U.K. court deals blow to insurers in COVID-19 case
The court's ruling states that most, but not all, of disease clauses in the insurance policies considered provide coverage.
London’s High Court has handed down its judgment in the Financial Conduct Authority’s (FCA) business-interruption insurance coverage test case. After considering the arguments by the FCA, the Court found in favor of the policyholders on the majority of critical issues.
In bringing the test case, the FCA’s objective was to clarify key issues of contractual uncertainty for policyholders and insurers. To do this, the FCA selected a representative sample of policy language from eight volunteer insurers. The FCA estimated that 700 types of policies across at least 60 different insurers and 370,000 policyholders could be affected by the outcome of the test case. The FCA aimed to argue the policyholder’s side to their best advantage in the public interest.
The case origins
Hundreds of policyholders who owned businesses worldwide were affected by the COVID-19 pandemic. Many suffered significant losses, resulting in large numbers of claims under business interruption insurance policies.
In the U.K., most of the insurance policies at issue are for small or medium enterprises (SME). Most of these SME policies focus on property damage and only contain minimal coverage for business interruption as a direct consequence of property damage. Some policies, though, also cover business interruption from other causes, including infectious or notable diseases, known as “disease” clauses, and non-damage denial of access and public authority closures or restrictions, known as “denial of access” clauses.
Some of the insurers accepted liability assigned under the policy, but others disputed liability even when their insureds considered coverage existed. The disputes lead to widespread concern about a lack of clarity and certainty.
The judgment
To establish liability under the sampling of the 21 wordings from various insurers, the FCA argued that the “disease” and “denial of access” clauses in the sample wordings provided coverage in the COVID-19 pandemic circumstances and that COVID-19 losses triggered coverage.
The Court found in favor of the FCA on most of the key issues, particularly on coverage triggers under most disease clauses, certain denial of access/public authority clauses, and causation and ‘trends’ clauses. Whether or not coverage was provided explicitly depended on the wording of the clauses and how the business was affected by the governmental pandemic response i.e., if the business was subject to a mandatory closure or was forced to close completely.
The judgment in the test case also clarified that the COVID-19 pandemic and the public and government response were a single cause of loss.
Industry impact
The judgment might seem like a win for policyholders but failed to say that the defendant insurers were liable across all of the different types of wording that were considered. Each policy still needs to be considered individually, and affected policyholders should expect to hear from their insurers within the week.
According to experts at Mactavish, a specialist outsourced insurance buyer and claims resolution expert, “the ruling will mean that a small proportion of the relevant claims cases may now settle. The vast majority will either be unaffected or only marginally better off as a result of this judgment, with many legal hurdles still to overcome.”
The purpose of the test case was to resolve key contractual uncertainties and causation issues to provide clarity to insureds and insurers. The judgment has provided policyholders with, essentially, an expert legal team to provoke the Court to decide some of the more hairy issues that have arisen in insurance policies.
“Ultimately, today’s decision just confirms that a selection of the claims that we felt should have been settled are now likely to be paid, but it gives little assistance to other claims that were not covered by the review,” said Bruce Hepburn, CEO of Mactavish, in a statement. “Policyholders and their advisers will now need to work out what today’s ruling means for their claims — for them, this is the start of the battle, not the end. The review did little more than look at a small subset of policies and claims, and then a subset of some of the obstacles to these being settled.”
The judgment from the test case may potentially be appealed, but until decided, an appeal does not preclude policyholders from seeking to settle claims.
Read more about the decision directly from the FCA here. A written summary by the FCA’s legal team can be found here.
The case is The Financial Conduct Authority v. Arch and Others.
Related: