As the FCA Test Case on business interruption insurance moves to the appeals stage at the UK Supreme Court, ABI Director-General, Huw Evans, explains where we are in the process
Next week the business interruption insurance test case moves to the appeal stage at the UK Supreme Court. Brought by the Financial Conduct Authority (FCA), and fully supported by the insurance industry, the test case was agreed to bring clarity on business interruption insurance coverage for businesses impacted by the UK wide lockdown in the Spring.
Business interruption insurance policies are not generally designed, priced or sold to cover unspecified, global pandemics. Indeed, the FCA has itself confirmed on several occasions that most business insurance policies are focused on property damage, have basic cover and do not cover pandemics. Some customers however, who had bought policies that provided some cover against infectious diseases felt their business interruption insurance policies were wide enough in scope to cover them for interruption to their business as a result of the pandemic. Whilst insurers may have disagreed on some of the policies, eight firms agreed to take part in the test case to help provide clarity on some of the key disputes around contract wording. We have always understood how difficult the challenge has been for many small businesses and insurers want to bring clarity for those customers as quickly as possible.
Business interruption insurance policies are not generally designed, priced or sold to cover unspecified, global pandemics. Indeed, the FCA has itself confirmed on several occasions that most business insurance policies are focused on property damage, have basic cover and do not cover pandemics.
For some businesses, the further hearing at the Supreme Court may understandably feel yet another delay to receiving a final decision about whether they will receive an insurance payment. But, even including the appeal stage, this unprecedented process will bring clarity far quicker than if any individual business had pursued legal action against their insurer. Any such process could have taken years, not the matter of months in which the test case has progressed. The option to appeal was invoked by parties from all sides and is written into the agreement that governs how the case will be handled. Given the court case covers some fundamental points of insurance contract law that could be relied upon for years to come, it’s understandable that a number of parties – including the FCA and a policyholder action group - have taken this step.
Back in July, the High Court looked at 21 policy wordings from the eight insurers and, in September, handed down its judgment with a mixed verdict that found in favour of both sides on different legal wordings and points. For two insurers, Zurich and Ecclesiastical, the judgment found entirely in their favour and the FCA decided not to appeal against the findings.
The hearing at the Supreme Court, expected to last for four days, will give parties on both sides the opportunity to present their respective appeals.
For the remaining six insurers, not all aspects of the High Court’s judgment are being appealed. The focus now is broadly in relation to the High Court’s findings in three areas so-called disease clauses, the disease element of hybrid clauses, and the appropriate use of counterfactuals. The FCA’s appeal is in relation to the findings on some of the hybrid clauses, and the circumstances in which there would be cover. All of the appeals raise issues about the cause of the business losses and whether this was connected to the insured risk (‘causation’) and the applications of trends clauses (the adjustment of the insurance payment based on wider factors that have affected trade).
Meanwhile, although the case is ongoing, other business interruption claims are being paid. Members of the ABI expect to pay out £900m in business interruption insurance claims as a result of Covid-19 and have a clear set of principles for the handling of these claims to ensure a focus on speedy settlement at this uncertain time.
While this issue is one that has understandably grabbed many of the headlines, it is important that the industry’s response to Covid-19 isn’t just seen through this prism. The insurance and long-term savings sector set up Britain’s largest private sector £100m Covid-19 charitable fund to help local communities while expecting to pay a total of £1.7billion in insurance claims in the UK. Insurers have also made a series of customer pledges to provide extra flexibility to customers working from home, having unusual driving patterns or those who are NHS volunteers. Private health insurers have worked with the private hospital sector to ensure facilities have been provided to help the NHS cope and travel insurers have worked tirelessly to help those whose holidays have been disrupted. Despite a 200% increase in customer call volumes and huge operational changes to enable mass working from home, the sector has ensured claims are paid, pensions payments continue to flow and that customers continue to get the service they need.
Despite this, it remains true that no insurer wants to find itself in dispute with customers and, no matter what the legal outcome may be, there will be much the industry wants to learn from the events of 2020. The economics of insurance is based on collecting premiums from the many to pay the claims of the few. This is always going to make providing insurance for a pandemic problematic and too big for the insurance industry to insure in a normal way. We continue to work painstakingly behind the scenes and across industry to examine potential solutions for future pandemics and similar risks. This could potentially involve partnerships with the Government in order to help underwrite the risk but it is too early to consider any long-lasting concrete proposals just yet.
In the meantime, the intention of insurers and all sides remains to conclude any outstanding issues in the quickest way possible to bring clarity for policyholders and to pay valid claims as soon as possible. We are grateful to the UK Supreme Court for holding the appeals so quickly in order that we can do just that.