Insurance companies fret over the declaratory judgement sought by Financial Conduct Authority


Thousands of businesses have found themselves knocking on FCA’s door after being rejected a payout under the Business Interruption Insurance policy during this pandemic.

Business interruption insurance covers loss of income incurred by a business following a natural disaster or fire, and aims to restore their trading position prior to the Pandemic. It can cover operating expenses, the move to a temporary location if necessary, payroll, taxes and loan payments. The economic and financial disruption following business closure led to an influx of insurance claims under business interruption insurance policies.

What issues have businesses faced amid pandemic?

The pandemic has largely disrupted a number of industries, but more prevalently the leisure and hospitality industry, and others which are restricted to operating from their premises. There has however been a rise in digitalization and remote working, as many moved to functioning from home where possible.  Business closure has led to a loss in profits with costs still being incurred. Employees were either made redundant, or furloughed, and an aura of uncertainty prevailed.

Businesses therefore became heavily reliant on their insurance covers for recompense. The major issue with the standard business interruption insurance policy is that it does not accommodate or account for interruptions caused by the outbreak of COVID-19.

What is the test case?

To address the uncertainty, the FCA has initiated a test case in the High Court to clarify and establish the meaning and effect of the select wording within business interruption policies regarding the coronavirus. An eight-day hearing is expected to take place in late July 2020 to obtain a declaration on the interpretation of such wording. 

The eight insurers involved in the test case include

  • Hiscox
  • Arch Insurance UK
  • Argenta Syndicate Management
  • Ecclesiastical Insurance
  • MS Amlin Underwriting
  • QBE UK
  • RSA
  • Zurich

In most cases, business interruption insurance usually only includes losses when a company has no choice but to temporarily close, following property damage resulting from a fire, for example.

Insurers have argued that claims under coronavirus do not fall within property damage but according to the FCA there is some scope under non-damage extensions. These non-damage claims arise from either government mandated business closure or an outbreak of an infectious disease. Moreover, business interruption coverage could also apply where the physical damage to the property arises from contamination, in cases such as this pandemic. In this scenario, business interruption insurance could arguably cover sanitation and decontamination expenses.

Insurers have further made the argument that in the case where their insurance policy covers infectious diseases, those diseases are specifically mentioned. However, the government only recognized coronavirus as a ‘notifiable disease’ in early March, and therefore there are only very few policies which,by virtue of set wordings, would cover it.

The FCA has stated that “the issue surrounding business interruption policies are complex and have the potential to create ongoing uncertainty for both customer and firms.” This test case aims to obtain a court declaration that resolves contractual disputes and the uncertainty surrounding the validity of these claims. The test case is being taken in the public interest to ensure consumer protection and protect market integrity. For more on what the FCA says, please click here.

The critical aspects challenged can be divided into two; coverage and causation. Firstly, the coverage issue can easily be translated into the following question, can the clauses (non-damage extensions) under business interruption policies cover losses caused by this pandemic? Secondly, under the causation issue, the courts will consider if there is a causal link between the loss suffered by policyholders and the pandemic, including trend clauses or similar provisions.

 What does this mean for businesses?

As of May 2020, there are approximately 8,500 claims under business insurance policy wordings likely to be affected by the test case, valuing approximately £1.2 billion. The decision reached in the test case will be legally binding on all parties involved in terms of the interpretation of business interruption policy wordings. The FCA is preparing a guide for interpreting similar wording issues for future reference.

Insurers are required to examine relevant policy wordings to determine whether the outcome of the claims will be affected by the decision of the test case. The FCA must be notified of these results by 8th July 2020 as it intends to produce a comprehensive list of policy wordings that will be affected by the outcome of the test case. Furthermore, if an insurer rejects a business interruption claim, the business owner is advised to check the list to see whether their policy is included in the representative sample in the FCA’s test case.

However, the representative sample does not include it; then advice should be sought by the company regarding whether the relevant wording in their policy is similar to the policies being examined depending on the outcome of the test case.

 What are the implications upon insurers and companies?

If the declaratory judgment declares that insurers have wrongly denied payouts, businesses will be able to recover for their losses arising from the interruptions caused by the pandemic.

Furthermore, throughout the developments of the test case, insurers have been advised to filter claims for coronavirus related losses, including those claims received before the introduction of the test case and FCA guidance to identify whether their claim will be potentially affected. Insurers are also held responsible to update policyholders whose claims are impacted by the declaratory judgment.

Lastly, the test case will not just affect the eight insurers involved in the case. The list published was only preliminary and the FCA plans to release a more comprehensive list of insurers and policies that the outcome might affect across the board. Time will tell what’s in store for insurers and policyholders.

This article is intended for guidance only and must not be relied upon for specific advice.