By E-Ming Fong and Calum Gee
On 15 September 2020, the High Court in London handed down its decision in The Financial Conduct Authority v Arch Insurance (UK) Ltd and Ors. The judgment provides highly anticipated guidance on the operation of non-damage business interruption insurance, with particular reference to the effects of Covid-19. Although success was mixed, the judgment is likely to be welcomed by those wishing to make claims.
The Financial Conduct Authority (FCA), representing the interests of policyholders (many of whom were small to medium enterprises), raised proceedings against eight insurer defendants. Whilst this action was brought by the FCA, two classes of litigants were also given permission to intervene in the proceedings. Those classes were formed by a number of policyholders who all had an interest in the outcome of the case.
What this means for Scottish business owners – individually and as a group
As we noted in an earlier article, this type of group action has been a part of English litigation for some time but a change in the law in Scotland which took effect on 31 July 2020 means that Group Proceedings can now be brought before the Court of Session (the equivalent of the English High Court).
The decision in favour of the FCA opens up potential claims by policyholders against insurers, with the FCA estimating that the decision could impact as many as 370,000 policies. In the event that insurers seek to avoid paying out, Scottish business owners may find that litigation is a necessary step for recovery. If so, affected policyholders could combine their separate claims into a single group litigation, benefiting from the efficiencies of the new Scottish group procedure.
The proceedings – a test case
The proceedings were run as a "test case" under the expedited procedure provided by the "Financial Market Test Case Scheme". The purpose of the proceedings was to determine issues of principle in relation to policy coverage for certain types of business interruption insurance during the pandemic.
Business interruption insurance seeks to protect businesses where their ability to trade has been restricted by the occurrence of an "insured peril". Many such policies restrict cover to business interruption caused by damage to or destruction of business premises. However, a number of policies extend cover to business interruption caused by, amongst other things, disease.
The Court considered 21 "lead" policy wordings (eg although each policy will turn on its own words, there were certain common clauses upon which the Court was able to provide useful guidance). In so doing, the Court identified three categories of cover:
- "Disease Clauses" – provisions which cover business interruption in consequence of or following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises.
- "Clauses preventing access" – provisions which cover the prevention or hindrance of access to or use of the premises as a consequence of government or other authority action or restrictions.
- "Hybrid Clauses" – provisions which are a blend of disease and prevention of access clauses. They tend to be engaged by restrictions imposed on the premises in relation to a notifiable disease.
The Court also considered the effect of "trend clauses" which are relevant to the quantification of a claim.
The decision - general
Each insurance policy is a contract between the insurer and the policyholder. The terms of the contract are to be interpreted using the normal rules of contractual construction. Each case turns on its own facts.
Thus, insurance cover depends on the precise wording of the policy, the nature of business and the event which occasioned the loss. However, there were some themes emerging from the case that will help establish whether or not your policy applies.
The decision - categories of cover
- Disease Clauses
The insurers argued that the disease (Covid-19) which caused the business interruption required to be within the "vicinity" of the business affected before cover should apply (for example, a localised outbreak of salmonella might fall into this category). Thus, they sought to restrict the effect of the policy to local outbreaks. In general, the Court did not accept the insurers' argument. The Court held that individual outbreaks formed an indivisible part of the UK-wide infection. Thus, it would be nonsensical to restrict cover to situations where there had been an instance of a localised outbreak.
- Clauses Preventing Access
Generally, the Court interpreted these clauses restrictively. However, where a business was prevented from operating by legislation (or the UK Government's instruction which immediately preceded the legislation) – such as in the case of bars, restaurants and clubs –cover should apply. Cover will only apply from the date when the business was forced to close. Restaurants which started a takeaway service may be covered for loss arising from closure of their table service. However, those with existing takeaway services are unlikely to be covered. Businesses (such as offices) which were not subject to mandatory closure of their premises are unlikely to be covered.
Reductions in profit caused by measures short of enforced closure (such as social distancing) are unlikely to be covered.
- Hybrid Clauses
The court, in line with its earlier reasoning, rejected the insurers' arguments that cover in relation to these policies should be restricted to local outbreaks. However, where cover was contingent upon "restrictions imposed" a narrow meaning was applied. Thus, cover will extend where the restriction was mandatory (for example, where it was introduced by legislation) but not where the restriction was advisory. The Court also considered that policy wording which required an "inability to use" required more than an "impairment" to use.
The decision - Trends Clauses
The Court also provided guidance as to quantification of any claims. The majority of the policies contained a "trends clause". Such clauses allow insurers to consider trends (including future trends) in business profits when assessing loss caused by the insured peril. The insurers argued that such clauses should be construed narrowly. In effect, arguing that the wider effects of Covid-19 (the impact of social distancing advice/stay at home advice etc) should be considered when assessing the likely business levels over the period claimed for.
The Court, in general, disagreed, finding that the wider effects of the pandemic should be disregarded during the period for which a business interruption claim is made.
This decision is unlikely to be the last word on matters. Appeals by either or both sides are likely and will seek to use the leapfrog procedure – skipping the Court of Appeal and going straight to the Supreme Court.
Next steps for Scottish businesses looking to claim under their insurance policy
- The decision, being English, is of only persuasive authority in the Scottish courts. However, the general approach to contractual interpretation is similar throughout the UK.
- The decision confirms the need to consider each insurance policy and claim on an individual basis. Any policyholders who have already had their claims rejected should get in touch if legal assistance is required in order to consider the possibility of taking action against insurers for refusing cover.
- Insurance policy wordings are complex. Expert advice should be sought if there is any doubt as to the meaning or effect of the wording.
- Those who have already submitted claims should review both the basis of their claim and the sum sought (both for claims which have already been refused and/or accepted).
- Those who have not already made claims should review their policies without delay to see if a claim can be made.
- Policyholders should ensure that any claims are submitted in accordance with the terms and conditions of their insurance policies. In particular, careful attention should be given to any time limits for notification. Policyholders should be aware that the notification date may be the date when their business was forced to close.
- Scotland has devolved powers enabling the Scottish Government to deviate from the restrictions imposed in other parts of the United Kingdom. Any Scottish insurance policy therefore needs to be construed in line with the Scottish laws and regulations in play at the relevant time. Depending on how the relevant restrictions impact upon interpretation of the policy wording, a different result may ensue depending on which side of the Border a claim is brought.
- With Group Proceedings now part of the Scottish court offering, the Scottish courts and Harper Macleod are ready and able to deal with any cases arising from this important decision, whether on a group basis or else on an individual basis.
Get in touch
If you require advice related to business interruption policy wording or the impact of this decision, please get in touch with a member of our specialist Dispute Resolution team.