The FCA’S Business Interruption Case

On 15 September 2020 the High Court handed down its eagerly awaited judgement in the FCA’s business interruption (“BI”) test case.

The Case

The case determined whether a sample of 21 non-damage BI insurance policies written by 8 different insurers provided cover in the context of the Covid-19 pandemic. To put this into context, FCA estimates suggest there are 700 policy types across 60 different insurers and that there could be in excess of 370,000 policyholders impacted by this case.

The non-damage clauses addressed by the Court were generally categorised as “disease” (RSA, Argenta, MS Amlin and QBE) and “denial of access” (Arch, Ecclesiastical, Hiscox, MS Amlin, RSA and Zurich), though there were some referred to as “hybrid” (Hiscox and RSA).  In overview, the court found that the majority of the non-damage BI insurance extensions provide cover to the policyholders but subject to the specific policy wording and the specific circumstances of the claim. The court concluded that the Covid-19 pandemic and the responses of the government and the public were a single cause in the context of policy coverage.

What does it mean for insurers?

This will be welcome news for policyholders, but what does it mean for insurers? Although the overarching message is that these policies will generally provide cover to the policyholders, there does remain some uncertainty in the specific application in certain cases. It is also apparent that the parties are exploring the possibility of an appeal, though this will be an expediated process going directly to the Supreme Court. The challenge for insurers now will be to consider the judgement in the context of their own policies and this will involve a careful examination of all wording. There is an expectation from the FCA that insurers should be communicating with policyholders to address next steps expediently.

BI claims are rarely straightforward

BI claims are, by their very nature, rarely straightforward. For many insurers the volume of claims to be processed will exacerbate this. It is critical that insurers have put in place the operational structures to deal with these claims on a timely basis but also have in place advisors who have capacity and technical expertise to address these claims, including loss adjusters and forensic accountants. 

Many insurers are approaching their quarterly reserving exercise with the knowledge that the Covid-19 pandemic has had a dramatic impact on claims experience and development patterns. This is clearly most acute for BI policies where claims teams will now need to revise their estimates to take account of the judgment. Where any uncertainty remains it is essential that claims and reserving teams work together to understand the potential exposure by considering what scenarios might transpire. Communication will be key as the increased level of uncertainty, caused by the pandemic, and uncertain outlook for rates and business volumes going forward will impact insurers capital requirements and approach to managing risk.

Key Contacts