Insurers challenged in Business Interruption Insurance test case

Stockport law firm, SAS Daniels, explains why business interruption insurance claims lodged during the coronavirus pandemic are being disputed and what impact a test case progressed by the Financial Conduct Authority may have on small businesses.

The pandemic has revealed that a large proportion of UK SME’s standard Business Interruption Insurance Policies (‘BI Policies’) do not provide cover for business interruptions caused by Covid-19. Typically, these policies only cover losses arising from property damage, leaving a significant number of SMEs inadequately insured.

However, even where a BI Policy states that it does provide cover for business interruptions caused by disease, insurers and policyholders are struggling to decipher policy wording in the context of the current pandemic and whether indemnity ought to be provided.

Business Interruption Insurance Test Case

The Financial Conduct Authority (‘the FCA’) is attempting to address the key issues in dispute between insurers and policyholders in consultation with both sides, by progressing a test case  in respect of the validity of BI Policies on behalf of policyholders and in the public interest. Presently, the test case is proceeding against a total of 8 insurers that have denied BI claims exceeding a combined value of £1 billion on grounds of coverage and causation.

What Will the Courts Consider?

With the co-operation of the Defendant insurers, the FCA has produced 17 samples of policy wording typically in dispute and has asked the Court to make declarations upon their contractual meaning and effect. The Court is being asked to review the sample policy wording against a ‘menu’ of agreed facts and additional assumed factual scenarios (for example, relating to the nature of the policyholder’s business) to determine the extent to which coverage might exist.

Some of the issues that the Court has been asked to consider are:

• Whether COVID-19 is included in the definition of a ‘notifiable disease’ or ‘contagious disease’ and what it means if the policy states that the disease is required to be ‘within the vicinity of the affected premises’?
• What the policyholder has to establish to prove ‘prevention of access’ to their business premises and what happens if, for example, the closure impacts only part of the business.
• The applicable test for causation in the context of policy wording.
• Whether exclusion clauses referring to, for example, a ‘micro-organism of any type’ or ‘contamination’ effectively exclude Sars-Cov-2 (the strain of Coronavirus that causes COVID-19).

A list of the insurers and policies specifically included in the review is anticipated to be published in July as more insurers may become involved. However, the court’s ruling will also impact policies not included in the review by laying the foundation of judicial authority on the subject.

The first Case Management Conference took place (virtually) on 16 June 2020 and was live-streamed online by the FCA. The insurers’ Defences are to be filed later this month with an expedited trial to take place in the second half of July, meaning that judgment could be handed down before the Autumn.

Claiming Through the Financial Ombudsman Service

Where a policyholder is defined as a ‘small business’ (annual turnover of less than £6.5m and either fewer than 50 employees or an annual balance sheet total of less than  £5m), it can refer a complaint about its BI Policy insurer to the Financial Ombudsman Service (‘the FOS’) for claims of up to £335,000. However, the FOS is expected to pause its BI complaints handling so that it can consider the outcome of the FCA test case.

For more information, read the FCA’s press release of 1 June 2020.