The Financial Conduct Authority (FCA) has challenged eight insurers in a business interruption insurance test case in order to seek coverage for insureds. The UK’s financial services industry regulator is taking an adversarial stance in order to determine whether 17 different policy wordings can provide cover for businesses across the country, in the hope this will provide a level of certainty at this difficult time for businesses.
As the coronavirus (COVID-19) pandemic continues to impact our daily lives, the English justice system has also been affected, with remote hearings now commonplace, and a live stream being provided to the public. Indeed, this was the setup for the FCA’s business interruption test case.
The trial commenced in the High Court on 20 July 2020, and lasted for an intense eight days. The Court, consisting of Lord Justice Flaux (Court of Appeal) and Mr. Justice Butcher (High Court), elected on most days to sit for longer sessions, demonstrating the volume and significance of this unprecedented and landmark case.
This case will, inevitably, have wide-ranging effects not only on the UK’s insurance industry but also the future, and perhaps survival, of many business insureds. Representing the FCA, Mr. Edelman QC in his opening remarks noted that the outcome of this case has the potential to impact approximately 60 insurers, 700 different policies, and 370,000 policyholders. The case took on an even wider significance when two groups of policyholders, the Hiscox Action Group (HAG) and the Hospitality Insurance Group Action (HIGA), were previously granted leave by the Court to intervene and join the case. Counsel for each of these groups made short submissions throughout the course of the hearing on behalf of hundreds of small business policyholders.
With eight full days of arguments put forward, we have set out some of the hearing’s key points.
The FCA’s submissions focussed heavily on the semantics and the perceived “natural” meaning of the words of the policies. For example, the FCA submitted that “inability to use” an insured premises, a phrase common among many of the business interruption policies, did not mean a total inability to use. The example of a restaurant with takeaway facilities was referred to often throughout the trial, with the FCA arguing that where a restaurant was closed but the takeaway element could continue, the business had still suffered an “inability to use” its premises. Similar arguments were put forward in relation to the phrase “prevention of access.”
Unsurprisingly, causation had a central role in the trial. Counsel for the FCA focused their causation arguments on principles dealing with concurrent causes of loss, exploring the approach when there are two or more effective causes. This principle is set out in the case known as The Miss Jay Jay (1987) which focused on two interdependent causes which were held to both be necessary to have caused the damage suffered in that case, but incapable of causing the damage alone. The FCA submitted that this principle could be extended to situations where there are independent causes with a commonality between them, being COVID-19 itself and the government’s responses to it in this context.
Another case that the FCA relies on is the P and C Insurance Limited v Silversea Cruises Limited (2004), known as the Silver Cloud case, which held that there was an inextricable connection between two concurrent causes of loss, being (1) the terrorist attacks of 9/11, and (2) the state warnings that were issued in response. The government’s response could not be severed from the attacks themselves in terms of damage to the luxury cruise liner’s business, and the intention of the policy could not have been to exclude losses caused by the underlying event that prompted the state’s interference (the state measures (the warnings) being the insured event).
Looking at the government’s responses to the COVID-19 pandemic, the FCA advanced arguments that “action” by the authorities, a word used in many of the policies, included all of the government advice, guidance, and pronouncements in addition to the government’s COVID-19-related legislation. Ms. Mulcahy QC (also counsel for the FCA) made the point using the example of schools. On 20 March 2020, the chancellor explained that the government had taken steps to close schools which was not backed by legislation (other than to give a power to close schools). It was argued that this measure, along with others that were not necessarily legally mandatory, should be considered as “action”, for the purposes of these clauses.
Counsel for the HIGA and HAG interveners made submissions predominantly in support of, and to enhance, those made by the FCA.
Their submissions were brief and echoed the FCA’s arguments regarding the proper interpretation of clauses. By way of example, where a clause does not include a geographical restriction, such words should not be read into the policy wording in order to exclude a disease that occurs nationwide, an argument in response to Hiscox (which we discuss in more detail below).
With there being eight insurers, the defendants elected to submit as part of their written pleadings, two joint papers: (1) on issues of construction; and (2) on the more substantial topic of causation. For the purposes of oral submissions, Mr. Kealey QC (who represented MS Amlin and Ecclesiastical) made submissions on behalf of all of the insurers in relation to causation. The insurers’ position was that the appropriate test is the “but for” causation test which is an integral part of contract law. Mr. Kealey QC emphasised that insurance contracts are indeed still contracts. As Lord Justice Flaux put it, “[i]t is an oddity of the way in which our insurance law has developed…that at the moment when the relevant insured peril occurs the insurer is in breach of contract” but that it is “absolutely” how it has developed. Mr. Justice Butcher in particular engaged with the arguments on the “but for” test, presenting a detailed hypothetical example which involved a train line suffering both a landslip and a signal failure (where only the landslip was an insured event). In the context of that example the insurers argued that insurance, in general terms, operates to put the insured in the same position as though the insured event had not occurred, rather than a better position. To provide cover for the landslip, where the train could not have travelled anyway as a result of the signalling failure, would be putting the insured in a better position.
The insurers also rejected the FCA’s criticisms in relation to the counterfactual scenarios that had been advanced. The insurers argued that the counterfactual should remove the entire combination that makes up the insured peril, and no more. To remove more than the insured peril from the counterfactual, Mr. Kealey QC argued, would be “fundamentally wrong”. The FCA however, was reluctant to use counterfactuals at all, considering it “the wrong approach” and that the “but for” test was being imported from other areas of the law where its application is a different context to insurance. The insurers submitted that following the judgment in Orient Express Hotels v Generali , there is no requirement or principle in law meaning that the “but for” test cannot be applied.
Each of the insurers’ counsel then progressed arguments in relation to their own policies. One argument of interest advanced by many, and Mr. Gaisman QC for Hiscox in particular, was that there could be no causal link between a local occurrence of COVID-19 and the government restrictions. These government measures were instead, he argued, caused either by the national outbreak (rather than a local one) or by the government’s fears about the future effects of the virus, including the capacity of the NHS. The FCA argued that this argument rendered the geographical limits without real or logical purpose. On the contrary, Mr. Gaisman QC argued that the point was merely emphasised by the radius requirements in some Hiscox policies (such as a 1- or 25-mile radius around the insured premises): these limits show that the policy was drafted with only local incidents in mind, not nationwide pandemics.
The hearing concluded on 30 July 2020. The Court was naturally reluctant to bind itself to a hard deadline for producing a draft judgment on the case, but made clear that it is conscious of the significant impact that this case would have on policyholders. Lord Justice Flaux, speaking on behalf of both judges, indicated that a judgment would hopefully be published in the middle of September, giving their Lordships a period of six weeks to gather their thoughts.
It is not possible to rule out an appeal in the case. The framework agreement, entered into by the FCA and each of the insurers, allows for any of the parties to appeal the test case judgment, subject to normal procedural rules requiring the appellant party to seek permission to do so. There is the expectation that any appeal would be heard expeditiously and the possibility of seeking an appeal directly to the Supreme Court has not been eliminated. Given the importance of this to the market, it is difficult to see a situation where an appeal is not made.
Morgan Lewis continues to monitor the developments and issues surrounding the case and we will publish further client updates accordingly.
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