The Financial Conduct Authority (FCA) brought the Test Case in June 2020 to clarify the extent to which certain non-damage “disease clauses” and “prevention of access” clauses in business interruption insurance policies would respond to losses arising out of the UK Government's lockdown measures taken to combat the spread of Covid-19 in March 2020.

The eight insurer defendants (Arch, Argenta, Ecclesiastical, Hiscox, MS Amlin, QBE, RSA, Zurich) agreed to participate in the Test Case. The FCA represented the interests of the policyholders, many of which were small to medium sized enterprises. There were 21 sample policy wordings considered by the High Court. The parties agreed to expedite the case timetable given the importance of the decision to the affected policyholders.  

In July 2020, the FCA issued guidance stating that insurers would be expected to apply the outcome of the Test Case to the extent that it affected the policy wordings, which they issued.  The FCA estimates that, in addition to the 21 particular wordings, some 700 types of policies across 60 different insurers and 370,000 policyholders could potentially be affected by the Test Case.

High Court Decision 

The High Court issued its ruling on 15th September 2020. 

A total of 21 sample policy wordings were considered, and the relevant provisions in the policies fell into three categories:

• Disease clauses: provisions which provide cover for business interruption in consequence of or following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises.
• Prevention of access / public authority clauses: provisions that provide cover where there has been a prevention or hindrance of access to or use of the premises as a consequence of government or other authority action or restrictions.
• Hybrid clauses: provisions which are engaged by restrictions imposed on the premises in relation to a notifiable disease. 

Disease Clauses:
The Court concluded that the proximate cause of the business interruption was the notifiable disease of which the individual outbreaks form indivisible parts; alternatively (but less satisfactorily) each of the individual occurrences was a separate but effective cause of the national actions.

Insureds would only be able to recover if they could show that the case(s) of disease within a specified radius or vicinity of the insured premises (typically 25 miles) or relevant policy area (RPA), as opposed to elsewhere, were the cause of the business interruption. 

Prevention/denial of access and “hybrid clauses” – interpretation of restrictions imposed and inability to use premises: 

The Court concluded that these clauses were to be construed more restrictively than the majority of the Disease Clauses, albeit their findings provide for cover for some insureds under some wordings.

The key factors considered by the court can be summarised as follows:

• The location and nature of the emergency/incident and the causal relationship between it and the relevant authority’s action.
• The Court considered “emergency in the vicinity”, “danger or disturbance in the vicinity”, “injury in the vicinity” and “incident within 1 mile/the Vicinity” were all requirements that connoted something specific which happens at a particular time and in the local area. The court therefore concluded that such wordings were intended to provide narrow localised cover. As such, for cover to apply, the action of the relevant authority would have to be in response to the localised occurrence of the disease and action taken in response to the pandemic would not suffice. Whether cover is available to an insured under a Prevention of Access clause will therefore turn very closely upon the precise terms of the policy and the application of the government advice and Regulations to the insured’s particular business, such as whether their business was directly mandated to close or was affected by the more general “stay at home” requirements.
• The Court also identified a category of “hybrid clauses”. These clauses are a blend of a disease wording and prevention of access/public authority wording. The Court took a similar approach to the “disease” part of the clause to that set out above, rejecting insurers’ argument that the only cover was in respect of losses flowing from a local outbreak. However, as with the prevention of access wordings, the Court construed the meanings of “restrictions imposed” and “inability to use” narrowly, finding that “restrictions imposed” requires something mandatory, such as the mandatory requirements of the regulations, and “inability to use” requires something more than just an impairment of normal use. Therefore again, close examination of the particular terms of the clause is required to determine policy application. 

Supreme Court Appeal and Decision 
Both the FCA and Insurers appealed aspects of the High Court Judgment via a “leapfrog” appeal procedure available in relation to matters of sufficient national importance. The Supreme Court held a four day hearing in November 2020 before delivering judgment on 15 January 2021. 

In summary:

Disease clauses
The Supreme Court held that the High Court was wrong to conclude that all of the effects of the nationwide outbreak of Covid-19 were insured if it could be proved that there was one undiagnosed case of Covid-19 within the RPA. It held that the clause only covers the effect of the particular case or cases of Covid-19 within the RPA, and also each individual case of Covid-19 was an equally effective proximate cause of the lockdown and the public response to it.  

