Let me at the outset just caution against popping the champagne corks too soon.
The UK Court found in favour of the arguments advanced for policyholders by the FCA on the majority of the key issues, not all of them. It also has to be borne in mind that the lockdown in the UK was handled differently from our own, and this could well impact on local outcomes.
As we noted recently, proudly South African also featured in this matter via the Guardrisk/Café Chameleon case. A number of these findings were used in arguing the case for policyholders in the UK.
Background
Most SME policies focus on property damage and only have basic cover for BI as a consequence of property damage. But some policies also cover for BI from other causes, in particular infectious or notifiable diseases (‘disease clauses’) and non-damage denial of access and public authority closures or restrictions (‘denial of access clauses’). In some cases, insurers have accepted liability under these policies. In other cases, insurers have disputed liability while policyholders considered that it existed, leading to widespread concern about the lack of clarity and certainty.
The FCA’s aim in bringing the test case was to urgently clarify key issues of contractual uncertainty for as many policyholders and insurers as possible. The FCA did this by selecting a representative sample of policy wordings issued by eight insurers. The FCA’s role was to put forward policyholders’ arguments to their best advantage in the public interest.
What the UK judgment decides
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.
What the judgment means for policyholders
Although the judgment will bring welcome news for many policyholders, it 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.
The test case has removed the need for policyholders to resolve a number of the key issues individually with their insurers. It enabled them to benefit from the expert legal team assembled by the FCA, providing a comparatively quick and cost-effective solution to the legal uncertainty in the business interruption insurance market.
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.
Christopher Woolard, Interim Chief Executive of the FCA, commented:
‘Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful.’
‘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 FSCA has decided to put its own “test case” to obtain legal certainty on CBI Cover on ice.
“After engaging with their legal teams, the majority of non¬life insurers have advised the FSCA that due to many legal complexities they are now of the view that the cases that are currently before the South African courts and the one by the Financial Conduct Authority in the United Kingdom will provide the required legal certainty on CBI policy wordings for the non-life insurance industry.”
Click here to read the detailed judgement summary by Herbert Smith Freehills
Click here to download the judgment of the BI insurance test case.
Click here to read the FSCA media release.
