In The Financial Conduct Authority v Arch Insurance and others, the High Court ruled that insurers, under certain circumstances, might be liable to pay out on claims to businesses forced to close during the lockdown.
A landmark ruling
The Financial Conduct Authority (“FCA”) brought a test case against the defendant insurers to determine the policy coverage issues in respect of claims by policyholders for potential ‘business interruption’ (“BI”) losses, such as loss of profits or additional expenses incurred as a result of Covid-19.
The defendant insurers agreed a sample of 21 different BI policies for the Court’s consideration. The relevant provisions in each policy fell within three distinct categories:
- disease wordings, providing cover for BI losses attributable to the incidence of a notifiable disease within a specified radius of the insured premises;
- public authority wordings, providing cover where access to or use of the insured premises is stopped as a consequence of government action or restrictions; and
- hybrid wordings, triggered according to restrictions imposed on the premises in relation to a notifiable disease.
The Court considered the issues in the test case against the above types of wordings in the agreed sample. Their ruling was handed down on 15 July 2020.
On disease wordings, the Court ruled that these clauses do provide cover to policyholders for BI losses, so long as these losses were solely attributable to Covid-19.
On public authority wordings and hybrid wordings, the Court also ruled that a detailed examination of the specific wording in each policy would be necessary for policy appreciation. Further consideration must be given to the degree to which the Government response to the pandemic, such as any mandatory closure orders, and the extent of any restrictions it imposed had affected a business.
What does the ruling mean for policyholders?
Central to this ruling is the FCA’s estimate that circa 370,000 policyholders, across 700 different types of policies and over 60 different insurers, may be entitled to relief from insurers for BI losses.
The ruling has resolved key contractual uncertainties and Covid-19 ‘causation’ issues, providing clarity for policyholders and insurers alike. The judgment is positive for policyholders and should bring welcome news for a significant number of the thousands of them impacted by BI losses attributable to Covid-19.
The FCA and defendant insurers are considering the judgment and the prospect of an appeal. An appeal in this test case may unusually proceed directly to the Supreme Court from the High Court, as opposed to the Court of Appeal first.
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