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02nd June 2020

The Testing Case of the Business Interruption Insurance Policy

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The Financial Conduct Authority (FCA) is pressing on apace with its test case on business interruption insurance cover, but expectations need to be tempered. Media reporting on the decision by the Financial Conduct Authority to bring a ‘test case’ on insurance policy wording for business interruption cover might give the impression that the disputed claims by troubled policyholders against insurers for COVID19 impact on their businesses can be resolved with the broad sweep of a swift judicial brush. Whilst the regulator’s purpose in taking this step is to ‘achieve clarity for all concerned in an unprecedented situation’ and achieve that clarity speedily (which is to be commended), there are limits to what the case can achieve and there will be technical challenges to surmount along the way.

The foundational issue of course is that for public policy reasons within its terms of reference the FCA is asking the Court to make decisions on the legal construction and interpretation of controversial insurance policy wordings. The Court is not being asked to decide whether policyholder claims are good or bad under the policies in question. Whether a policy will respond and if so how in any one instance, will depend on the specific circumstances of the policyholder’s case and will not be decided in this test case. What the FCA is hoping however, is that the decisions on policy terms it is asking the Court to make will aid the resolution of disputes between claimants and insurers.

Unusually, the regulator is also making the case in its own right; doing so under the ‘Financial Markets Test Case Scheme’ (a part of the Civil Procedure Rules governing Court procedure that is not thought to have been used before). Although it is intended that insurers will be party to the application to Court, it is not the FCA’s intention that policyholders will be (though some may consider applying to intervene). The claim is being brought by the FCA in its capacity as regulator and not as representative of the policyholders, something the Court will no doubt be considering at an early stage; to decide whether a policyholder or policyholders ought to be party to the Claim. As conceived however, the case is not a claim between policyholders and insurers.

That the outcome of the case will not produce a comprehensive solution is emphasised by the understandably limited number of policy wordings the FCA is asking the Court to consider, just 17 out of hundreds in the market, and those policies issued by just several insurers out of many. The regulator’s legal team have had the unenviable task of selecting wording that they hope will have the highest relevance and value. In many cases, the decision whether to include a policy will have been easy, as most business interruption cover offered in the market is not framed to provide an indemnity against losses caused by a pandemic. In other instances however, deciding between policies to be included will have been trickier. It should also be recognised that the FCA’s focus has been on SMEs, so its choice of policies to bring before the Court unsurprisingly reflects sectors of the economy where SMEs are prevalent, for example the hospitality sector.

The inevitable consequence is that there will be many businesses who ultimately will not be able to point to the Court’s decision in the FCA’s case as a specific aid to resolving their particular dispute with their insurer. Whilst what the Court has to say will no doubt be keenly reviewed for potential relevance and leverage in negotiations between policyholder and insurers, expectations need to be tempered. As to that, the FCA is issuing guidance to insurers (presently under consultation) directing them to review whether the test case could affect claims made against their policies and laying out how it expects claims to be handled pending the outcome of the court proceedings.

On the political plane of course, interest in the case is equally keen. The availability of business interruption cover will be ‘make or break’ for many, many businesses up and down the country, and that has obvious implications for an already heavily burdened economy.

An unusual case for extraordinary times.

Dominic Hopkins is Head of Disputes and Litigation at Hewitsons and is advising on a business interruption insurance cover claim relevant to the FCA’s test case. For more information please contact him on 01604 233233 or click here to email him.