The High Court has this morning handed down its much anticipated judgment in the Financial Conduct Authority’s business interruption test case, finding in favour of the arguments advanced for policyholders on the majority of the issues.

Insurers were advised to "reflect on the clarity provided" and consider the steps they can take now to progress claims of the type that the judgment says should be paid.

Christopher Woolard, interim FCA chief said the judgment was a significant step in resolving uncertainty for policyholders against the backdrop of COVID-related uncertainty.

"We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market. We are pleased that the Court has substantially found in favour of the arguments we presented on the majority of the key issues. Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders. We are grateful to the court for delivering the judgment quickly and the speed with which it was reached reflects well on all parties.

"Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful."

"If any parties do appeal the judgment, we would expect that to be done in as rapid a manner as possible in line with the agreement that we made with insurers at the start of this process. As we have recognised from the start of this case, thousands of small firms and potentially hundreds of thousands of jobs are relying on this."

The ruling will affect around 370,000 policyholders. General insurance leader at PwC, Mohammad Khan, warned that if the insurers appeal, a further delay could mean impacted policyholders may not get a decision before January 2021.

"Insurers with affected portfolios should have a clear view of what policies are affected by each clause by now. For those not defending the test case, they should also have a mapping of their own clauses to the ‘equivalent’ clauses subject to the test case.

"The judgement presents some nuances of interpretation which means further analysis to identify those policies where the court found in favour of insurers and where claims will not be paid up. These relate to a potential narrow definition of prevention of access and inability to use premises. This means that the same type of business might find itself covered or not depending on whether it was still selling or whether it was mandated to close by the government rulings rather than its advice."

A "shining example" of regulatory intervention

Many policyholders whose businesses were affected by the COVID-19 pandemic suffered significant losses, resulting in large numbers of claims under BI policies. Michael Frisby, dispute resolution partner at law firm Stevens & Bolton, said the FCA's intervention will be particularly welcomed by smaller businesses.

“This test case is a shining example of regulatory intervention, addressing key legal issues in a divided market. The FCA has set a new regulatory standard for times of crisis – acting speedily and effectively for the benefit of all, particularly given that many policyholders are smaller businesses fighting for survival. All regulators should take note.

“Today’s judgment provides much-needed clarity to policyholder and insurer alike. Whilst the judgment doesn’t determine every claim or point of confusion, it provides clear guidance to identify which claims are covered in the wake of the pandemic. It will have the effect of reducing the disputes over coverage arising from the pandemic, and should also help resolve some individual disputes.

Commenting on the result of the case, BIBA said it recognised how important the case was for customers and the insurance industry alike and said it will be studying the judgement in detail over the coming days, while waiting to see if any of the parties appeal.

"COVID-19 and the application of insurance in relation to business interruption insurance created a complex situation requiring legal consideration of the many different issues of proximate causation and wording interpretations. That is why, from the outset, we welcomed the FCA intervention in bringing this test case and the ultimate clarity the judgement will bring (once any appeal process is complete)," it stated. "Meanwhile, the outcomes do not prevent individual policyholders from pursuing issues through the courts, or eligible complainants from taking a complaint to the Financial Ombudsman Service.

"Looking forward, it is important that we have a solution so that customers can be protected in the event of another pandemic. It Is our belief that that a public-private partnership would be the best means."

The Chartered Insurance Institute meanwhile urged policyholders to bear in mind that the decision may be subject to appeal, and that regardless of the outcome, the industry and government should act now to avoid a repeat of this kind of test case in the future.

“Although the High Court decision will bring greater certainty to the situation, we must bear in mind that this decision may be subject to appeal," CEO Sian Fisher said.

“Business interruption insurance is a crucial product for many SMEs. It provides for a wide range of risks that could threaten the survival of a business, including fire and flood.

“Looking to the future, insurers, brokers and government must act now to reduce the need for court cases such as this one in future.”

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