Despite being celebrated as a policyholder victory, many legal professionals feel this reaction to the test case verdict could be ‘premature’ as the likelihood of an appeal from insurers still looms large

Legal professionals are applauding the FCA’s prompt response to the conflict between insurers and policyholders surrounding Covid-19-related business interruption (BI) claims as the High Court yesterday published its verdict on the eight-day test case that sought to clarify non-damage BI policy wordings and their interpretation.

For example, Michael Frisby, dispute resolution partner at Stevens and Bolton, described the regulator and its unprecedented High Court test case as a “a shining example of regulatory intervention, addressing key legal issues in a divided market”.

He continued: “The FCA has set a new regulatory standard for times of crisis – acting speedily and effectively for the benefit of all, particularly given that many policyholders are smaller businesses fighting for survival. All regulators should take note.

“For the insured, without the FCA, they would have been left to fight an expensive, lengthy and complex dispute on their own to obtain resolution of the issues raised by the FCA.

“Small enterprises with little funds or litigation experience were pitted against deep-pocketed and experienced insurers. It really was a case of David against Goliath. But the FCA stepped up to the plate. By representing these smaller businesses, there was an equality of arms between claimant and defendant.”

Clive O’Connell, partner and head of insurance and reinsurance at McCarthy Denning shared this view. He added: “This case is a wonderful example of a regulator taking proactive action to resolve an issue that would otherwise have been the subject of litigation for many years.”

SME impact

The verdict, therefore, should have a positive knock-on impact for many SMEs who have experienced financial difficulties as a result of the Covid-19 pandemic.

Stephen Netherway, partner and head of the insurance practice at national law firm Devonshires, said: “[The] judgment gives a much-needed lifeline to struggling businesses across the UK and could prevent many from going bankrupt.

“It provides for many a basis for presenting their Covid business losses under their commercial insurances. As a result, [this week’s] victory for the FCA, provided payments are to be made now, will save thousands of people from losing their jobs. Fundamentally it will mean many millions of pounds being paid out to some of the businesses that are desperate for a cash injection.”

Industry roadmap

Steven Skiba, legal director and commercial disputes specialist at law firm Shakespeare Martineau, noted an additional “ripple effect” of the ruling – namely that there is now a “a roadmap to businesses and insurers for handling business interruption claims”.

“As well as giving guidance on how to interpret the wording of policies, both groups now have much-needed clarity that government-mandated measures, such as lockdown, count as a cause for business interruption,” he explained.

“The issue of whether business interruption policies cover losses caused by the pandemic was one of the most controversial legal issues resulting from the coronavirus crisis; this ruling could potentially cost insurers billions of pounds. One of the biggest takeaways from the case is that the correct approach for assessing loss is to look at where the business would have been had the pandemic not happened.”

However, Aaron Le Marquer, partner at Fenchurch Law, thinks that policyholders with prevention of access cover may feel themselves short-changed in terms of their claims success.

He explained: “The judgment has widely been described as a victory for policyholders – and it is undeniably a good outcome for those policyholders with infectious disease coverage. According to the court, not only are their claims covered, but the value of their claims will not be reduced by the application of trends clauses.

“However, those pursuing claims under prevention of access covers will be very disappointed at the court’s finding that coverage will only be engaged under very narrow circumstances, and not in response to the national lockdown.”

Speaking on the real estate sector, Anthony Lennox, head of reinsurance and insurance at Bryan Cave Leighton Paisner, agreed.

“Whilst the judgment overcomes the causation hurdles raised by insurers in relation to business interruption claims and establishes cover under many policies with notifiable disease extensions, it is going to be more difficult to establish cover for policies with business interruption cover triggered by restrictions on the use of premises,” he said.

“In our experience, many of the policies for those in the real estate sector, including construction all risks policies as well as policies protecting property portfolios, contain denial of access clauses whereas notifiable disease polices are less common - and many of those specifically exclude losses arising from a coronavirus-type pandemic.”

Orient Express

Le Marquer added that the way the judges’ dealt with the previous Orient Express case law could provoke insurers’ reaction.

