Non-damage business interruption test case in the English Courts

Significantly in the UK, the Financial Conduct Authority (FCA) is bringing a test action, in order to seek a declaratory judgment on a number of policy coverage questions arising from non-damage cover under business interruption (BI) policies, using the Financial Markets Test Case Scheme. It has stated that its intention in doing so is to provide clarity to policyholders and insurers. Given that the issues involved are being determined in a number of jurisdictions, the judgment will no doubt be of interest outside the UK. Other regulators may also decide to take similar action. In particular, it is reported that the Australian Financial Complaints Authority is considering bringing a business interruption test case before the court, following receipt of a request to do so.

Some of the issues to be considered by the English courts (such as the meaning of common causation wordings used in policies) mean that the judgment will likely have some relevance to insurance policies generally.

The FCA has reviewed a number of policy wordings, and has selected a number as representative, and eight insurers have been asked to participate in the test case. It is asking the court to decide whether there is cover for loss under non-damage business interruption policies on the basis of agreed and assumed facts.

The agreed facts relate to issues such as the date and nature of steps taken by the UK Government in response to COVID-19, and the assumed facts relate to a number of illustrative matters such as the nature of the affected businesses, whether it was fully or partially closed, and when.

The issues put forward for the court to decide include:

• a determination of whether there is cover in principle under the various permutations of facts and policy wordings;
• whether the necessary causal link is present between the loss and insured peril; and
• various generic issues including for example:
  • What effect is required on the business, in principle, to constitute interruption or interference;
  • What is the meaning of disease being “in the vicinity” in the current context and what proof is required;
  • What must the policyholder prove to establish denial of access;
  • Do various common terms used in relation to causation in insurance policies require a proximate cause or something narrower or broader, such as “resulting from”, “directly resulting from” “caused by”, “following”, “arising from” and “as a consequence of”;
  • What relevance do the trends clauses, or equivalent clauses, contained in some policies, have to the test of causation to be applied, and if there is more than one potentially operative cause what is the effect on recovery;
  • Do exclusions for micro-organisms extend to SARS-Cov-2; and
  • Do pollution or contamination exclusions apply.

It should also be noted however, that the FCA has reiterated its position that most SME BI covers are focussed on property damage, with a requirement to pay BI claims only where there is property damage, so that the consequences of the COVID-19 pandemic are not covered.

The FCA filed the claim on 9 June 2020 (particulars) along with an application for the matter to be heard as a test case scheme with an expedited hearing, and is hoping that the matter will be listed to be heard towards the second half of July. It will take some time following a hearing for a judgment to be issued, quite possibly a number of months, and there is also the potential following that for appeal to the Court of Appeal and Supreme Court (although there is also a possibility of a leapfrog to the Supreme Court), so that there may be some substantial delay in a final outcome.

The FCA has also consulted on draft guidance in the meantime which sets out that insurers must review their relevant policy wordings and claims or complaints and determine whether or not they will be affected or depend on the test case, and whether the test case will provide guidance on the interpretation of the policy. The results of insurers’ assessment must be reported to the FCA and policyholders kept advised of insurers’ position and developments throughout the lifetime of the test case. Following the outcome of the test case, insurers will need to review their coverage determinations where claims have not been paid.