15 September 2020 10:47

Philip Day Bonmarché Edinburgh Woollen Mill

The High Court is set to deliver a landmark ruling on the coronavirus pandemic's impact on insurance claims which could see hundreds of thousands of businesses receive a payout. The Financial Conduct Authority (FCA) brought a test case earlier this year over the wording of business interruption (BI) insurance policies, which some insurers argue do not cover pandemics. The city watchdog previously said it was bringing the legal action following "widespread concern" over "the lack of clarity and certainty" for businesses seeking to cover substantial losses incurred by the Covid-19 pandemic and subsequent national lockdown. The FCA selected a representative sample of 17 policy wordings used by 16 insurers, which were considered at an eight-day hearing in July. Eight insurers agreed to assist the FCA by taking part in the test case, which the regulator has said it hopes will provide "clarity and certainty for everyone involved in these BI disputes, policyholder and insurer alike".

It argued that, while some insurers had provided payouts to customers, many businesses had had claims "rejected" under "blanket denials of cover". The FCA's written arguments at the July hearing noted that, while positions vary, insurers have denied claims on the basis that their policies "do not cover pandemics, but only local events". The court also heard that some insurers' policy clauses explain that cover is only provided in outbreaks of a "notifiable disease", which Covid-19 became in England from March 5, which means medical practitioners have a legal duty to report cases. A witness statement by the FCA's director of general insurance and conduct specialists Matthew Brewis said that, up to early May, about 8,500 claims had policy wordings likely to be affected by the test case, with a value of approximately £1.2 billion. The FCA has said that most SME insurance policies have basic cover that was focused on property damage, meaning insurers were not obliged to pay out due to the coronavirus pandemic.

This test case is focused on the remainder of policies where an argument could be made that they did provide cover during the virus outbreak. In only a few hours time we will discover the outcome of a critically important Covid-19 legal test case in the UK High Court. Indeed, it is no exaggeration to describe the process as the most important Covid-19 related (re)Insurance dispute in the global industry thus far. Using an untested (until now) legal mechanism, the UK regulator identified eight UK property insurers and 17 different policy wordings to test the applicability of BI coverage for primarily smaller businesses impacted by the Covid-19 restrictions and lockdown measures imposed this year. The US, the spiritual home of the plaintiff bar and coverage litigation, has naturally seen a spurt of BI disputes but a narrower range of wordings and in particular the popularity of the ISO policies has had a tempering impact.

This seems high but if one took a yardstick of £50,000 as an average policy limit, then nearly £20bn in potential insured losses could be issued based on this estimate. It's general stance of "you're not covered" - despite, in many cases, policy wordings to the contrary - has setback the industry's standing in the eyes of many of its business customers. Second, even if the Court determines broadly in one particular direction there are many different policy wordings at issue. Ahead of the FCA test case trial, many London (re)insurance lawyers felt the advantage was with the industry. The infamous case of Orient Express Hotels vs Assicurazioni Generali has served as the leading authority on the application of trends clauses for a decade now in English Law. In essence it says insurers can legitimately determine the quantum of the BI loss by calculating what would have been suffered by, say, restaurants or hotels if they had remained open even while the pandemic (and the fear of it) ravaged the country. For example, the shame imposed upon the industry by its failure to consistently issue policy wordings ahead of coverage was exposed during the Silverstein one-two event WTC litigation after 9/11. The dispute trundled on for years but a welcome outcome was the commitment by carriers to "contract certainty" - ie issuing policy wordings on time. If a similar positive legacy can occur from the FCA litigation – perhaps around clarity over loss quantum, causation or greater consistency around wordings and coverage – then this is to be welcomed. It would be a mistake to think the fallout will be restricted to the business interruption insurance market. The Financial Conduct Authority's (FCA) business interruption insurance test case against eight general insurers has kept the London market on tenterhooks. Because it is taking so many issues against so many insurers, in such an aggressive way, that it is difficult to see how anyone will win in the end, if the FCA wins now. For example, the FCA, the Prudential Regulation Authority and a small group of insurers met representatives of HM Treasury in March, and an "agreement" was reached: if the insurers received a claim, they would pay it, if the only reason not to do so was that cover depended on a public authority making an order, and no order had been made. The FCA seems to think it should also bind the insurers that weren't there, and the FOS might well agree. If the FCA wins in the Supreme Court, the market will be forced to pay claims it did not underwrite, reserve for or expect to pay, and that will materially reduce insurers' reserves.