COVID-19 UK BI losses: High Court finds in favour of policyholders

In the business interruption test case brought by the FCA, the judgement from the UK’s High Court has largely found in favour of policyholders.

The FCA has said that the various terms under consideration were relevant to approximately 370,000 businesses in the UK, with a potential pay-out following the judgement of as much as £4 billion. This judgement, however, is likely to prompt appeals from many (if not all) of the insurers included in the test case. Lloyd’s syndicates generally have very little exposure to UK business interruption claims.

The FCA’s interim CEO, Christopher Woolard, said: “We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims … We are pleased that the Court has substantially found in favour of the arguments we presented on the majority of the key issues. Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders …Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible … Insurers should reflect on the clarity provided here and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgment says should be paid … If any parties do appeal the judgment, we would expect that to be done in as rapid a manner as possible in line with the agreement that we made with insurers at the start of this process.”

The FCA also summarised what it believes the ruling means:

In order to establish liability under the representative sample of policy wordings, the FCA argued for policyholders that the ‘disease’ and/or ‘denial of access’ clauses in the representative sample of policy wordings provide cover in the circumstances of the Covid-19 pandemic and that the trigger for cover caused policyholders’ losses.

The judgment says that most, but not all, of the disease clauses in the sample provide cover. It also says that certain denial of access clauses in the sample provide cover, but this depends on the detailed wording of the clause and how the business was affected by the Government response to the pandemic, including, for example, whether the business was subject to a mandatory closure order and whether the business was ordered to close completely.

The test case has also clarified that the Covid-19 pandemic and the Government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid even if the policy provides cover.

Although the judgment will bring welcome news for many policyholders, the judgment did not say that the eight defendant insurers are liable across all of the 21 different types of policy wording in the representative sample considered by the Court. Each policy needs to be considered against the detailed judgment to work out what it means for that policy. Policyholders with affected claims can expect to hear from their insurer within the next 7 days.

The test case has removed the need for policyholders to resolve a number of the key issues individually with their insurers.
The test case was not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers. The judgment does not determine how much is payable under individual policies, but will provide much of the basis for doing so.

It is possible that the judgment will be appealed. Any appeal does not preclude policyholders seeking to settle their claims with their insurer before the outcome of any appeal is known.

The full statement from the FCA can be found here.

Alpha comment

This High Court ruling was never going to draw a line under the Business Interruption (BI) ruling as far as COVID-19 is concerned. It was an expedited process, but one that looked at wording rather than deciding individual cases. This means that each claimant’s insurer (and lawyer) needs to interpret the judgement based upon individual circumstances. Additionally, both sides have the right to fast track an appeal to the Supreme Court, which might push any final legal decisions in to the New Year. The judgement does, however, provide some indication as to the extent that the courts are prepared to declare cover to have been in place under retail & SME BI policies. Numerous lawyers acting for claimants have declared the decision as a ‘landmark decision’ and a ‘victory for policyholders’. Insurers, on the other hand, have taken a more sanguine view and pronounced comfort from the fact that (in the words of Hiscox) coverage “is essentially limited to those customers who were mandatorily closed by government orders, and then only in certain circumstances.” Shareholders agreed, with Hiscox shares rising as much as 15% yesterday after the company’s statement; RSA’s shares rose by c4%. It is also important to bear in mind: (i) that the majority of the clauses being examined by the High Court were part of policies issued by retail divisions, not by Lloyd’s syndicates; and (ii) that the broad consensus is that the judgement falls a long-way short of any ‘worst case scenario’ (Hiscox estimates the impact to their group to be in the region of £100m versus a previous declared range of £10m-250m). We do not see this judgement significantly increasing the overall COVID-19 losses for the Lloyd’s market, estimated in the recent Interim results to be in the region of £3bn (spread over the 2019 and 2020 years of account).