Business interruption insurance test case: High Court rules largely in policyholders' favour

    The English High Court has handed down its judgment on the FCA’s business interruption (BI) insurance test case. The Court was asked to review 21 BI policy wordings to determine the correct construction of the policy terms and whether cover is available in principle. In its ruling, the Court largely found in favour of arguments put forward by the FCA on behalf of policyholders.   

    Here is a summary of the ruling and its immediate implications for the market. 

    A fillip for SMEs – the ruling at-a-glance

    The test case considered policy wordings from eight insurer defendants, which were categorised into:

    • Disease clauses.
    • Prevention of access clauses.
    • Hybrid clauses (i.e. a blend of disease and prevention of access wording).

    Broadly, the Court found that most of the disease clauses reviewed provide cover in relation to Covid-19 claims, while certain of the prevention of access clauses reviewed also provide cover. The Court reached this view by applying the principles of construction of English law insurance contracts (outlined in the judgment) and analysing specific policy wording by reference to these principles. 

    In this context, the Court considered, for each contract, what peril was covered by the policy wording. The Court also looked at any limitations in the policy wording which would restrict insured losses to those caused by a local outbreak (as opposed to losses caused as a result of the government / public response to the pandemic more widely), as well as any specified exclusions of cover. 


    Specified in the judgment as


    Disease clauses

    “[BI] in consequence of or following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises

    Most of the clauses were said to provide cover in principle (in particular, the Court disagreed with the insurers’ position that cover was only against BI proximately caused by a local outbreak). In a minority of other disease clauses, recovery may only be possible if cases of Covid-19 within the relevant policy area were the cause of the BI.

    Prevention of access (and similar perils) clauses

    A prevention or hindrance of access to or use of the premises as a consequence of government or local authority action or restriction

    Certain clauses were said to provide cover, but this depends on (1) the exact policy terms; and (2) how factors such as government measures applied to the policyholder’s business (for example, was it subject to a mandatory closure).

    Hybrid clauses

    “[Policy terms] which refer both to restrictions imposed on the premises and to the occurrence or manifestation of a notifiable disease

    In respect of the “disease” and “prevention of access” aspects of such clauses, the Court broadly followed the same considerations and approach as adverted to above. As with prevention of access clauses, certain clauses may provide cover, depending on the exact policy terms and the impact on the insured’s business.

    On trends clauses – simply, clauses that allow insurers to adjust the amount payable, based on business trends, to avoid any over or under indemnification – the Court rejected insurers’ arguments that the insured peril should be narrowly defined. For example, in relation to disease clauses, insurers had argued that the peril was limited to the localised occurrence of Covid-19 (and, therefore, the wider effects of the pandemic, government controls etc. should be treated as a business trend – reducing the amount payable under the policy even if the claim is valid). 

    What now for the insurance market

    The FCA and defendant insurers are considering the judgment and the possibility of an expedited appeal. This includes a potential “leapfrog” appeal to the Supreme Court, in view of the importance of the case to policyholders and the industry. 

    In the meantime, there is likely to be a period of uncertainty and further disputes between insurers and policyholders, regarding similar but materially different policy wording. The test case was not intended to be all-encompassing; all BI insurers – not just those who participated in the test case – will therefore need to carefully consider their policy wordings against the detailed judgment, and make reasoned decisions about fair customer treatment and claims assessment accordingly.

    More broadly, the judgment – at least until the determination of any appeal – is expected to act as guidance for:

    • Courts, when considering separate claims in relation to similar policy wording.
    • The Financial Ombudsman Service (FOS) i.e. in settling complaints.
    • The FCA, as part of ongoing supervisory (and, potentially, enforcement) work to ensure insurers are handling claims fairly. Insurers can expect heightened FCA supervisory scrutiny in the short term, and should be alert to the longer-term risk of enforcement and civil litigation where their approach is not aligned with the test case. Insurers should also refer to the FCA’s specific guidance for firms.

    The judgment will be also be of particular interest to other common law jurisdictions outside of England and Wales where BI insurance is marketed.

    Regarding the financial and prudential impact, attention may also turn to the secondary market and insurers’ reinsurance policies, with reinsurers considering their exposure to a rise in potentially valid claims.

    BI insurance and the background to the test case – a quick recap

    The Covid-19 outbreak, and the public health measures introduced in response, have put businesses under sustained financial pressure. SMEs were particularly affected, and many have subsequently claimed for unforeseen losses under their BI policy (and, more specifically, under certain “non-damage” policy extensions). 

    The FCA – despite initially suggesting in a Dear CEO letter that insurers are, in most cases, not obliged to pay out for pandemic-related losses – announced in May 2020 that it was bringing a test case (under the Financial Markets Test Case Scheme) to resolve key contractual uncertainties.

    Eight insurers participated in the test case, the outcome of which the FCA estimates may be relevant to around 370,000 policyholders. 

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