, such as the nature of the affected businesses and how they were affected. The proposed questions for determination include the degree to which a business needs to be impacted to trigger the cover, e.g. is closure or part closure required, and what is the necessary causal link that needs to be established between the loss and the interruption to, or interference with, the policyholder’s business.

The intention is that the representative sample of 17 policy wordings will capture the majority of the key issues that the FCA considers could be in dispute. The list includes both standalone policies and those written as part of commercial combined contracts of insurance.

The FCA and insurers have entered into a framework agreement recording the mutual objective of insurers and the FCA to achieve the maximum clarity possible for the maximum number of policyholders, consistent with the need for expedition and proportionality.

The framework agreement with insurers includes provisions that the usual loser pays the winner’s costs rule will not apply. Accordingly, each party to the test case will bear its own costs associated with the test case, and of any appeal, and no party will seek an order for costs against the other.

The outcome of the case will be binding upon the parties to the test case in respect of the representative sample of wordings considered by the court. Given the care that has been taken to include in the test case the key arguable contractual uncertainties and ‘causation’ issues, it will also provide persuasive guidance for similar policy wordings that can be taken into account by policyholders and insurers when similar claims are considered. The test case will not determine how much is payable under individual policies, but it is hoped it will provide the basis for doing so.

The FCA's intention is to publish all pleadings, orders, skeleton arguments and evidence so that affected policyholders have full transparency on the process.

The estimated timetable for the test case

Practical advice

Policyholders interested in the test case can sign up to receive email updates from the FCA by clicking on this link. Policyholders with claims that are currently under consideration should be receiving notification of the progress of the test case and its implications for potential claims under their policies, from their insurers and brokers in accordance with the FCA guidance for insurers outlined above.

As always, if a policyholder believes it may have grounds to make a claim under a BI policy, the first step is to read the policy wording. It is always worth double checking that you have the complete contract of insurance. Policy schedules or endorsements need to be considered carefully because they can contain valuable extensions to the cover e.g. by way of “writing back” coverage that is excluded in the main body of the policy wording.

Sullivan’s client alert ‘Insurance Claims-Tips for Commercial Policyholders’ contains additional practical guidance (link here).