What is the test case, and what did it consider?
The test case was brought by the FCA (on behalf of business interruption policyholders generally) with the aim of determining issues of principle on policy coverage and causation under sample business interruption wordings.
The case involved eight defendant insurers and 21 sample wordings.
However, the implications of the judgment extend much more widely and the FCA estimates that some 700 types of policies across 60 different insurers, affecting up to 370,000 policyholders could be affected by the outcome of the ruling.
What are the headline points?
The complexity of the judgment does not lend itself to easy conclusions, but here is a list of the key issues as we see them.
(A more detailed analysis of the legal aspects of the ruling is set out later in this note - see here).
- The judgment is a complex one and it is difficult to draw general conclusions.
The court considered each of the 21 sample wordings on their own merits and ruled on the meaning and effect of each wording individually, including construing individual words and phrases in each of the wordings.
The application of the judgment to similar wordings will require detailed analysis
The nature of the ruling means that insurers and policyholders considering their own policies and claims will need to undertake a detailed analysis of their own policy terms against the ruling and apply the relevant parts of the judgment.
The ruling may be appealed
Where cover is available, insurers will be expected to handle and pay existing claims in line with the ruling. Policyholders will expect prompt payment.
However, should elements of the judgement be appealed, the position on payment of claims in the interim may become unclear. We would expect the FCA will issue guidance in this regard in due course.
- Key issues for determination went both ways
Each side can claim victory on certain key issues in the case; some issues went in policyholders' favour, others favoured insurers.
A more detailed analysis of the various elements of the decision is set out below.
The extent of the insured peril is therefore critical to the recoverability of losses. A narrow definition will result in fewer recoverable losses, a wider definition in greater scope for recovery.
The court's decision on this point went in favour of greater recoverability of losses, since the effect of the ruling was to compare actual profits against profits generated in a non-COVID-19 scenario (i.e. no virus, no government restrictions).
This was a keenly disputed area of the case and likely to be significant in terms of insurers' overall exposure to covered claims.
- Not all policyholders will have equal cover, even where their wordings are the same
The bottom line is that whether any particular insured has cover will depend upon:
- the precise terms of the relevant cover wording (as interpreted by the court);
- for Notifiable Diseases covers – whether the existence of the disease can be established as a matter of fact in the relevant area;
- for Prevention of Access/Public Authority covers – whether or not the business was subject to mandatory closure and the extent to which it was able to continue trading.
Two businesses with the same cover wording could find themselves with different coverage positions.
The judgment considers each of the 21 sample policy wordings in turn and gives detailed rulings on the meaning and effect of specific words and phrases within the various clauses.
(A) The wording types
The wordings fall into three categories: (i) Notifiable Disease covers; (ii) Prevention of Access/Public Authority Wordings; and (iii) Hybrid wordings.
(i) Notifiable Disease covers
- The court held cover was not confined to the effects only of a local occurrence of a notifiable disease.
- The relevant insured peril was the existence of a peril of COVID-19 plus subsequent Government action, provided there was disease within the relevant radius.
- An 'occurrence' of the disease occurs from the point in time when there was cases of disease in the relevant policy area (the test being whether the cases were diagnosable – i.e. it should not matter whether the cases were in fact diagnosed, or were symptomatic).
(ii) Prevention of Access/Public Authority Wordings
- These wordings were construed more restrictively than the disease covers.
- Scope for cover is limited and will depend on:
- the precise terms of the relevant policy; and
- the nature of a policyholder's business and the impact of the Government's guidance/regulations upon them (in particular, whether they were mandated to close).
- However, a number of wordings were construed as providing only narrow localised cover.
- Cover under certain wordings will respond only where applicable Government actions had the force of law – i.e. mandatory business closures, rather than advice/guidance. However wordings with 'advice' triggers will more readily be engaged.
- "Prevention" of access was found to require closure of premises, whereas clauses with e.g. "hindrance of use" are construed less restrictively.
- "Interruption" does not require complete cessation of business, but businesses that were not prohibited from opening, and managed to continue to trade (to a certain degree) may find (depending on their wording) that there is negligible scope for cover.
(iii) Hybrid wordings
- These wordings blend elements of disease and prevention of access covers.
- The decision therefore blended the elements of the rulings summarised above, with a more policyholder favourable approach to the disease trigger, but a more restrictive ruling on what restrictions and inability to use premises a policyholder must establish to obtain cover.
- So, similarly to the type (ii) wordings above, cover under hybrid wordings will depend on the precise terms of the wording and nature of the business and operational restrictions faced by the insured.
In summary, whilst there is a gateway to cover under most wordings, the relative width of that gateway varies considerably between wordings.
(B) Trends Clauses
An important element of the judgment concerns Trends Clauses. These relate to the mechanism for establishing the quantum of a covered claim (amount insurers will pay).
A business's lost profits are generally established by comparing actual profits against the profits a business would have obtained absent the insured peril.
Insurers contended for a narrow approach, arguing that because COVID-19 affected the UK as a whole, insureds would have suffered the losses even without the specific outbreak of the disease that triggered policy cover. That would have significantly reduced the scope for insureds to recover the losses suffered from business closures.
By way of illustration: an insured's recoverable losses will be materially different if you compare their actual profits to a situation where: (a) the insured's business premises is open and trading, but the Government restrictions remain in place and COVID-19 is at large; compared to (b) normal trading conditions in a world without COVID-19.
In a decision favourable to insureds, the court construed the insured peril element broadly for each category of wording, so that (in effect) the test is to compare profits in the COVID-19 world against profits in a non-COVID-19 world.
This element of the ruling significantly favours policyholders, allowing greater recovery of trading losses than if the decision had gone the other way.
Conclusion & next steps - check your wordings
Given the detailed nature of the judgment it will be necessary for all involved to take time to digest the implications of the ruling and to apply the terms of the judgment to their own policy wordings.
For the reasons explained above, there is going to be a wide range of outcomes in terms of cover for claims and the result across the policyholder community and the insurance market will vary.
Further disputed issues are likely to arise as the ruling is applied to similar, but non-identical, policy wordings. And, for now at least, there remains the possibility of appeal of the decision.
So: a decision, but not necessarily certainty.
What is true for all, however, is that the immediate next step is to conduct a detailed review of wordings against the 21 policy wordings considered by the court.
Authored by Lydia Savill.