“A striking aspect of the judgment is the way the court neatly despatches with the complicated causation arguments raised by insurers, by making it a part of their very clear finding on the construction of the coverage clause. Because, the court says, the insured peril is the composite peril of interruption or interference with the business caused by the national occurrence of Covid-19, the causation arguments ‘answer themselves’. For the same reasons, trends clauses are largely irrelevant and the principle in Orient Express has no application,” he said.

“The court’s finding that Orient Express was wrongly decided and that they would not have followed it even had they not found it to be distinguishable, will certainly raise eyebrows and will surely lead to an appeal from insurers on this issue at least.

“In deciding whether to appeal on the policy trigger issues, insurers will have to weigh up the potential further reputational damage they may suffer from being seen to resist the court’s very clear findings.”

Appeal potential

However, legal experts all concur that an appeal from insurers is very much on the cards, meaning that the final case conclusions may not be confirmed until next year.

Ed Lewis, a partner at Weightmans, therefore described the High Court’s ruling this week as being “not the beginning of the end, it is just the end of the beginning”.

He continued: “Even if insurers are ultimately unsuccessful in any appeal, assessing the extent to which just those policies featured in the test case respond to claims will take months to resolve. The onus remains very much on policyholders to demonstrate actual proof of loss before any claims will be considered for payment.”

Netherway agreed: “While this is a victory for the person on the street, the small business, there will undoubtedly be an appeal from the insurance industry, so we are effectively only at half time in this case.

“There is devil in the judgment detail and not all policyholders are in the same box seat with their insurers, depending on what actual insurance wording they hold.

“What is important now is that the FCA sits down with the insurance sector to discuss how they move forward and discuss if [businesses] can secure interim payments from their insurers pending any appeal.

“For the insurance industry this is a blow, but they will, I am sure, continue to fight this all the way to the Supreme Court where the final judgment will most likely be made.”

For Tom Ataii, senior associate at international law firm Mayer Brown, “this judgment is unlikely to be the end of the story”.

He continued: “The Court’s decision will not - and is not intended to - address all possible disputes. The position of individual policyholders will depend on the specific wordings and the individual circumstances. There may be significant further litigation around specific issues, as well as around determining issues of quantum in individual cases.”

Robert Ganpatsingh, partner at South East law firm DMH Stallard, added that an appeals process will only “prolong the agony being suffered by smaller businesses during the pandemic, who thought they were well protected by their insurance”.

He further described this as “a sign of things to come”. He explained: “The case hinged on the wording of various business interruption policies. There will be countless future pieces of litigation to interpret the terms of contracts where the impact of the coronavirus pandemic has been felt.”

Richard Moore, a commercial litigation specialist at national law firm Clarke Willmott, believes it is “premature to celebrate just yet”.

He continued: “The case was a representative test case only. There are many other insurers who were not involved in the case who may rely on the fact that their own policy terms and conditions differ from those examined by the court and therefore the judgment may be of indicative interest only. Policy holders who are covered for business interruption for property damage only will also be unlikely to be covered by their policies.”

Revisiting policy wordings

Andrew Crocombe, partner at Plexus Law, expects the ruling to affect policy wordings and the thinking behind certain trend methodology.

He said: “The pandemic did lead the majority of insurers to revisit their wordings so some work will already have been done to clarify what is and is not covered under the policy. In light of this decision, we do expect there to be a revisiting of the ‘trends clause’, particularly given the fact that the, often maligned, Orient Express Hotels judgment was essentially rebuffed by the court.

“There will also be a recognition that certain clauses need to be better thought through, particularly in relation to the linkage between general exclusions and clauses [or] extensions that write-back limited cover.”

In terms of the judgment’s impact outside of commercial insurance policies, Crocombe added that it could influence “cyber risk, where policy wording is still evolving”.

He said: “Some broker and MGA wordings in this area are quite generous in terms of cover. Insurers may want to restrict the risks that they’re prepared to write to ones which they know have been properly scrutinised.

“We may also start to see longer, more detailed policy wordings in response which would, we suspect, be seen as an unwelcome development in the market.”