Court to clarify Covid-19 business interruption insurance disputes
The government lockdown introduced in late March designed to limit the spread of SARS-CoV-2 has forced many companies in the UK to suspend operations. This has produced an unprecedented level of loss and distress for businesses, in particular for small and medium-sized enterprises (SMEs). Many companies were hoping to recoup at least some of the financial fallout from their BI insurance provider but after claims were denied some are threatening legal action.
Policyholders have formed several group actions in recent months against a few carriers over the non-payment of BI claims due to ambiguous wordings.
“There is continuing and widespread concern about the lack of a positive response of some of those BI insurance policies, and the basis on which some insurers are making decisions in relation to claims,” the FCA explained.
In order to address the uncertainty and avoid widespread and costly litigation the regulator has pulled together a sample of representative policy wordings and associated disputes for consideration by the High Court. In seeking legally binding declaratory relief, the FCA intends for the public judgment to act as an indicator as to which, if any, policy wordings should respond to COVID-19 related claims and how the law applies to these unprecedented circumstances.
To achieve their aim, it is clear that the judgement will have to be very detailed taking into account a myriad of policy wordings and claim circumstances. For now, litigators are unlikely to issue legal proceedings in the absence of the judgment so as to ensure that their clients are not liable for the insurer’s legal costs should the High Court take a dim view of the policyholder arguments presented by the FCA and their nominated lawyers, Herbert Smith Freehills. Furthermore, unless insurers consider their denials to be built on sand it is anticipated that most will maintain denials until they have a better indication as to how the court will apply the law to their particular policy wordings.
While the FCA aims to get the case heard by as soon as July, the public release of a judgment will take longer considering the ramifications for policyholders. Whilst this wait for clarity is sure to be unappreciated by those who have had their claims denied, if the ruling is sufficiently robust it should prove to be a much quicker and cheaper route to legal determination than the alternatives available.
Meanwhile, the FCA has issued an update with regard to property damage and BI wordings and how they should be interpreted in light of COVID-19 related losses.
Since 1st May the FCA has approached 56 insurers and reviewed over 500 relevant policies from 40 insurers. From this consultation it has determined 17 policy wordings (at this stage) that should be reviewed by the High Court. In addition to the policy wordings themselves the FCA have also today (1st June 2020) released a matrix detailing the key issues with each wording, a list of questions it is asking the Court to address, a set of factual examples for the Court to use in considering the legal issues, guidance for insurers and intermediaries on dealing with coverage disputes and a copy of the Insurer framework agreement.
The following insurers (‘Core Insurers’) are parties to the action and their wordings will be reviewed by the Court during the process:
- MS Amlin Underwriting Limited
- Arch Insurance (UK) Limited
- Argenta Syndicate Management Limited
- Ecclesiastical Insurance Office plc
- Hiscox Insurance Company Limited
- QBE UK Ltd
- Royal & Sun Alliance Insurance plc (RSA)
- Zurich Insurance plc
In addition, the FCA considers that some wordings supplied by the following insurers (‘Secondary Insurers’) match wordings used by the Core Insurers, meaning the judgment will be directly applicable to them:
- Allianz Insurance plc
- American International Group UK Limited (AIG)
- Aspen Insurance UK Limited
- Aviva Insurance Limited
- Axa Insurance UK Plc
- Chubb European Group SE
- Liberty Mutual Insurance Europe SE
- Protector Insurance UK
It is noted that the list is not exhaustive and many of the issues determined by the action will be relevant to policy wording disputes pursued against other insurers.
The FCA expects to publish in early July a comprehensive list of other insurers and many other BI policies in the market that they expect the test case to affect.
It remains to be seen whether this timetable is achievable taking into account the complexity of this matter. A judgment from the Court should not be expected for a number of weeks/months after the hearing in late July.
In the absence of the High Court judgment the FCA has asked all insurers to conduct a review of their wordings and return to them in two weeks’ time with confirmation of which of their policies they consider are likely to be affected by the judgment.
Insurers are asked to publish sufficient details with appropriate prominence and signposting to keep all policyholders with relevant non-damage business interruption policies updated about the test case and its implications for potential claims under their policies.
Insurers are also placed under an obligation to amend or supplement any statements or communications they have already had with policyholders in light of the test case. They should contact all policyholders who have made claims or complaints in the next three weeks to confirm whether the claim or complaint relates to the test case and the implications taking into account the test case guidance.
In addition policyholders should be provided with continuing updates throughout the test case and insurers should reassess all declinature once the case concludes to consider whether the course of conduct was correct. Any settlement offers made prior to the test case by insurers must include guidance from the insurer as to the potential implications of the action.
The FCA has set out a large number of legal questions and factual settings they would like the Court to consider. The documents released provide a good overview of key areas of dispute, particularly with regard to the legal status of SARS-CoV-2 (in respect of causing property damage), how Notifiable Disease and Non-Damage Denial of Access wordings should respond to differing claim circumstances and how issues of causation should be addressed both procedurally and evidentially.
Where the wordings to be considered are not specifically those of particular insureds it would be hoped that insurers, intermediaries and legal representatives will largely be able to infer the Court’s approach (thereby avoiding costly litigation) from similar examples addressed by the FCA.
However this action, albeit comprehensive, will certainly not be the final word on this issue. The FCA’s focus here is very much on SMEs and to that end (for example) they do not intend to address a number of issues which are likely to be pertinent to larger businesses. Accordingly, it is highly likely that some satellite litigation will be required following the judgment to fully clarify the legal landscape and/or more unusual factual scenarios.
Furthermore, even for particular wordings assessed by the High Court, Core Insurers will retain a right of appeal. Should they be unhappy with the result, the Framework Agreement confirms that Insurers are expected to seek a ‘Leapfrog Appeal’ to the Supreme Court (thereby avoiding the Court of Appeal). Whilst this may speed up the process to a final and binding determination, it will bring delay and further uncertainty to policyholders who need to plan for their future.
That being said, today’s update from the FCA is sure to be welcomed by policyholders who have had their claims declined leaving no option but expensive and lengthy legal action. The process is clearly a thorough exercise and will hopefully bring much needed clarity to these issues, allowing for the relatively speedy and low cost resolution of tens of thousands of claims.
Full details of the process, the associated documents and the FCA guidance to Insurers can be found at www.fca.org.uk.
For further information, please contact:
Samuel Ellerton, Regional Claims Leader Risk Solutions
Tel.: +44 (0)121 232 4563