In June 2020, the Financial Conduct Authority (FCA) started a claim in the High Court on behalf of businesses with Business Interruption insurance (policyholders). Due to COVID-19, many businesses have not been able to turn to their insurers and it’s because of this that the FCA is now seeking clarity for policyholders and insurers as to whether businesses should be entitled to their interruption insurance cover.
What is the aim of the test case relating to Business Interruption (BI) insurance?
This test case is to help clarify the circumstances under which a claim against BI insurance by a policyholder should be paid out and on what basis losses should be assessed, as a result of the effects on its business by the COVID-19 pandemic.
The test case has been brought to resolve these uncertainties as quickly as possible for policyholders and insurers. This is so that businesses with BI insurance know to what extent they can rely on financial support from their insurer by making a claim against that insurance, as their survival may be dependent on this.
It is also so that insurers are clear as to which claims will be paid out and how losses to business as a result of COVID-19 related claims will be assessed, so that insurers are aware of their liabilities.
If a claim against an insurance policy is successful, the loss to be paid out to businesses by insurers will be assessed against what the business would have earned had the business interruption not occurred. But one key issue that needs to be clarified is whether a business’s losses will be calculated by looking at what the business would have earned if the COVID-19 pandemic had not existed at all; or whether it is calculated by looking at what the business would have earned if it could have stayed open during the COVID-19 pandemic. Policyholders are likely to benefit more from the former and insurers from the latter.
The FCA’s test case is particularly focussed on Denial of Access, where a business has cover for claims where it suffers loss because it cannot use its premises or is ‘denied access’. Many businesses were forced by government orders to close their premises during the COVID-19 lockdown and so could fall within this definition.
Another point for consideration is policies that mention Notifiable Disease. This is where policies provide cover if there has been a ‘notifiable disease’ at their premises or within a specified geographical radius of the business. Whether COVID-19 can be applied to this definition is being debated.
The result of the test case will be legally binding on the insurers and it will also provide persuasive guidance for the interpretation of similar policy wordings and claims. While the test case cannot encompass all possible disputes and will not determine how much is payable under individual policies, it should provide the basis for doing so, by helping to resolve some key contractual uncertainties and by providing clarity for policyholders and insurers.
How will I know if my business is affected by the result of the test case?
While there are only eight insurer defendants involved in the current test case, the results of the hearing will have much wider implications. According to insurer reviews on how the test case may affect the outcome on claims,generally there are over 40 pages of insurers and policies, including around 370,000 different policyholders, which may be affected.
Insurers were asked to individually notify policyholders by 15 July 2020 whether their claim or complaint is potentially affected and what this means, but if you were not contacted and you think your business may be affected you should contact your insurer directly to discuss this in the first instance.
No action is required to be taken by the potentially affected policyholders yet, as being contacted at this stage does not mean that there will necessarily be any effect on your insurance or that any potential claim on your BI insurance would be successful.
What steps should my business take prior to the result of the test case?
It is important for you to take steps to determine whether you have BI insurance as soon as possible and you should ensure that claims against your insurance policy are identified early. You may want to look at not just your own business’ insurance but if you are part of a group structure, it is advisable to check all group company policies as you may have BI cover under a group company’s insurance policy.
If you do have a policy containing BI cover and believe you may have a claim for losses suffered by your business as a result of COVID-19, notify your claim to your insurers as quickly as possible as set out in your policy, to avoid falling foul of time constraints for claims.
If you think your business might be affected by the BI insurance test case, keep an eye on developments and stay in close contact with your insurer. If you need support to review and assess your BI policy, our disputes team can help. We will scrutinise the wording of your policy and identify the types of losses you may be entitled to claim and continue to track the progress of the FCA and group actions with your claim in mind.
We will update our website with the judgement, which we expect to be handed down in September 2020 but if you have any questions in the meantime please get in touch.