The FCA Test Case
Over 8 days in London in July 2020, the Financial Conduct Authority (“FCA”), several insurers and policyholder ‘action groups’ each sought to persuade the High Court that their respective interpretations of principles of business interruption insurance was the correct one. This test litigation is the first of its kind in the UK. It was brought by the FCA under the High Court’s Financial Markets Test Case Scheme, a scheme introduced (but never used) to settle uncertainties arising from the UK’s departure from the European Union.
As the conduct regulator of insurers and insurance products in the UK, the FCA’s stated objective in bringing the test case was to deliver certainty for policyholders, and to the wider market in general. The FCA has very much cast itself as a consumer champion in this action, highlighting that holders of the relevant policies tend to not to be well-resourced or sophisticated in the way a large corporate would be, and arguing for consumer-friendly interpretations of the law.
The test case has sought to clarify:
- Whether business interruption policies with a non-damage insurance clause provide cover for business loss arising from interruption or interference associated with the Covid-19 pandemic?
- If coverage can be established, whether policyholders can establish the necessary causal link between the losses sustained and the relevant peril, event or circumstance that is covered?
Notably, the test case did not seek to resolve any issues relating to losses alleged to be caused by property damage arising from the Covid-19 outbreak.
The legal arguments
Two key areas of argument were:
- Whether phrases in policy wordings such as “inability to use” or “prevention of access” only provided cover if there was a total inability to use or access insured premises. The FCA argued that a partial inability to use the insured premises would be sufficient for a claim to bite. Many policyholders, particularly in the hospitality sector will have found themselves able to operate to a limited extent. The example of a restaurant which could still operate its takeaway facilities was used throughout the trial. The policyholder action groups aligned themselves with this argument, whereas insurers unsurprisingly argued for a narrower interpretation. For example, it was argued on behalf of Zurich that to fall within the policy wording, access to premises must either be physically obstructed or otherwise rendered impossible, and that the authority leading to the action should be mandatory. Similar arguments were made around what sort of advice or guidance a business would have to be acting upon to trigger cover.
- The correct test of causation. The FCA argued that the test for causation should account for the fact that there may be concurrent, overlapping causes of loss. For example, a business might be affected by staff absences, interruptions in the supply chain, and a direction to close, all of which could be traced to the Covid-19 pandemic. The insurers stressed the primacy of the ‘but for’ test of causation, and the fact that insurance policies were first and foremost, a type of contract, to which principles of contract law should apply.
The High Court’s judgment – a win for policyholders?
In the lengthy judgment in The FCA v Arch Insurance (UK) Ltd et al  EWHC 2448 (Comm), delivered on 15 September 2020: download a full copy of the judgment here. Lord Justice Flaux and Mr Justice Butcher found largely in favour of the FCA and policyholders:
- Business ‘interruption’ did not have to amount to a complete cessation of business. A disruption or interference could suffice.
- Where policies had ‘disease wordings’ such that they provided cover for business interruption arising from an outbreak of disease, it was not necessary to establish that there had been an outbreak on or within a defined distance of an insured premises.
- Policy wordings based on prevention of access or an inability to use premises were generally interpreted more narrowly than with disease wordings, albeit physical prevention of access was not required.
- Lengthy arguments were made at trial about causation, but the Court found that causation should be analysed based on the wordings of the policies, rather than any clause having “a settled meaning” against a background of long-standing and clear authority. They thus distinguished Orient Express (Orient Express Hotels v Assicurazioni Generali Spa (UK) (t/a Generali Global Risk)  EWHC 1186 (Comm)). But the Court went further and observed that, had they needed to do so, they would have held that Orient Express was wrongly decided.
- Trends clauses (also known as the “Other Circumstances Clause” or “New Business Clause”) could not be interpreted so as to negate the value of the coverage provided by insurance.
This is far from the end of the matter, however. It is likely that an appeal will be brought by any or all the parties, and that the appeal will bypass the Court of Appeal and proceed directly to the Supreme Court. If so, it will be one of the first business interruption insurance cases in the common law world to reach a final court of appeal. It will be interesting to see whether the recently promoted Lord Hamblen, who, as Hamblen J, decided Orient Express will be on the panel.
