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COVID-19: Financial Conduct Authority – business interruption test case

17 July 2020
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The COVID-19 pandemic and resulting health controls imposed by the United Kingdom (UK) Government are causing substantial loss to businesses in the UK. In particular, small and medium enterprises (SMEs). Those dependent on these businesses for their livelihoods are experiencing immense financial strain.

Some SMEs have made claims under policies covering business interruption (BI) for the losses they have suffered. In particular, the claims have been made under policy extensions or other coverage clauses that do not require property damage but are rather focussed on events that cause an impact to the insured business. Many insurers have disputed these claims.

Under this backdrop, the Financial Conduct Authority (FCA) seeks legal certainty for the benefit of all stakeholders and accordingly brought a test claim against eight insurers under the Financial Markets Test Case Scheme.

The decision will impact the situation in South Africa and is outlined below.

Points of significant commonality

The Defendants (eight insurers) who offer BI cover principally to SMEs have argued that:

  • the policy extensions do not cover pandemics, but only local events;
  • any loss was caused by matters other than the policy trigger (which, in the Defendants’ cases, may include the existence of disease nationally, or country-wide action or behaviours in response to COVID-19); and
  • businesses are not prevented from accessing or using insured premises or interrupted if they can continue to operate for any (however limited) purpose.

This test case therefore seeks to ascertain whether these reasons for denying the BI claims are valid, without considering complex factual scenarios and taking into consideration the principles of Treating Customers Fairly (TCF).

FCA test case

The FCA argues that the Defendants are wrong to reject policyholders’ claims and/or are wrong in the way in which they have addressed the causation of insured losses.

The FCA seeks declarations to establish the basis upon which the insurance provided by such provisions under representative standard form policies issued by the Defendants (Wordings) respond to non-damage BI losses.

The FCA therefore seeks to remove the general ‘road-blocks’ that have been advanced by insurers to give blanket denials to claims irrespective of individual facts and advance the policyholders’ arguments on coverage and policy construction.

In summary the FCA argues in relation to the Wordings that:

  • The response of the UK Government to COVID-19 was (and is) a single body of intervention which prevented and hindered access to, and the use of business premises; caused closure of, and restrictions on, activities within the premises; and interrupted and interfered with business activities. This includes businesses required to close by the Government such as pubs, most shops and restaurants, and businesses that were not ordered to close (whether at all or in their entirety), because measures imposed by Government satisfied the policy trigger.
  • Where insuring provisions require the presence of the disease to occur within a certain radius or vicinity of the premises, (i) the insured can (in addition to specific proof in a particular case) prove the presence of COVID-19 at a certain date on the balance of probabilities by statistical or other means without necessarily proving that there was a medically diagnosed case; (ii) those insuring provisions do not require the event to occur only within that vicinity or radius, so that wide area events within the locale are covered (there generally being no exclusion for such events or for pandemics); and (iii) certain events (e.g. danger, emergency), were nationwide, so automatically occurred within the relevant vicinity.
  • Nothing in the Wordings or in the law entitles the insurer to deny cover, or requires the Court to find a lack of cover or reduce the indemnity, by reason of loss not being caused by the insured peril but because it was caused by COVID-19 more generally (such as other public authority action, or public reactions to the pandemic).

The FCA states that where there remains genuine ambiguity about the proper construction of the policy, that ambiguity is to be resolved by applying a construction which favours the insured.

Regarding the risk of epidemics and pandemics, the FCA argues that there was significant information and general knowledge as to the risks of epidemics and pandemics occurring periodically and the potential for governmental action in response.

Although unprecedented in the UK (and the world at large), the risk that such a situation could happen must be considered when assessing the policies. Insurers should have expressly excluded cover for those risks if they wished to do so.

Regarding the common trigger terms, the FCA acknowledges that there are several different policy wordings which require public bodies to take some form of action in order for the policy to offer coverage. The public bodies are referred to by way of differing terminology.

The FCA then cites cases that have dealt with a ‘public authority’. In particular, the South African Café Chameleon case is used to provide guidance on interpretation that it does not matter if it was not a local authority but rather national government that declared COVID-19 a notifiable disease. Please refer here to our previous newsflash on this case.

Regarding whether COVID-19 fulfils the requirements of being a disease, the FCA states that this is common ground.

The FCA then looked at the words ‘prevent’ and ‘hinder’ and argues that a threshold should not be read into the policies on the degree of interference required to establish a ‘hindrance’; anything that makes access to, or use of, the premises more difficult (subject, perhaps, to a de minimis threshold) should constitute a ‘hindrance’. In other words, these words should be interpreted broadly and not restrictively.

Furthermore, the FCA argues that there is no requirement that the nature of the prevention or hindrance must be a physical one (e.g. that customers are physically prevented from accessing the premises by police tape).

This means anything which prevented access to any extent or made access to, or use of, the premises more difficult, whether physical or otherwise; is captured. For instance, curfews or guidance/ orders to stay away from the premises, all of which impede the otherwise free access or use of a premises on which businesses rely.

The FCA also assessed the meaning of ‘access’ and ‘use’ and argued that where these words are used together, they should be construed (in this context) as a pair. It is possible for both these words to be prevented or hindered in circumstances which will have commonly arisen as a result of the action or advice of the Government.

Regarding the words, ‘interruption’ or ‘interference’, the FCA argues that the terms simply require an operational impact on the business which causes loss. This could be physical or economic and even if the interruption or interference was short in duration, it still qualifies as an event for which the policies should cover.

On the issue of causation, the FCA set out the ‘but for’ test and the proximate cause test. The FCA argues that the application of any causation principles must adapt to the apparent intention of the parties. The single proximate cause of the interruption is the disease everywhere and the Government and human responses to it.

The Café Chameleon case is cited which states that there was a clear nexus between the COVID-19 outbreak and the regulatory regime that caused the interruption to the insured’s business such that causation was established.

The FCA then goes on to deal with the policy wording of each Defendant insurer in depth.

Conclusion

The purpose of the test case was to remove the uncertainty that has been created by insurers’ reliance on reasons for denying cover which were of general application to policyholders and refusing to hear the individual merits of each claim.

Insurers should not adopt a narrow approach to the application of the clauses and causation.

The FCA therefore seeks declaratory relief to correct the errors in the insurers’ approach to the claims against them under the BI policies tested in this litigation.

Application to South Africa

What is clear from the FCA’s arguments is that the South African regulator, the Financial Sector Conduct Authority, in its communications, has taken a similar approach to that of the FCA.

Our courts have usually looked to foreign law to assist in their determinations, yet the FCA has, in this instance, relied upon the South African judgment of Café Chameleon to aid in its argument. This illustrates how the South African insurance industry is considered, from a regulatory perspective, as an equivalent jurisdiction to the of the UK. This test case as well as Café Chameleon are going to test the principles of Treating Customers Fairly (TCF).

Refer to our previous newsflashes on the regulatory response in South Africa here and the FSCA stance on BI insurance here.