Judgment handed down in the Financial Conduct Authority’s test case
The long-awaited judgment on the Financial Conduct Authority’s (“FCA”) business interruption insurance (BII) policies test case has been handed down today.
It provides much-needed clarity for businesses who had obtained BII policies against the risk of loss caused by the outbreak of pandemic disease, only to be told by their insurers that the specific risk of Covid-19 (and the coronavirus which causes it) fell outside the scope of the insured risks.
Why did the FCA decide to bring its test case?
The outbreak of the Covid-19 pandemic did not fit with the more traditional perception of an insured risk: an act of nature which causes physical damage to a building. Nonetheless, some BII policies allowed consumers to make claims to be made for business interruption without the pre-requisite of physical damage. And in the case of those policies, certain insurers had taken the view that Covid-19, despite having caused a sudden (and in some cases devasting) interruption to business, was not an event capable of triggering a claim by the policyholder. The insurers’ stance was heavily criticised. It brought about considerable uncertainty in the consumer market, which the FCA felt was undesirable.
And so to clarify the position, the FCA brought a test case in the High Court. The objective was to test the insurer’s interpretation of the “non-damage” polices concerning the effect and consequences of Covid-19. A total of eight insurers were party to the proceedings, including Hiscox Insurance Company Limited, Royal & Sun Alliance Insurance PLC and Zurich Insurance PLC.
What was the Court asked to consider?
In broad terms, the objective of the test case was to examine two key aspects of the policies:
- Coverage: whether specific policy wording should/does respond to business interruption caused by the Covid-19 pandemic; and
- Causation: if the policies did indeed cover the specific risk of Covid-19, then whether the losses claimed by the policyholders could be said to have been caused by the pandemic.
What did the Court decide?
- The Court separated the policy wording into three main categories: (a) those which enabled claims to be made if the event of a notifiable disease occurred within the vicinity of a policyholders’ premises; (b) those which provided cover if the premises had been rendered unusable as a result of the outbreak of a notifiable disease and (c) hybrid clauses, which mentioned both requirements.
- The Court did not accept the insurers’ position that only claims in respect of local outbreaks of notifiable disease would meet requirements of the policies, and as such, the national (indeed global) event of Covid-19 would be disqualified. Instead, it found that the cause of the business interruption was Covid-19: a national pandemic comprised of indivisible local outbreaks. In other words, the local and national situations were effectively the same.
- But the Court took a different, more restrictive, approach to policies which require that the loss should flow not only from the outbreak of Covid-19, but that access to, or use of the policyholder’s premises, should also have been restricted as a result of the pandemic. In those cases, it would be necessary to take a closer look at circumstances on a case by case basis. For example, what type of business was the policyholder operating at the premises? Was the complete closure of the business mandated in response to the public health emergency of Covid-19, or could it have continued to function in a reduced capacity?
What does this mean for businesses generally?
The decision of the Court is undoubtedly good news, for policyholders. Irrespective of whether they have made a claim so far or not, every policyholder should take the opportunity to review the terms of their policies in light of today’s decision. The factual condition of having an outbreak of a notifiable disease within the vicinity of the premises in question will now be much easier to prove. And it may also be possible to satisfy specific requirements relating to use and access to the premises as well. The representative policies examined by the Court were typically held by SME businesses, but are unlikely to differ in form from those held by larger businesses. This is a powerful judgment, and it is going to apply widely.
That said, it is still general guidance. The acceptance or rejection of any given claim could turn on a seemingly minor point of detail in the wording of an individual policy.
For further information and assistance on the wording of your BII policy, please feel free to contact either Pradeep Oliver on +44 (0)1892 765 453, Ed Weeks on +44 (0)1892 506 196 or Mike Scott on +44 (0)1892 506 101.
And what does the decision mean for landlords and tenants?
Like any other policyholder, landlords will have been waiting to learn whether the terms of their BII policies are engaged by the specific circumstances of Covid-19. But there is then the added question of whether, if the claim is accepted by the insurer, that triggers the effect of a rent suspension clause in any occupational leases of the premises. You can find a more detailed commentary on this subject here:
But to summarise: leases often contain rent suspension clauses which suspend the tenant’s obligation to pay rent if the premises are physically damaged following the occurrence of an event, again which the landlord is required to insure. Some rent suspension clauses may go even further, suspending the tenant’s obligation to pay rent simply if the happening of an insured risk has rendered the premises unusable.
If, as a result of today’s decision, a landlord is able to engage a BII policy in relation to losses caused by Covid-19, then, depending on how the relevant clauses in the lease are drawn, the “domino effect” could be that Covid-19 falls within the definition of events that suspend the tenant’s obligation to pay rent. But this is not not a general rule. The terms of the insurance policy will still have to be interpreted and read in conjunction with the rent suspension clause of the lease, and there is often some conditionality between the two. And so it is worth tenants carefully reviewing the terms of their lease before drawing any conclusions from today’s judgment.
Is this the end of the matter?
While helpful clarification to all concerned, the Court’s decision was only intended as guidance for policyholders and insurers. Many details will remain specific to each policy (e.g. the calculation and adjustment of loss.)
Within the landlord and tenant context, a more collaborative approach to dealing with the interruption and loss to both parties’ businesses (e.g. through rent concession and deferment schemes, or temporary turnover rents) will help to avoid disputes, and will certainly be a more cost-effective solution than resorting to litigation over the question of rent suspension. That said, it is perhaps inevitable that the courts will soon be called upon to decide how this decision should apply to leases.
It is also quite likely that the insurers could appeal, perhaps directly to the Supreme Court, so we are unlikely to have heard the last of this subject just yet.