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 – and responded to the decision by calling it a “significant step”. 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. According to the regulator, the value of policies likely to be affected by the test case is about £1.2 billion.
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”.
In a 150-page judgment, which was delivered remotely on Tuesday, Lord Justice Flaux and Mr Justice Butcher considered 21 “lead” insurance policies issued by eight separate insurers.
The court’s decision could mean 370,000 people get payouts
The High Court in London
In a statement after the ruling, the FCA said the court determined that the “disease clauses” in most – but not all – of the policies in the test case provide cover to policyholders
But the regulator also said: “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.”
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The FCA’s interim chief executive 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 and the wider market.
“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.”
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Huge numbers of businesses – including in Oxford Street – were unable to trade during the lockdown
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He added: “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.
“They should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.
“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.
“As we have recognised from the start of this case, thousands of small firms and potentially hundreds of thousands of jobs are relying on this.”
The Hiscox Action Group, which has over 400 members and intervened in the High Court case, also welcomed Tuesday’s ruling.
The group’s solicitor, Richard Leedham from Mishcon de Reya, said: “Today’s judgment by the High Court is one of the most significant in recent years and will provide a lifeline for small businesses across the country.
“We joined the court case as we believed it was vital for businesses to have a voice in the proceedings and we are delighted they have finally been heard.”
Mark Killick, a Hiscox Action Group steering committee member, said: “Today’s judgment represents a huge victory for the Hiscox Action Group.”
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At the hearing in July, the FCA’s barrister Colin Edelman QC said about 370,000 policyholders “could potentially be affected by this litigation”.
He suggested this “ballpark figure” pointed to the importance of the case for businesses “confronting the financial impact of the coronavirus epidemic”.
The FCA said the Government’s coronavirus public health controls had caused “substantial loss and distress to businesses”, particularly small and medium enterprises (SMEs).
Leigh-Ann Mulcahy QC, who also represented the FCA at the hearing, told the court the outbreak of Covid-19 had triggered a “national response” driven by “the danger and the emergency” of the disease.
Coronavirus testing earlier this year
She suggested all businesses had to follow the Government’s advice, guidance and lockdown requirements, whether or not these were specifically legislated for.
Businesses had “legal duties” to employees, customers, contractors and visitors, including health and safety requirements, she said.
She added: “It wasn’t up to policyholders to breach the UK Government’s advice and guidance without breaching their legal duties regarding the health and safety of employees and as occupiers in relation to the public.”
(More to follow)