COVID-19: FCA Test Case on Business Interruption Cover

16 September 2020


Whilst most businesses are unlikely to have taken out specific pandemic insurance, it is likely that the majority will have cover for business interruption. The Financial Conduct Authority (FCA) took a test case against eight insurers seeking legal clarity on whether or not insurers should pay out to businesses affected by the COVID-19 pandemic when claims are made through the business interruption clauses of their insurance policies.

Business interruption clauses typically provide cover for loss of revenue associated with property damage. Optional extensions include cover for events such as closure of premises or denial of access. Businesses can also obtain extensions which specifically refer to notifiable diseases. In some policies where there is an extension of cover to include business interruption for notifiable diseases, a specific list of those diseases is given, but in other policies there is no such list.

The focus of the FCA test case was the insurance cover provided under “non-damage” extensions to business interruption. These clauses deal with denial of access, notifiable disease and public authority clauses. The hearing touched on issues such as the definition of “interruption or interference” for the purposes of an insurance policy and the definition of a notifiable disease. Another issue considered was what was intended when a policy stipulated that diseases must be within the “vicinity” of the insured premises.

The judgement, which was eagerly awaited by the insurance sector and businesses alike, was handed down by the High Court on 15th September. The High Court has ruled that some insurers should have paid out for losses covered by the lockdown. The ruling stated that the disease clauses in some business interruption policies did provide coverage for losses incurred as a result of the COVID-19 pandemic.

The interim Chief Executive of the FCA commented on the ruling saying:

“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 judgement is a significant step in resolving the uncertainty being faced by policyholders.”

The judgment did not specifically state that the eight insurers involved in the case were liable for each of the 21 types of policy wording considered by the Court. Therefore each policy and its wording will still need to be considered against the judgment to work out precisely how it applies to that policy.

The Court also directed that policyholders should hear from their Insurers within 7 days with regard to any claims submitted under the business interruption clauses of their respective insurance policies. Given the potentially vast sums of money involved, it is expected that the eight insurers involved in the litigation will proceed to appeal the High Court’s decision. If they do appeal, it is possible the case may bypass the Court of Appeal and be fast tracked directly to the Supreme Court.

If you require advice regarding insurance issues, please do not hesitate to contact John McCloskey or another member of the Defence Insurance Litigation team at Carson McDowell.

*Please note that this information is for guidance purposes only and does not constitute, nor should be regarded as, a substitute for taking legal advice that is tailored to your particular circumstances.