Prevention denial of access and “hybrid” clauses – interpretation of restrictions imposed and inability to use premises
The FCA successfully appealed the High Court’s narrow interpretation of public authority instructions. An instruction from a relevant authority can amount to a “restriction imposed” if it carries the “imminent threat” of being legally enforceable, or it is clear that compliance is expected “in mandatory and clear terms”. 

It was held that the term “inability to use” premises do not mean a complete inability to use them, but could also cover an inability to use part of them or an inability to use them for a discrete purpose. 

Covid-19 Causation 
The Supreme Court concluded that, in order to obtain cover under the disease extensions, it is sufficient for a policyholder to show that at the time of any relevant government measure there was at least one case of Covid-19 in the RPA. The Supreme Court also indicated that the above analysis was applicable to those disease/hybrid clauses which require as one element an occurrence of a notifiable disease within the vicinity of the insured premises as the insured peril. 

Trends Clauses 
The Supreme Court’s starting point was to consider that the aim of such clauses is to arrive at the results that would have been achieved but for the insured peril and circumstances arising out of the same underlying or originating cause. The Supreme Court did not accept Insurers’ argument that “trends clauses” which allow for adjustments for fluctuations of turnover, required the amount of recoverable losses to be reduced to take account of the downward impact of the uninsured effects of Covid-19. 

Pre-Trigger Losses
The High Court had allowed insurers to use trends clauses to reduce the quantum of claims based on Covid-19 where some, but not all of the elements of the insured peril had occurred. For example, where a business had closed in reliance on Government advice before it subsequently became mandatory for them to do so. The Supreme Court rejected that decision in accordance with its more general decision on trends clauses, namely the trends or circumstances for which adjustments may be made do not include trends or circumstances caused by the insured peril or its underlying or originating cause.

Status of the Orient Express Hotels Ltd v Assicurazioni Generali SPA  case 
Significantly, the Supreme Court held that the 2010 decision in Orient-Express should be overruled. In Orient-Express, the owners of a New Orleans hotel damaged by Hurricanes Katrina and Rita were unable to recover business interruption losses because, applying the “but for” test, the losses would still have been suffered as a result of the damage to the wider area. The Insurers had relied upon Orient Express to argue that, “but for” the insured peril; policyholders would still have suffered similar losses due to the national pandemic and the government response in relation thereto. 

What does this mean for policyholders?
Overall, the judgment is positive news for policyholders; there is finally some clarity (in the policyholders favour) from what had been an incredibly contentious and emotive problem. Insurers will now be tasked with advising those clients whose claims will be paid.  Whilst insurers will be under pressure from the FCA to process, adjust claims and make interim payments to policyholders as swiftly as possible; this will no doubt still take some time to manage given the test case only looked at a finite number of policy wordings. Therefore, there will still be an element of interpretation required on those wordings that were not included within the Test Case.

Professional Indemnity Insurance
In respect of insurance brokers and MGA’s own professional indemnity (PI) insurance, insurers have been taking a varied approach to offering terms. Those PI insurers who are prepared to still quote have generally been looking to apply a Covid-19 exclusions, with a number of major players looking to insert the language of “…directly or indirectly and in any way related to…” which, interpreted in its widest sense, could extend to exclude claims arising from any aspect of work undertaken during the pandemic. This has been coupled with what are already incredibly tough market conditions and insurers have been requesting more information from brokers following the Supreme Court’s ruling. Covid-19 questionnaires have been adapted to include questions relating to the FCA Test Case; requesting from insureds information such as;

1. How many policies fall within the FCA test case?
2. How companies are recording such information, number of policies, limit purchased, sector of policyholder, commentary on BI exposure (policy wording)? 
3. If a complaint has been made against the company, how many will remain following the Test Case ruling.

Key risk management factors

• Any advice provided to clients on what is/is not covered in respect of Covid-19 is very clear and well documented within the file
• Fully review your professional indemnity insurance quotations to understand the Covid-19 cover or exclusion. If an exclusion has been applied, ensure you understand the extent of this exclusion.

Summary

Although, it has been an incredibly tough year for the insurance industry as a result of the uncertainty generally around Covid-19, the culmination of this Test Case, although generally finding in favour of the policyholders, should begin to soften the approach that insurers have towards brokers and MGAs when it comes down to their own PI. The expansion of Covid-19 questionnaires to ask around the impact of the FCA Test Case on a broker or MGA’s business, might mean that insurers are no longer mandated to put blanket covid-19 exclusions on policies as the overarching risk has been dealt with by the Supreme Court’s decision.

Note that this article is intended for general information purposes only and is not legal or formal advice.