Some thoughts on Next Steps in the FCA Test Case

Shortly after 10.30am on Tuesday 15 September 2020, victory was announced. Law firms stormed the Web to be the first to describe the policyholder triumph in the FCA’s Test Case on business interruption cover. But then odd things began to happen. By the end of the day, shares in Hiscox, one of the vanquished Insurers, were valued 15% higher than earlier that morning. Over the next few days reports emerged of individual Insurers posting loss reserves on business pertaining to the case in the region of £100million. Hold on: hadn’t they been told to pick up the tab for an economic catastrophe in which no-one now really pays attention to figures below £10billion? Are we the victims of fake news? Let’s have a look.

From the start of this pandemic it was apparent that businesses across the country would suffer losses, for which they would seek recovery under their BI insurance policies (paid for of course by premiums over the years). Initially there was some scope for optimism. Following a meeting between the Treasury and senior representatives of the insurance industry on 17 March 2020 the Chancellor announced to Parliament that Insurers had agreed to “do the right thing.” That optimism was short-lived, as soon thereafter Insurers lined up to deny claims for BI losses, more often than not it seemed irrespective of policy terms.

In response the FCA launched its ambitious Test Case, the outcome of which it was said would be binding on Insurers. Affected policyholders were therefore told to “wait and see”: the FCA Test Case would bring clarity. In impressive time the High Court gave its judgment. Undeniably it contains good news for many policyholders, whilst being disappointing for others. But, whilst the FCA has already released a statement urging Insurers to honour the judgment as promised, those policyholders who have “won” are now being told by Insurers that they must await the “final outcome” of any appeal, even before any application for permission to appeal has even been made.

Against that background the question must be asked: do Insurers actually want to appeal?

The Disease Clauses

As an example, let’s take those classes of BI wordings described in the Test Case as the “disease clauses”. Broadly speaking these clauses provide coverage for BI losses in consequence of or following the occurrence of a notifiable disease within a defined policy area (often expressed as a specified radius from the insured premises).

The High Court rejected Insurers’ arguments that cover under such clauses arose where there was only a local occurrence of a disease (in effect the argument that the worse the problem, the less the cover). The Court said that there simply has to be some local appearance of the disease for such clauses to respond, and the fact that any local outbreak may form an indivisible part of a national outbreak does not operate to deprive the policyholder of cover.

On any sensible analysis that is unquestionably the right decision. The essence of the insurance is BI suffered in consequence of the occurrence or outbreak of disease. That is the insured peril for which policyholders sought and bought insurance. Would any objective observer really consider it a reasonable proposition to argue that the worse the impact of the insured peril, the more restrictive should be the insurance cover? Yet that is precisely the proposition argued by Insurers, and which it is now suggested they may continue to argue before the Supreme Court.

Causation and Trends Clauses

Insurers also argued that the so-called “trends clauses”, which are a common feature of BI insurance, operate so as effectively exclude cover in any event for the losses suffered.

The intended effect of these trends clauses is relatively simple: losses are to be adjusted so as to put the policyholder in the same position as it would have been had the insured peril not occurred. Thus the covered losses are confined to those caused by the insured peril. That is not a controversial proposition, and it is perfectly reasonable that such adjustments should be made.

Insurers’ argument though went further; they argued that losses should be adjusted so as to remove losses which would have been suffered in any event as a result of the national outbreak of Covid-19. That argument was dismissed as a “fallacy” by the High Court, which recognised that such an interpretation would effectively negate all available cover.

Again, that is unquestionably the right decision. Are Insurers really prepared to argue before the Supreme Court the unreasonable proposition that a trends clause, intended to operate so as to adjust the quantum of insured losses, should be construed so as to actually operate to exclude all such losses?

In reaching its decision on causation the High Court also refused to apply the infamous case of Orient Express Hotels v Assicurazioni Generali Spa (2010). It will be equally interesting to see if Insurers are really prepared to argue before the Supreme Court that one of the most widely criticised judicial decisions in modern times was correctly decided. That said, the judge in that case, and one of the panel in the arbitration it concerned, now sit in the Supreme Court.

The Position of the FCA

The position that will be adopted by the FCA also warrants scrutiny. Whilst some policyholders have “won”, others have undoubtedly lost, and it is difficult to defend certain aspects of the Test Case judgment.

In particular, certain policyholders covered under “disease clauses” were denied cover, purely it seems on the basis of the inclusion of the word “event”, which it was found had the intended effect of limiting cover solely to the consequences of the local occurrence of the disease (to the exclusion of the national pandemic). In doing so the Court specifically relied on a decision from the great plague of cases that considered what “event” meant when used to determine whether or not losses could be aggregated. No consideration was given as to whether, and why, the policy draftsman had intended to use the word in that sense, with all that baggage, in the clause in question. Aren’t words supposed to be construed on their contractual context, rather than given unshakeable meanings that the policy must then bend to accommodate?

Similarly, policyholders covered under “prevention of access” clauses were denied cover, in the main on the basis that the Court found that the use of the words “danger” or “disturbance” in the relevant defined policy area demonstrated that the cover was intended to be a narrow, localised form of cover, such that on a true construction of the wording the Government action in response to the national pandemic could not be said to be in response to such a danger.

In both cases there appears to be a clear and obvious inconsistency in the Court’s interpretation of the various clauses in issue, and no obvious legal or logical basis for the marginal distinctions drawn by the Court. It is difficult to escape the conclusion that the Court, having found against Insurers on certain aspects, felt compelled to find for them on others. The arbitrator’s urge to “split the baby” might have taken hold.

So where does that leave the FCA? It began the process intending to bring clarity for the benefit of affected policyholders as a whole, but it now faces a potential conflict of interests within the ranks of those policyholders. Some will want to argue: why am I not covered if they are? Others will be determined to shore up their win and chase away arguments that might see their cherished baby disappear with the bathwater? Does the FCA stick with the partially successful outcome on the table, or does it throw in all the chips and prompt a cross appeal that Insurers might not otherwise wish to bring?

Conclusion

The FCA Test Case was intended to bring clarity for all. It has succeeded in part, but policyholders are now being told that it is only half-time. On any view Insurers have not covered themselves with glory throughout this process – they seem to have escaped with endurable financial damage, and it might be time to get working on rebuilding some tarnished reputations? And what of the FCA, does it feel duty bound to fight on for the benefit of all policyholders? For immediate purposes all that seems certain is that, if permission to appeal is sought and granted, the second half should be interesting.

Dan Brooks | Partner

Chris Dunlop | Partner

Stuart Hill | Partner

Michael Howard | Partner

Roger Jones | Partner

Dan Screene | Partner

This post is intended to provide guidance of a practical nature but does not contain legal advice or advice as to what action you should or should not take specific to your insurance needs or those of your business, or with regard to any particular situation.