Beyond the media hype, what does the UK FCA business interruption test case really mean?

The United Kingdom High Court of Justice handed down judgment on 15 September 2020 in the COVID-19 business interruption insurance test case brought by the UK’s Financial Conduct Authority (the “FCA”).  The judgment has been subject to much media hype with headlines announcing great victory for insureds, while insurers have seemingly lost the business interruption coverage battle.  However, the judgment is lengthy, technical and can hardly be summed up by a media headline. 

We take a look at what the judgment really means from both a UK insurance industry perspective and possible local impacts.

A principled approach

The purpose of the test case was to determine issues of principle on policy coverage and causation under sample insurance policy wordings. The Court considered 21 lead sample wordings from eight insurers and held that not all insurers will be liable across all 21 different types of sample policy wordings. The relevant provisions of the 21 sample policies were divided into three categories:

 

Category	Policy wording	Cover	Insured peril	Insurer’s possible liability
Category 1	Disease wordings	These provisions provide cover for business interruption in consequence of or following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises.	The insured peril is the: - interruption or interference with the business; and - following the occurrence of the disease including via the authorities’ or public’s response.	The Court held that most, but not all, policyholders with disease and the hybrid clauses provide cover for business interruption loss due to COVID-19.
Category 2	Prevention of access / public authority wordings	These provisions provide cover where there has been a prevention or hindrance of access to or use of the premises as a consequence of government or other authority action or restrictions.	The insured peril is a composite one involving three elements: - prevention or hindrance of access to or use of the premises; - by any action of an authority; - due to an emergency / incident which could endanger human life.	Those with prevention of access (or similar) policy wordings may also find themselves with cover if the insured satisfies the requirements of the policy.
Category 3	Hybrid wordings	These provisions provide cover for restrictions imposed on the premises in relation to a notifiable disease.	The insured peril is also a composite peril involving: - inability to use the insured premises; - due to restrictions imposed by a public authority; and - following the occurrence of a human infectious or contagious disease.	The Court held that most, but not all, policyholders with disease and the hybrid clauses provide cover for business interruption loss due to COVID-19.

 

The test case further clarified that COVID-19 and Government’s response were a single cause of the covered loss.  This is a key requirement for claims to be paid, even if the policy provides cover.

 

What the judgment means for policyholders

Although the judgment may appear to bring welcome news for policyholders in the United Kingdom, the judgment does not require that the eight defendant insurers are liable across all 21 different types of sample policy wordings.  Each policy needs to be considered against the judgment to work out what it means for that specific insured.  The judgment therefore does not provide automatic coverage for all insureds merely because the insured has taken out business interruption insurance.

While the nature of foreign jurisprudence is only persuasive, South African courts are
likely to consider the judgment in ruling on business interruption insurance. 

We can be reached for insurance related queries at the contact details below.

This bulletin was prepared by partner Deanne Wood and candidate attorney Emma Alimohammadi.