The FCA has published guidance setting out their expectation that, following final resolution of the test case (including any appeals), insurers should apply the judgment in (re-)assessing all outstanding or rejected claims and complaints which may be affected by the test case. The FCA have published a list of policies with claims that may be affected. It is thought that this covers approximately 370,000 policyholders.
It is important to note that the High Court heard no evidence and made no factual determinations. Furthermore, while the principles of the judgment will be relevant to policy wordings that were not directly considered by the litigation, the precise extent of its reach is likely to be a matter of dispute.
Other international developments
The approach taken to business interruption claims in other jurisdictions is instructive. For example, counsel for the FCA drew the court’s attention to a French case where a hotel had remained open only for some key workers. The French court ruled for the policyholder in finding that this still amounted to a closure of the business.
In the South African case of Cafe Chameleon CC v Guardrisk Insurance Company Ltd, the High Court of South Africa (Western Cape Division, Cape Town), the judge accepted that there was a clear link between the coronavirus outbreak and the government response, which caused the claimant’s loss. The judge rejected an argument from the insurer that the government measures were only concerned with ‘flattening the curve’. This has echoes of the argument advanced on behalf of Zurich, that the purpose of the coronavirus restrictions in the UK were to protect the NHS as a whole rather than to address outbreaks in particular locations.
This is not to say that all judgments have been favourable to policyholders. In the US in particular, there have been several judgments in favour of insurers. This has led to something of a backlash, where legislators in Congress and some states have attempted to introduce bills which would retrospectively extend cover to policyholders.
Two key questions have emerged in the US: Do the causes of COVID-19 business interruption losses constitute “physical loss or damage to property”? And if so, is coverage nevertheless overridden by specific exclusions relating to contamination or any virus?
One positive interlocutory ruling was recently made in Studio 417, Inc. v. The Cincinnati Ins. Co.: The court denied an insurer’s motion to dismiss the coverage claims of a proposed class of restaurants and hair salons, rejecting the insurers’ arguments that the plaintiffs had not adequately stated a claim for “direct physical loss” or for “civil authority” and other coverages under their “all risk” policies.
In the ruling, the court acknowledged that “physical loss” and “physical damage”, which were undefined in the policy, are distinct and not synonymous, and that “loss” includes “the act of losing possession” and “deprivation,” as well as property being in a condition that is “unusable for its intended purpose.”
Accordingly, the court concluded that the complaint “plausibly alleges a ‘direct physical loss’ based on ‘the plain and ordinary meaning of the phrase.’” The court also rejected the Southern District of New York’s rationale in the Social Life Magazine case, which did not include allegations of physical loss: Studio 417, Inc. v. The Cincinnati Ins. Co., No. 20-cv-03127-SRB (W. D. Mo. Aug. 12, 2020).
However, there remains a long way to go in the US with hundreds of claims filed across many of the individual states.
The significance of this litigation reaches far beyond the affected policies and even this jurisdiction. Several important principles can be gleaned from the judgment which will assist with negotiations over London Market policies outside the scope of the litigation, or policies held in other jurisdictions, whether through application or distinction. It is rare for an insurance dispute to be argued so thoroughly and so publicly with so many points in issue. This litigation is therefore likely to have enduring significance for insurance claims, whatever its final impact on the Covid-19 claims currently in issue.
Any corporate policyholder with business interruption losses arising under a London Market policy may benefit from the assistance of English counsel with expertise in resolving similar complex coverage disputes.
David Stern: Over the last three decades, David has developed a unique commercial insurance practice, which focuses on the resolution of London Market insurance claims on behalf of international policyholders, with a particular emphasis on North America.
He is considered to be a leading expert on legal issues arising out of Lloyd’s of London, Equitas and its successors and the London companies’ market, as well as in FSMA 2000 dealing with insurance business transfers.
Founder of Settlement Counsel in 2000, he has been retained in some of the largest commercial insurance settlements and litigation to act on behalf of the corporate policyholder, usually with the assistance of international counsel. He has been a regular speaker at the American Bar Association.
David received his LL.M. in Commercial Insurance from Cambridge University.
Amy Woolfson: A versatile junior barrister, who trained in the UK and the USA, Amy has been closely monitoring developments in Covid-19 litigation and insurance claims. She maintains a busy trial advocacy practice alongside her advisory work.