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Covid-19 FCA test case ruling – Are insurers really the bad boys?

(Estimated reading time: 6 minutes, 23 seconds)

In January the Supreme Court handed down its judgment regarding the Financial Conduct Authority’s test case on business interruption claims. I think it fair to say the appellant insurers have received a bad press (some saying ‘rightly so’) and are probably now in the unenviable position of having replaced bankers as public enemy number one.

The perception is they wrongly declined cover on COVID-19 business interruption insurance claims and that, if it hadn’t been for the Financial Conduct Authority coming to their rescue and taking up their cause, insurers would have been quite content to simply let matters lie; the thinking being that for policyholders to bring an action against them would be prohibitively expensive. Meanwhile policyholders were left fighting to keep their businesses afloat.

If the accusation is this is just another example (albeit on a grander scale) of insurers wriggling out of their contractual obligations, then in the court of public opinion, they are guilty as charged.

There is, however, a defence to be made in support the position they took.

The existence of a healthy and buoyant insurance market is crucial to the commercial world and has been so for many hundreds of years. The London insurance market is admired worldwide for the level of its sophistication and the depth and experience of its professionals. Many billions of pounds of risk is underwritten every year in respect of all aspects of commercial trade.

It will come as no surprise that the wording of the particular risk underwritten, “the insured peril”, is absolutely key, both to the insurer and to the insured. Every effort is made by the insurer to describe, with precision, exactly what is covered and what is not.

Many small businesses take out Commercial Combined Policies which cover a multitude of different risks, such as property damage, public liability and business interruption. These are complex contractual documents. Many policyholders who submitted business interruption claims took out these types of policies.

I think it would be fair to say that very few insured took much notice or even knew of the “non-damage” extensions to the “standard” business interruption cover. They would have taken far more notice of the “damage” policy provisions relating to business interruption caused by damage to property and equipment rather than “non-damage” business interruption caused by “infectious diseases”, murder or suicide.

The last pandemic was the Spanish Flu in 1918. Severe acute respiratory syndrome (SARS) which took hold in 2003 emerged from China, but its spread was limited, whilst the Middle East Respiratory Syndrome (MERS) in 2012 began in Saudi Arabia and spread only to a few other countries. Both of these were epidemics and not pandemics. No-one foresaw that a coronavirus emerging from a seafood and poultry market in Wuhan, China in December 2019 would spread to virtually every country in the world and cause such economic devastation.

What you don’t foresee, or think unlikely, you don’t legislate for (from the insurer’s perspective) and what you don’t think likely (from the insured’s perspective) you don’t wish to pay for in terms of any increased premium.

The “infectious diseases” extensions in the insurance policies had probably lain dormant in the form they were in for some considerable period of time without much, if any, attention paid to them or their suitability to fit the risk intended by both the insurer and the insured to be covered. The reality was neither party expected the risk to be engaged.

In February 2020, no insured even contemplated they would be making claims for business interruption losses caused by government measures taken to curtail the effects of a pandemic. Who would have thought that phrases such as “lockdown”, “bubbles” and “social distancing” would now be commonplace?

Insurers likewise did not contemplate such an event occurring and I think it fair to say they did not intend that any such risk should be covered. Had they done so, they would have inevitably engaged experts such as epidemiologists and modellers to assess what measures might be taken by the relevant public health authorities and Government to combat such an event, then price the risk accordingly.

What I think insurers did intend to provide cover for was the occurrence of specific incidents of an infectious disease at the insured’s premises (or within a specified radius of it) which in turn interrupted or interfered with the insured’s business, thereby causing loss.

The insurers suddenly found themselves presented with business interruption claims worth billions of pounds. Clearly they did not wish to pay out on such claims unless they fell squarely within the risk insured and the loss was directly linked to the insured risk. Notwithstanding the growing public outcry, moral outrage and parliamentary pressure to do the “right thing”, they clearly had an interest not to pay out on those claims if there was no contractual obligation to do so.

In essence the insurers were saying, on their interpretation of the policy wording, that it wasn’t the occurrence of the “notifiable disease” that caused the business to shut down, but the Government lockdown. There was therefore no “causal” link between the cases of COVID-19 occurring and the businesses being shut down. The “insured peril” related to discrete and specific incidents of the disease within a defined area and not a general outbreak occurring nationwide.

The Supreme Court essentially agreed with the insurers as regards the definition of the “insured peril”. Where the insurers came unstuck was on the issue of “causation”.

The loss against which the insurer agreed to indemnify the insured must be linked to the occurrence of the insured peril. What caused the premises to be shut? The occurrence of the disease or the Government measures? Would the loss have occurred irrespective of the occurrence of the insured peril? These were entirely legitimate questions of law to be asked.

Ultimately the court found against the insurers and preferred the FCA’s interpretation that:

“…each individual case of illness from COVID-19 was an equally effective cause of the government measures and consequent business interruption.” [para 193 of the judgment].

This may be viewed by the man on the street as common sense, obvious and a victory for what is right. However, what’s generally viewed as “right” or “common-sense” often does not align with what the law is. On this occasion it did.

In the interests of balance, there were certain arguments made by the insurer appellants which do indeed seem rather disingenuous, especially relating to “exclusion” clauses (seeking to exclude liability for the very loss insured) and “trends” clauses (seeking to reduce the loss to reflect the downturn in business due to the pandemic – which does seem somewhat bizarre, given their stance on causation).

Undoubtably insurers have a lot of work to do to rebuild public trust and restore their reputation however, what is indisputable is that insurers are indispensable in providing the necessary safety nets that enable commercial enterprises to operate. It is not, contrary to general public opinion, an inharmonious relationship. Quite the contrary, insurers pay out substantially more on policies than is thought.

As a result of the judgment, insurers and their re-insurers are now engaged in processing valid claims and meeting their liabilities in a timely fashion. It is estimated the total pay-out across the board is likely to be in the billions of pounds.

No doubt, also as a result of the judgment, insurers and their lawyers will be conducting a thorough and comprehensive review of policy wording as they relate to infectious diseases and a subsequent rewriting of those relevant policy wordings.

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