FCA BI test case appeal likely to see clear winner but result in balance, says leading lawyer

The Supreme Court’s appeal ruling in the UK’s business interruption (BI) test case is likely to be decisive but could go either way, according to a legal expert, who added that it will impact similar cases overseas, as well as insurance and reinsurance contracts subject to English law. Last week saw the conclusion of the test case brought by the Financial Conduct Authority (FCA) against eight insurers to resolve key coverage issues in relation to Covid-19 non-damage business interruption (NDBI) losses in the UK. The initial High Court ruling in September – which contained 123 declarations in a 162-page judgment – produced some important results for policyholders, but many of the key findings are now under appeal by the FCA and insurers at the Supreme Court. The appeal was heard last week. The Supreme Court ruling, due late next month or in January, will be very important for policyholders and insurers, according to Fenchurch Law partner Aaron Le Marquer, who advises policyholders in disputes with insurers over BI and event cancellation claims in excess of £2bn. “I expect the [Supreme Court] judgment will go one way or another as the issues are largely interconnected. There should be a clear winner, either insurers or the FCA. Once we have the judgment, it will be final and the clock will restart on any claims under FCA guidance,” said Mr Le Marquer. The UK’s BI test case was the first of its kind to be brought under the Financial Markets Test Case Scheme. It was brought, heard and decided on in an unprecedented and accelerated timetable. With the first Covid-19 claims triggered in March, disputes were already in the High Court at the end of July, and the Supreme Court in November. The case is expected to affect more than 370,000 policyholders, with 700 wordings issued by 60 insurers, according to the FCA. The judgment of the Supreme Court, the final court of appeal in the UK, is likely to be decisive, according to Mr Le Marquer. Although the case is complex and examined 21 separate wordings, it boiled down to several core issues. These centre around disease wordings, denial-of-access wordings, hybrid wordings, causation and trend clauses. The latter, also known as other circumstance clauses, may require the insured to show that ‘but for’ the loss, they would not have suffered business interruption. This point was considered in the case of Orient-Express Hotels v Generali. It found a hotel was not covered for its business interruption following hurricane Katrina because ‘but for’ the damage to the hotel, the loss would have been suffered anyway as New Orleans was effectively closed down from the wider effects of the hurricane on the city. The High Court judged in the FCA BI test case that the previous Orient Express ruling was wrongly decided and did not apply in this case. All points considered in the FCA test case and subsequent appeals are entwined with the issue of causation, explained Mr Le Marquer. “If the Supreme Court finds that the lower court was right in its construction of the disease clause radius requirement – ie that the clauses respond to all losses caused by Covid, not just losses caused by cases within the radius – then it is also more likely to agree with the lower court that Orient Express was wrongly decided and/or does not apply here, meaning that claims do not stand to be reduced or eliminated because ‘but for’ the prevention of access, the losses would still have been caused by Covid. In that case, the case would largely go in favour of policyholders,” he told CRE. “Alternatively, if the Supreme Court agrees with insurers that the disease clauses provide a much narrower scope of cover, it is likely also to find that Orient Express applies here, and that coverage under prevention-of-access clauses is reduced or eliminated by the inclusion of Covid-19 in the counterfactual for the purposes of causation and trends clauses. It is difficult to see how the Supreme Court would find in favour of insurers on one issue and not the other, as this would lead to a less logically consistent outcome,” Mr Le Marquer added. At this point in the case, policyholders appear to be winning the argument. The earlier judgment by the High Court produced some favourable results for insureds. If the Supreme Court upholds the lower court’s findings on Orient Express and the radius issue in disease clauses, then policyholders will have come out of the legal process on top, said Mr Le Marquer. “For SME policyholders with modest limits of liability, one hopes that insurers will move directly to paying claims without further delay or quibbling over quantum, but for businesses with more substantial coverage, there will certainly be further disputes to come over measurement of loss and aggregation, for example whether a single or multiple sub-limits of liability can be claimed,” he said. Even after the Supreme Court gives its ruling, claim payouts will be subject to individual policy interpretation, complex loss adjusting and potentially further litigation. According to Mr Le Marquer, there will be further issues with the application of trends clauses that are often contentious. Insurers will need to consider other factors when calculating BI claims that were not considered by the commercial court, which could potentially include Brexit, he said. Insurers will also need to apply sub-limits, which could apply to loss, claims, occurrence, events and originating clauses. Sub-limits are typically substantial, 10% or less, for NDBI claims and can make a big difference to the ultimate insurance recovery. The Supreme Court judgment will have direct relevance beyond the UK and in commonwealth jurisdictions, but is also being carefully watched in other common law and even civil law jurisdictions where legal systems are less closely connected with the UK, said Mr Le Marquer. Courts in Australia and South Africa recently found in favour of policyholders in similar Covid-19-related BI cases. The Western Cape High Court, which found in favour of Ma-Afrika Hotels in its dispute with insurer Santam, referred to the FCA case. “The origins of insurance law principles are found in English common law, and the London market remains the pre-eminent global (re)insurance hub for now. So, the Supreme Court’s findings will have a direct bearing from a reinsurance perspective on many international losses, as well as being influential on the manner in which courts in other jurisdictions approach the issues,” said Mr Le Marquer. “We saw in the South African case that the FCA test case was directly quoted in the court’s judgment, despite having no formal standing in that jurisdiction, so that is an indication that the Supreme Court’s findings will have global, not just national, significance,” he added.

FCA BI test case appeal likely to see clear winner but result in balance, says leading lawyer

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