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Fighting an insurer over lockdown payout? UK policyholders just won an important COVID-19 test case

After wrangling the small print over countless Skype for Business meetings (yes really)

The High Court of England and Wales has said insurers should pay up on a raft of key "test" clauses in a ruling affecting hundreds of thousands of UK businesses forced to close during the UK's COVID-19 lockdown.

In a 150-page whopper of a judgement handed down yesterday, the court found in favour of most of the arguments advanced on behalf of policyholders by the state's Financial Conduct Authority (FCA).

The FCA earlier estimated that around 700 types of policies inked by more than 60 insurers and 370,000 policyholders could potentially be affected by the test case. You can check for your policy here [PDF], although The Reg notes that the court didn't find that all of the wordings provided cover. Any policyholders who have made a claim or complaint that is potentially affected by the judgment should receive an update from their insurer within seven days.

The judgment relates to a test case brought by the FCA itself, the state regulator of insurers, which looks at so-called non-damage "business interruption policies" in relation to the pandemic. The court reviewed 21 different policy wordings (meant to deal with key contractual uncertainties) across a sample of insurance docs and assessed how they should be dealt with.

The test case (which took place over Skype for Business, apparently, though the judgment referred to businesses using Zoom in lockdown scenarios) began on 9 June 2020, but insurers and the FCA inked a framework agreement beforehand on 31 May – essentially saying the watchdog and the insurers had the same objective: "achieving the maximum clarity possible for the maximum number of policyholders and their insurers". They also agreed to move things along speedily – including appeals – for the sake of everyone concerned.

Two policyholder groups – the Hiscox Action Group (HAG), and Hospitality Insurance Group Action (HIGA) – were granted permission by the court to intervene in the case and were represented by Mishcon de Reya.

Those 21 policy wordings were divided into "disease clauses", having to do with "notifiable diseases"; clauses covering prevention of access; and hybrid clauses that dealt with both.

The Reg has asked the eight defendant insurers for comment on the ruling, although not all of them are liable and not all 21 types of policy wording the court considered were deemed to offer cover. The FCA has noted that "each policy needs to be considered against the detailed judgment to work out what it means for that policy".

The massively long judgement is a lesson in the principles of contractual interpretation, with lawyers delighting in all manner of "counterfactuals" – trying to ascertain causation by speaking hypothetically about what could have been true under different circumstances (sometimes called "but-fors" – for example, "but for the existence of X, would Y have occurred?"). Among other details, the silks argued over the definition of "vicinity".

Lord Justice Flaux and Mr Justice Butcher found this point among the arguments notable:

that one of the HIGA Interveners, insured under the equivalent of the RSA 4 wording (though not in fact by RSA), has 340 locations in the country, and the vicinity of those locations (on any view of that term) covers a large swathe of the country.

On RSA's argument, that insured could not establish that interference with its business was the result of the notifiable disease within the Vicinity of any of those 340 locations, because it would have resulted from the occurrence of the disease elsewhere. [Ms Susannah Jones for HIGA] submitted that that was an absurd result which demonstrated the fallacy of RSA's case.

The justices found in HIGA's favour on that point, with HIGA noting in a statement yesterday: "The Court agreed that Vicinity could be very extensive, and indeed nationwide. The Court went further to say even if Vicinity was not the entire country, a policyholder would still be insured for interruption or interference caused by COVID-19 including the public's and Government's response to it."

Christopher Woolard, interim chief exec of the FCA, commented: "We are pleased that the Court has substantially found in favour of the arguments we presented on the majority of the key issues. Today's judgment is a significant step in resolving the uncertainty being faced by policyholders."

The FCA chief said of the proceedings: "Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat.

"Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible, and today's judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful."

A spokesperson from Ecclesiastical – which insures churches and is one of the defendants whose clause was found not to provide cover – told The Reg: "The Court has found that loss suffered is expressly excluded from cover in EIO's policies by the 'infectious disease carve-out.' That means that our cover does not respond to the COVID-19 pandemic as it was not designed or priced to do so. We will update our policyholders separately as soon as we can.

"We are aware that the COVID-19 pandemic continues to cause severe hardship across the UK economy. We hope that this judgment, while not being the result that some policyholders will have wanted, begins to provide some much-needed clarity to the market."

Insurer RSA said in a statement yesterday: "Based on our initial review, RSA estimates the additional financial impact to RSA of today's judgment to be approximately £104m on a gross basis across its portfolio of relevant business interruption policies.

"After the application of our catastrophe reinsurance protection, RSA estimates the impact of this judgment to be around £85m which is in turn expected to reduce further through qualifying as a loss covered by the group-wide aggregate reinsurance programme."

Insurer Argenta declined to comment.

QBE, meanwhile, said in a statement: "The Court ruled in favour of QBE with respect to two out of three of QBE's notifiable disease policy wordings examined and in favour of insurers generally with respect to denial of access policy wordings. However, the Court ruled in favour of insureds with respect to one of QBE's notifiable disease policy wordings and QBE is considering its options to appeal that decision.

"Based on the notified claims affected by the FCA test case and having regard to individual policy sub-limits, QBE's estimate of its UK business interruption claims exposure is around $170m before allowing for recoveries under the Group's catastrophe reinsurance protections."

Mishcon de Reya, which acted for HAG and HIGA, said in a statement: "The case was overall a resounding victory for the policyholders. For the Disease cover [one of the wordings considered by the court], the effect is that where there has been interruption or interference with the insured's business occurring within the UK after 31 December 2019, the insurer should pay the resulting business interruption losses.

"The Court agreed that Vicinity could be very extensive, and indeed nationwide. The Court went further to say even if Vicinity was not the entire country, a policyholder would still be insured for interruption or interference caused by COVID-19 including the public's and Government's response to it.

"For the Prevention of Access – Non Damage cover, the Court also found in our favour – that where there has been interruption or interference with the insured's business as a result of the Government's advice and actions in the UK in response to COVID-19, the insurer should pay out."

The FCA noted that any insurers planning to appeal should hotfoot it, saying: "If any parties do appeal the judgment, we would expect that to be done in as rapid a manner as possible in line with the agreement that we made with insurers at the start of this process. As we have recognised from the start of this case, thousands of small firms and potentially hundreds of thousands of jobs are relying on this."

If it is not successfully appealed at a later stage, the High Court judgment is legally binding on the eight insurers when it comes to the interpretation of the policy wordings considered by the court.

The FCA noted that it also provides "persuasive guidance for the interpretation of similar policy wordings and claims", which can be taken into account in other cases, including in Scotland and Northern Ireland, by the FCA and the Financial Ombudsman Service in looking at whether an insurer is handling a claim fairly.

Next up, the court will hear the parties' declarations in light of its findings in a hearing expected to take place in October. ®

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