The UK High Court handed down its verdict on the Financial Conduct Authority’s test case on Business Interruption on September 15. Some of the 370,000 policyholders affected will now be hoping to receive insurance payouts in time to stave off bankruptcy. Others will now be considering whether they have viable grounds for appeal.
There were a number of battlegrounds in the case. BILA (British Insurance Law Association) will be holding a webinar on September 28, but in the meantime some of the interesting points were:
- Causation: The Court held that the proximate cause of the business interruption was the composite peril of the business interruption following the occurrence of the notifiable disease. Individual outbreaks were deemed to be part of a national whole.
- Public authority and prevention of access clauses differed between the policy wordings under consideration, with some being deemed to provide narrow, localised cover while others were deemed to respond to government regulation when it was issued on March 26.
- Trends clauses are relevant to the calculation of the insured loss because they take account of the circumstances/trends of the insured business. Insurers relied on the decision in Orient Express Hotels v Assicurazioni Generali Spa (UK)* to argue that the insured could not show that the business loss would not have been suffered ‘but for’ the insured peril because many businesses would have suffered loss in any event due to the Covid-19 epidemic. The court felt that Orient Express had been incorrectly decided and therefore did not follow the precedent.
Appeals from both sides are likely, and then a key question will be whether the Court of Appeal chooses to hear the case or leapfrog it straight to the Supreme Court. An expedited appeal might be heard in late 2020 / early 2021, but not even that will really bring closure. Major UK insurers who are not currently part of the FCA test case will likely find that policyholders seek to read judgments across to their coverage, and thus find themselves embroiled in coverage disputes.
Meanwhile in the background and on the sidelines, the skirmishing will continue.
The FCA has published a Dear CEO letter suggesting quite strongly that insurers should not seek to deduct furlough and similar government payments from any claim settlement, but they have not provided any guidance on how else such payments might be fairly treated.
Reinsurers have already given strong indications of their intention to scrutinise any payments which insurers may make and for which they may seek to recover under their reinsurance arrangements. Certainly catastrophe reinsurers will be considering:
- The operation of hours clauses: the treaties are designed to respond for specific identifiable events such as earthquakes and windstorms. In the case of a disease outbreak, is it a natural catastrophe? When does the event begin and end? Is it one event, or several?
- Loss quantification: if an insurer has been using poorly drafted policy wordings which resulted in coverage being awarded where none was intended, can the reinsurer argue that this qualifies as some sort of ex gratia payment and is hence not recoverable?
- Loss aggregation: a large composite insurer may have multiple portfolios of risk – say SME property/BI, marine and event cancellation (to name just a few). If treaties are written on different bases (eg occurrence vs risks attaching) how will insurers aggregate their losses?
And so the Business Interruption battle will grind onward – in adjudication as well as in arbitration. Certainly many new precedents will be set. It’s an interesting time to be considering insurance and reinsurance disputes.
* Trading as Generali Global Risk,  EWHC 1186 (Comm).
This post has been written Shirley Beglinger (Advisory Board Member) at Crescendo Advisors.
Crescendo Advisors (www.crescendo-erm.com) is a boutique risk management consultancy. Crescendo Advisors has a solid track record of successful engagements in both adjudication and arbitration.