Maybe, but not quite yet.

The High Court in England & Wales yesterday handed down a judgment in the business interruption insurance test case of The Financial Conduct Authority v Arch and Others. Whilst policyholder campaigners and the FCA say this was a lifeline for businesses and a judgment which substantially found in favour of their arguments[1], perhaps the detail of the judgment shows it is not so straightforward. Indeed, the insurance industry has pointed out that they won some key arguments too.

What is a 'business interruption claim'?

When a business is prevented from trading and is insured for being unable to trade, it can claim for losses connected to the interruption of their business. The claim which can be made, and the insurance payment available, will turn on the facts of each case and depend on the policy wording. Business interruption cover will commonly cover loss of profits and additional expenses suffered as a result of damage to physical property, such as following a fire or flood, or vandalism. Policies can include specific extensions for matters other than physical damage, such as disease or public authorities preventing a business from operating.

What was the court action about?

Following the UK Government lockdown in March 2020, large numbers of policyholders intimated business interruption claims to their insurers. However, most of those claims were rejected on the basis that insurers considered the wording of the relevant clause or clauses meant there was no cover. But there was confusion across the insurance market as to what the correct legal interpretation of many of the clauses was. This test case was an attempt to clarify matters.

The proceedings were brought as a test case by the Financial Conduct Authority (FCA), as the regulator of the defendant insurers, in an unprecedented step as a regulator, "to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market."[2] 21 different policy wordings were considered which could broadly be broken down into 3 categories:-

  1. Disease wordings - provisions which provide cover for business interruption as a consequence of or following on from a notifiable disease occurring within a specific radius of the insured premises.
  2. Prevention of access / public authority wordings - provisions providing cover where there has been a prevention, hindrance of access to, or restriction of use of the premises due to government or other authority action or restrictions.
  3. Hybrid wordings: provisions which are engaged by restrictions imposed on the premises in relation to a notifiable disease.

So what did the Court say?

The judgment itself is more than 150 pages and contains detailed conclusions, many of which are fairly nuanced and specific to the wording. Without putting too fine a point on it the Court clarified that:-

  1. Disease Wordings – The majority of policies provided cover for interruption or interference with the business as a result of any notifiable disease or occurrence of a notifiable diseases within 25 miles, or 1 mile, or the “vicinity” of the insured location. Insurers were unsuccessful in arguing that the cover provided was for a local occurrence of a notifiable disease. Instead, the Court decided that a successful claim was not limited to outbreaks wholly within the relevant policy area because the wordings did not expressly state that the disease should only occur within that area and diseases do not neatly operate only within 25 miles of an insured premises. Those diseases which are notifiable include those capable of widespread circulation. Cases within the relevant policy area are not therefore independent of, and a separate cause from, cases outside the relevant policy area.
  2. Prevention of Access wordings - The Court found that, generally, these clauses were construed more restrictively. As businesses were affected differently, claims here will depend upon the nature of the business, the authority order and the specific policy wordings. For example after the lockdown order of 23 March, a restaurant which only offered sit-in food prior to the announcement could successfully argue that the order could amount to a “prevention of access” because it closed the premises for the purposes of its existing business, but, a restaurant that offered sit-in and takeaway services would only have its business partially impaired by lockdown. As such, there may not be a “prevention of access”. Two restaurants with the same wording on their insurance cover, both of which have had to close their premises to sit in customers, could therefore find themselves with different coverage positions.
  3. Hybrid Wordings -There was considerably more variance between policy wordings in the hybrid category . Broadly they were a mix of 1 and 2 above, and provided cover for an interruption to the business due to an inability to use the premises because of restrictions imposed by a public authority following an occurrence of disease. The Court considered that the meaning of phrases, such as “inability to use” requires something more than just an impairment of normal use as such close examination of the particular terms of the clause in each policy and how it relates to each policyholder's circumstances is required to determine policy application.

What next for insurers and policyholders?

The purpose of this test case was to provide clarity, it was not punish any insurer and, indeed, a number of insurer interpretations of policies have been upheld. Despite what some have suggested, this is no clear sweep for the claimants.

The FCA have stated that affected policyholders can expect to hear form their insurers in the next 7 days. That is unlikely to include a decision on any claim made but will provide an update following the judgement.

This judgement is not final and may well be appealed. Any applications to appeal will be heard at a consequentials hearing before the High Court and we understand the FCA is looking to have that hearing as early as possible.

The FCA and Defendant insurers have also agreed that they will seek to have any appeal heard on an expedited basis. This includes exploring the possibility of any appeal being a ‘leapfrog’ appeal past the Court of Appeal to the Supreme Court due to its importance to insurers and policy holders.

[1]https://www.fca.org.uk/news/press-releases/result-fca-business-interruption-test-case#:~:text=The%20High%20Court%20has%20today,majority%20of%20the%20key%20issues.

[2] Christopher Woolard, Interim Chief Executive of the FCA; https://www.fca.org.uk/news/press-releases/result-fca-business-interruption-test-case#:~:text=The%20High%20Court%20has%20today,majority%20of%20the%20key%20issues.