The FCA COVID-19 Property Damage and Business Interruption Test Case
1. What is the Financial Conduct Authority (‘FCA’) Test Case?
2. What is ‘Declaratory Relief’?
3. Why is the FCA doing this?
4. What is the role of the FCA in the Test Case?
5. Will all relevant wordings be considered?
6. Which insurers are involved in the test case?
7. Which policy wordings will be considered by the Court?
8. My policy is not listed. Will my claim still be affected by the test case?
9. What types of factual scenarios will be consider by the Court?
10. Is the test case legally binding in the UK?
11. What is the FCA asking the Court to decide?
12. What are the main issues in dispute?
13. Are there any key issues which will not be considered by the Court?
14. Will the test case resolve all uncertainty around the application of PDBI cover to losses from COVID-19?
15. How long will the test case take and when is the hearing?
16. Can the parties to the action appeal?
17. Can I still take legal advice/action?
18. Where can I find more details?
19. I still have questions, what should I do?
1. What is the Financial Conduct Authority (‘FCA’) Test Case?
The FCA Test Case is a formal application by the FCA (the UK financial services regulator) for Declaratory Relief by the High Court on the interpretation of Property Damage and Business Interruption (PDBI) policies and whether these cover losses resulting from the COVID-19 pandemic.
Declaratory Relief is a type of judgment from a court that defines the rights of the parties in relation to the legal question presented.
Essentially the FCA is asking the Court to provide a judgment which details how the law applies to various different policy wordings and factual scenarios arising from the COVID-19 pandemic.
3. Why is the FCA doing this?
The FCA have said the following:
‘The issues surrounding BI policies are complex and have the potential to create ongoing uncertainty for both customers and firms. The variation in the types of cover provided and wordings used mean it can be difficult to determine whether customers have cover and can make a valid claim. There are genuine doubts over the appropriate interpretation of the wording in some cases. This has led to uncertainty and disputes, with many customers who believe they have valid claims having these rejected by their insurer. We believe the circumstances of the current coronavirus emergency, and its effect on businesses holding BI policies means this uncertainty needs to be resolved as quickly as possible.’
The judgment is intended to provide clarity to policyholders and insurers so that in as many cases as possible it can be determined whether any cover exists. It is hoped that this will avoid the need for expensive and lengthy litigation on different policy wordings.
The FCA is standing in the shoes of policyholders and is acting in their common interests. As the Claimant in the litigation the FCA is presenting what it considers to be the best legal arguments available to policyholders.
The FCA has instructed the law firm Herbert Smith Freehills and a number of senior barristers to present the arguments on their behalf.
No. There are hundreds, if not thousands, of different PDBI wordings. The FCA has selected a number of example wordings for consideration by the Court. These wordings represent a broad sample of the main issues that the FCA considers require legal clarification.
The following insurers have been selected to be Defendants in the test case and will have some of their wordings specifically considered by the Court:
- MS Amlin
A list of all policy wordings presented to the Court by the FCA can be found here.
It is very likely that the test case will in some way affect any COVID-19 related PDBI claim. The wordings included by the FCA in the test case are far from exhaustive; they have been selected as representative examples to bring to the Court’s attention the key areas of dispute between policyholders and their insurers.
The FCA is presenting 7 different examples of factual circumstances that could lead to claims. These examples are not meant to be exhaustive but cover off many of the types of business that have been negatively affected by the pandemic. These examples are detailed here.
The test case will be legally binding on the insurers who are party to the test case and the policy wordings considered by the Court. The judgment will be legally persuasive with respect to all other wordings not explicitly considered in the action, meaning any lower Court (e.g. District Court, Circuit Court) will use it to assist in the interpretation of any other cases pursued relating to COVID-19 PDBI claims. High Court judgments are only directly applicable in England and Wales, however it is highly likely that the judgment will be used in claims pursued in Scotland or Northern Ireland.
The FCA has issued a number of questions which they have asked the Court to consider. These can be found here. The test case is largely focussing on whether there is cover for losses under non-damage extensions such as Non-Damage Denial of Access or Notifiable Disease. However the Court has also been asked to comment on evidential and causation issues which will be central to determining what, if any, cover is provided for policyholder losses resulting from COVID-19.
The main reasons for claim denial that we are seeing from Insurers, and which will be addressed by the test case are as follows:
- The losses alleged have been caused by government restrictions rather than occurrences of COVID-19
- You are unable to evidence specific occurrences of COVID-19 which have directly led to loss
- You must evidence specific occurrences of a disease for there to be any cover. Suggesting that the disease is ‘everywhere’ is insufficient to trigger cover
- Even if there was cover, your loss would be nil or close to nil because you would have had no customers
- The restrictions on your business were not applied by the type of authority specified in the policy
- The claim must relate to a specific incident within a stated vicinity of your premises. The pandemic does not meet the criteria
- There is an exclusion which is relevant to your claim e.g. contamination, micro-organism
Yes. A number of issues which may be relevant to COVID-19 PDBI claims will not be addressed in the test case. This is due to the fact that the FCA intends to present its case on behalf of SMEs and on the arguments it considers have the best prospects of success. It is likely that further litigation will be required to obtain certainty for all policyholders.
No. This is not the objective of the test case. As confirmed by the FCA:
‘this intended action, which we hope to place before the courts in an agreed and urgent manner, is not intended to encompass all possible disputes, but resolve some key contractual uncertainties. This will assist both insurers and the insured. It will not determine how much is payable under individual policies, but will provide the basis for doing so.’
As detailed above there will be a number of areas that may need further legal clarification. The aim of the FCA is to address the largest number of wordings available in the fastest time possible. The focus is also on assisting SMEs who it is thought are most in need of financial support at this time and unable to fund litigation themselves.
That being said, the test case will certainly bring much needed clarity to a majority of disputes that have arisen over cover, thereby allowing final determination in many claims without the need for legal action.
The FCA has released a timetable for the test case:
9 June - FCA started claim in the High Court
16 June - Case management conference, at which the court will be invited to fix the timetable for the case and other procedural matters
23 June - Insurers file Defences
c.26 June - Further case management conference
3 July - FCA files Reply
1st half July - Skeleton arguments and replies served
20th July - 5-10 day court hearing
The second Case Management Conference on 26 June and the final hearing starting on 20 July will be streamed online at the following address:
The starting time for these hearings can be checked on the final court listing after 4.30pm on the day before each hearing.
The High Court is likely to take a number of weeks to compile their judgment after the hearing before it is released to the public. It is expected that a judgment is likely to be released between August - October 2020. Any appeal may delay matters further.
The Framework Agreement relating to the test case confirms that the FCA or any of the insurers involved can appeal the decision of the High Court. The parties will seek the possibility of a leapfrog appeal directly to the Supreme Court. Any appeal is likely to be on relatively narrow points of law.
It is expected that the High Court judgment will be released to the public regardless of whether any subsequent appeal is made.
You are free to take legal advice and formal legal action at any time. However it should be noted that litigation brings with it an entitlement for the successful party to recover their legal costs from the unsuccessful party and accordingly legal representatives are likely to urge caution until the legal interpretation of COVID-19 PDBI cover is clarified by the FCA test case.
The FCA has set up a dedicated test case page which includes all documents they have released. This can be found here.
Contact your Lockton representative. We are here to help and have a team of dedicated claims experts who will be able to help you with any questions you may have.
For more information contact:
Regional Claims Leader, Risk Solutions
+44 (0)121 232 4563
+44 (0)7787 277771