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THE Financial Conduct Authority’s (FCA) business interruption insurance policies test case will help to provide much-needed legal clarity for companies experiencing financial losses caused by the coronavirus pandemic, according to an expert solicitor at East Midlands-based law firm Nelsons. 

Many businesses that were forced to close as a result of the Covid-19 crisis have made claims for the substantial financial losses they have suffered under their business interruption insurance policies. However, policyholders who believe they have valid claims are reporting that these have been rejected by their insurers. 

The FCA is now taking court action – bringing forward a test case that aims to provide much needed clarity and certainty for policyholders and insurers.  

Cathryn Selby, head of Nelsons’ dispute resolution team, discusses whether lost profits suffered during the pandemic are covered by business interruption insurance, and what the FCA’s test case means for businesses. She said: “The pandemic has caused widespread disruption. Small businesses, in particular, have found the current economic environment hugely challenging and have placed their hope in being able to make a recovery of at least some of their losses under their business interruption policy. 

“However, many have been disappointed with the outcome of their claims, and there is a genuine uncertainty over whether specific policy wordings should respond to business interruption caused by the pandemic. 

“The FCA’s test case will not provide a comprehensive solution to business interruption disputes, but it is likely to settle some very important points of principle and its ramifications are likely to be felt outside business interruption and in other wider areas of insurance law.” 

What is business interruption insurance? 

“Business interruption insurance is often provided by way of an extension to an insurance policy – most commonly where there is property damage. It provides for insurers to pay lost profits and/or additional business expenses caused by an insured peril. So, for example, if a property is damaged by flood and the business cannot operate, cover may be provided for both the flood damage and any loss of profits while the premises are closed.” 

Is Covid-19 covered by business interruption insurance? 

“Most businesses do not have business interruption cover and, of those that do, there are a small number of policies that inarguably cover business interruption caused by the coronavirus pandemic. However, there are many more policies where the position is genuinely unclear. 

“It’s unlikely that coverage connected to property damage will cover losses arising from Covid-19. But there may be other coverage clauses that do not require damage to the policyholder’s property, and, in those cases, the policy will usually set out a list of the insured perils, which can include, for example, infectious or notifiable diseases. 

“By way of example, the diseases covered are often specifically listed and some policies include reference to ‘coronavirus’ or ‘SARS’. Insurers have tended to argue that such wording does not capture the ‘new coronavirus’. However, policyholders have said that insurers had the option to define the terms in the policy precisely and chose not to do so, and they must, therefore, bear the cost. 

“There are a significant number of these types of arguments involving very detailed analysis of specific wording that are taking place between policyholders and insurers and, for that reason, the FCA has decided to run a test case seeking court declarations as to whether cover is provided by the particular wording of some policies.” 

Why is legal clarity needed? 

“The government response to the pandemic involved advice, instructions and legislation that practically prevented many businesses from accessing and using their premises and interfered with the running of the business. 

“For some businesses, the advice to close was mandatory but for others, it was a strong recommendation that staff should operate from home if they could. Insurers have argued that this type of guidance was not envisaged by the policy wording – which was intended to provide for a local outbreak as opposed to a pandemic – and that unless a business ceased to trade completely, its activities were not interrupted. 

“In response, policyholders have argued that insurers could have chosen to include specific exclusions and did not do so and they must now bear the cost of that inadequate drafting.” 

How will the test case work? 

“The test case is being brought as part of the court’s little-used Practice Direction 51M Financial Markets Test Case Scheme. The pilot scheme – intended to run from 1 October 2015 to 30 September 2020 – is designed to allow cases raising issues of general importance to proceed where authoritative legal guidance is needed immediately. The test case process is a way of obtaining guidance from the court on matters that will affect parties beyond those included in the test proceedings. 

“The FCA has decided to bring the test case because it determined it could do so more economically and more speedily than individual policyholders – whether acting alone or as part of group litigation. Indeed, the speed with which matters have progressed through the court is truly breathtaking.  

“As part of the test case, the FCA is acting as claimant and advancing the claims on behalf of the policyholders. The defendants are eight insurers (including Hiscox Insurance Company Limited, Royal & Sun Alliance Insurance PLC, and Zurich Insurance PLC), each of which have filed their own defence. 

“Skeleton arguments were filed on behalf of the FCA/policyholders on 10 July 2020, with insurers due to provide their skeleton arguments on 14 July. The trial will then take place over eight days, concluding on 30 July 2020.  

“It is not yet known how long it will take for judgment to be handed down and, of course, there is always the prospect of an appeal to the higher court. However, the FCA has made it clear that the results of the test case will be binding on those insurers that are party to it, and they will need to assess all policies/claims in light of the judgement and reassess claims that might previously have been rejected.” 

What should businesses look out for in their contracts or individual policies to check whether the pandemic is covered? 

“Whether a claim for Covid-19 is covered by a policy will depend on the very precise wording of the policy and, now, the outcome of the FCA test case. At this stage, it may be easier to say if a claim is definitely excluded by the terms of the policy – for example, ‘loss connected to pandemics’ may be a specific exclusion in some policies. 

“It may be worth looking to see if there is a more general provision in the policy, such as a non-damage denial of access clause, which typically covers losses arising from ‘an incident’. Under such a non-damage denial of access extension, the losses arising to the business as a direct result of such denial of access due to the coronavirus could be covered by the policy. 

“There are differing legal views as to whether this type of clause is triggered by a pandemic and whether, if it is, there has to have been an outbreak at the business premises or within a specified proximity of the business premises to be able to make a claim, Again, the precise wording will be important.” 

What should businesses do if they want to make a claim on their business interruption policy due to the effects of the coronavirus?  

“If you do believe you have business interruption cover, it’s important that the business’ senior management team starts to keep careful documentary evidence of the way in which the business has been interrupted by the coronavirus and the amount of the losses incurred.” 

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