The Covid-19 pandemic has affected businesses of all shapes and sizes in almost every industry. As a result, there are a substantial number of claims being made to insurers under the terms of business interruption (BI) insurance policies.

BI insurance policies traditionally cover loss of revenue following damage to property. A typical policy is usually triggered by an ‘act of God’ such as a storm or fire. However, BI cover can extend to non-physical damage to encompass losses resulting from events such as the closure of premises, but businesses rarely opt for this more extensive coverage.

Nonetheless, a large number of claims are being made under BI policies and there is a great deal of concern surrounding how insurance companies have responded to the claims. Disputes have arisen between insurers and policyholders over whether the BI policies were designed to cover pandemics or whether losses in revenue can be linked to an event covered by the relevant BI policy. The Financial Conduct Authority (FCA) have reacted accordingly by bringing a test case forward to the High Court. This enables a declaration from the courts which will clarify the current uncertainty surrounding certain BI policies in this unprecedented situation. The FCA will act in the public’s interest by putting forward policyholders’ arguments to their best advantage.

The result of the test case will be legally binding on the insurers that are parties to the case. It will also act as persuasive guidance in interpreting claims based on policies with similar wording in other court cases, as well as claims to the Financial Ombudsman Service and the FCA. As such, the FCA have published guidance which outlines that all insurers should check whether their policies will be affected by the outcome of the test case.

It is important to note that the FCA have made clear that most SME insurance policies are focused on property damage (and usually only have basic cover for BI as a consequence of property damage), therefore in the majority of cases insurers will not be obliged to pay out for coronavirus-related claims. The test case is being brought forward to clarify the current grey area arising from the more extensive BI policies.

Importantly, the test case will not prevent businesses from negotiating, settling or even issuing court proceedings themselves against their insurer with respect to their BI insurance policy. However, it may be advisable to make a complaint to the Financial Ombudsman Service as we wait for a decision in this test case, rather than incurring vast litigation costs in the meantime.

The Hearing So Far

The FCA have approached 56 insurers for information on how they intend to handle claims, as well as various policyholders of BI insurance who are in dispute with their insurers for their own arguments. As a result of this consultation the FCA has collated a sample of 17 policy wordings which in their view “captures the majority of the key issues that could be in dispute”.

The FCA has proposed a swift timeline for the case. In fact, the FCA has already filed its claim with the court and the case management conference was live streamed to the world on 16 June 2020. The FCA were aiming for the hearing to begin during the final two weeks of July and the court have agreed. The hearing will be from 20 July to 30 July 2020. The court have also confirmed that the case will be heard by two judges: Mr Justice Butcher and Lord Justice Flaux.

The insurers’ defences are due to be filed on 23 June 2020 and the second case management conference will be live streamed on 26 June 2020.

In the meantime, the FCA’s finalised guidance advises that insurers should review their policies to determine whether the outcome on any claims made by their policy holders could be affected by the resolution of the test case. If they believe that they may be affected, the insurer must report this to the FCA who will then publish a list of policies that will be affected by the case.

Conclusion

It is difficult to understate the potential impact of this test case for businesses that have experienced a downturn in revenue due to the COVID-19 pandemic as well as the insurance sector. The FCA have advised insurers that all potentially affected claims will have to be re-assessed in light of this test case, including those that have been rejected by insurers, and in any event the judgement of the test case will have to be applied to all outstanding claims once the court has made its decision.

Whilst, as stated, numerous small businesses are unlikely to be affected by the case, this is entirely dependent upon the wording of one’s policy. Therefore we implore everyone to review the FCA’s sample policy wordings in light of their own BI insurance policy – http://www.fca.org.uk/publication/corporate/bi-insurance-test-case-proposed-representative-sample-of-policy-wordings.pdf.

The legal word awaits the outcome of what is easily one of the most significant cases of the year. It is also envisaged that this case is likely to ‘leapfrog’ from the High Court straight to the Supreme Court on appeal once a decision is reached. We are likely to be on the edge of our seats all summer!