Following the decision of the English High Court 1 in the high profile test case brought by the UK's Financial Conduct Authority (the "FCA"), the UK insurance industry faces the prospect of being liable to cover losses relating to COVID-19 under business interruption policies.
In this alert memorandum, we review the implications of the decision and the position of policyholders in both the UK and the US.
Executive Summary
The English High Court has found that a number of representative business interruption insurance policies will cover financial losses caused by COVID-19. Insurers can now be expected to incur significant financial liabilities in meeting claims.
The Court's key findings include:
- the "insured peril" should be broadly construed. The defendant insurers unsuccessfully argued for a narrow construction, claiming the wider effects of the pandemic were a "trend" which would have affected businesses in any event (an argument which may have substantially reduced the value of any recoveries by policyholders);
- the majority of "Disease Clauses" (which provide cover in respect of business interruption arising from the occurrence of a notifiable disease within a specified radius of the insured premises) and "Hybrid Clauses" (which require both restrictions imposed on the insured premises and the occurrence of a notifiable disease) will cover COVID-19 related losses; and
- "Prevention of Access" and
similar clauses (which provide cover where there has been a
prevention or hindrance of access to, or use of, the insured
premises as a consequence of government or local authority action)
may only provide cover for narrow, localized COVID-19 losses. The
precise effects of such clauses which will be sensitive to the
specific wording used and the way in which the business was
affected by authorities' actions (e.g. whether the business was
ordered to close and/or the degree to which it was able to remain
trading).
It remains to be seen whether the judgment will be subject to an appeal, which may delay the final resolution of claims.
In the meantime, U.S. courts have been grappling with similar issues as policyholders file hundreds of insurance claims seeking coverage for business losses due to the COVID-19 pandemic and associated civil authority orders. While the great majority of the U.S. cases are still pending, recent decisions indicate that, much like the English Court's judgment, the U.S. courts will have to address whether "prohibition of access" provisions require total closure of premises to trigger coverage. Additionally, the outcome of a great majority of the U.S. claims will likely turn on how courts interpret a common provision, requiring "direct physical loss or physical damage" to trigger business interruption coverage.
Background
On 1 May 2020, the FCA (which regulates UK insurers) announced its intention to obtain a "timely, transparent and authoritative [Court] judgment" to resolve contractual uncertainty in business interruption insurance cover, due to widespread concerns about the lack of clarity and certainty for some customers making business interruption claims 2. This stemmed from concerns that the range of wordings and types of coverage in the business interruption market made it difficult to determine the degree to which any individual customer may be able to claim.
Consequently, the FCA launched a test case in June 2020 to determine whether 21 sample insurance policies covered business interruption losses arising in the context of the COVID-19 pandemic and the consequential advice of and restrictions imposed by the UK Government (the "Test Case"). The FCA was representing the interests of the large number of policyholders who purchased the policies, many of whom are small to medium-sized enterprises. The FCA estimates that approximately 700 types of policies across over 60 different insurers and 370,000 policyholders could be affected by the Test Case.
The Test Case was heard in July 2020, with an expedited trial under the Financial Market Test Case Scheme 3 in the High Court's Financial List. This procedure is available where a claim raises issues of general importance where immediately relevant authoritative English law guidance is needed. The trial was held remotely, by two judges (Lord Justice Flaux and Mr Justice Butcher) sitting together, because of the particular importance or urgency of the Test Case.
The High Court (the "Court") decided the issues based on a set of agreed facts (which covered, amongst other things, the chronology of the pandemic and related UK government actions) as well as a set of assumed facts (illustrative factual scenarios as to how businesses have been affected by COVID-19) 4.
The Court grouped the sample clauses into three broad categories and examined each group in turn:
- "Disease Clauses" - which largely provide coverage in respect of business interruption in consequence of or following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises;
- "Hybrid Clauses" - which refer both to restrictions imposed on the relevant premises and to the occurrence or manifestation of a notifiable disease; and
- Clauses covering the prevention of access to premises and similar perils - which provide cover where there has been a prevention or hindrance of access to or use of the premises as a consequence of government...
