Latest High Court decision chips away at FCA Test Case on Business Interruption Insurance

Revisit your BI policy again - you may be covered after all!

Just over a year since the Supreme Court handed down its “landmark” judgment in the FCA v Arch and Others [2021] (the FCA test case on business interruption insurance), cracks in the test case are already appearing, most notably in Corbin & King Ltd and Others v Axa Insurance UK PLC [2022]. This latest case suggests that, certain policies that the test case dismissed as not providing cover, may actually cover business interruption losses.The aftermath of the test case therefore raises the important question, was it a good idea in the first place? Or was it always going to be a flawed exercise trying to bring a case covering so many policies based upon an assumed set of facts when, in reality, every business suffered uniquely during the pandemic? Given that, by now, many businesses have made the decision whether or not to pursue cover, and others have made the heart wrenching decision to stop trading, the latest decision will be a gut punch for many businesses still suffering the effects of the pandemic - and with media attention long moved away, many businesses are unlikely to notice the importance of this case.

Where did the FCA Test Case Leave us?

Let's start at the beginning. COVID-19 was an unprecedented and largely unpredictable pandemic. However, several insurers took what many in the market perceived to be an unduly harsh approach to coverage, which was particularly surprising for those that had built reputations on being customer-centric and not denying cover on technical coverage points. Given the outcry, the FCA brought a test case to “seek legal clarity on business interruption (BI) insurance to resolve doubt for businesses who are facing uncertainty on their claims.” The FCA said it would represent policyholder's interests. Although this was welcomed by many, we expressed concern that the test case may, in fact, cause a roadblock for some policyholders:

It is good to see the FCA trying to take a proactive step but this seems to be a real misstep. #Policyholders should be free to challenge #insurers on the interpretation of policy wordings on the specific facts of their claim unencumbered by the outcome of such questionable proceedings.[1]

All of the clauses considered in the test case contained a geographical limit to the cover provided. The test case was first heard in the High Court, which decided broadly in favour of policyholders on “disease clauses” (clauses that provided cover for business interruption losses arising from disease within the geographical limit) but broadly against policyholders with “non-damage denial of access” clauses (NDDA clauses) (clauses that cover business interruption due to being closed down by a public authority in response to certain events within the geographical limit). Based upon the same reasoning as NDDA clauses, the High Court also decided against policyholders in respect of “hybrid” clauses (NDDA clauses that also require disease to trigger cover). In respect of “disease” clauses, the Court's reasoning was broadly that, due to the nature of diseases, it would be illogical to deny cover on the basis that cases of the disease occurred outside of the geographical limit as well as within it. However, in respect of NDDA clauses, the Court held these should be interpreted as only providing localised cover for local events, such as a gas leak or bomb scare, not national events or, indeed, global ones. We provided a comprehensive summary of the High Court judgment in our previous article. After this decision was handed down, the FCA promoted its “win” with interim chief executive Christopher Woolard citing the case as “a significant step in resolving the uncertainty being faced by policyholders”. The test case leapfrogged on appeal to the Supreme Court. Both the insurers and the FCA appealed. However, the FCA decided not to appeal the High Court's decision on NDDA clauses. This left policyholders with NDDA clauses facing an unfavourable decision as a huge hurdle to bringing their claims. It begged the question that, if the FCA was representing all policyholders, did it not have a duty to run all arguments with prospects of success to the highest court? Either way, it didn't...The Supreme Court decided broadly in favour of policyholders on the points of appeal. However, its approach to the coverage arguments and causation was different to the High Court. Effectively, its decision was that each case of COVID-19 was an equal and effective cause of the UK-wide restrictions and, therefore, disease clauses would cover the losses arising from the pandemic notwithstanding the fact that there were cases occurring outside of the geographical limit as well as within it. Although coverage was not appealed in respect of NDDA clauses, the Supreme Court did state its approach to causation would apply to all the types of policies it had considered. We provided our analysis of the Supreme Court decision in our previous article.

The China Taiping Arbitration

The first signs that the FCA test case may be in for a rough ride came in the China Taiping arbitration. Former Deputy President of the Supreme Court, Lord Mance, concluded that, although the High Court's decision was highly persuasive, he was not bound by the High Court's decision in the test case as, in his opinion, the High Court would have approached NDDA clauses differently if it had the benefit of the Supreme Court's analysis. Ultimately in that arbitration, the policyholders ended up failing in any event as Lord Mance agreed with the insurers that the UK Government was not a “competent local authority”.

Corbin & King Ltd and Others v Axa Insurance UK PLC

Where the China Taiping arbitration revealed some potential cracks, Corbin & King has opened wide for discussion the issue of whether particular NDDA clauses provide cover. The case was heard in the High Court before Mrs Justice Cockerill. As the decision in relation to NDDA clauses was made by the High Court in the FCA test case (and was not appealed), Mrs Justice Cockerill felt she was only bound by the previous decision where the High Court had decided the point in question and where its reasoning had not been undermined by the Supreme Court decision. The case concerned a number of restaurants and similar venues that were closed in response to the restrictions imposed by the UK government lockdowns during the pandemic. The business interruption policy provided cover for:

“interruption or interference with the business where access to your premises is restricted or hindered for more than the franchise period show in your schedule arising directly from:

1 the actions taken by the police or any other statutory body in response to a danger or disturbance at your premises or within a 1 mile radius of your premises.

Mrs Justice Cockerill described some differences between this wording and those considered in the test case. Mrs Justice Cockerill then went further than Lord Mance, stating that “the decision of the Supreme Court has moved the goalposts and the argument which has emerged is materially different”. She therefore did not feel bound to follow the High Court decision and saw no reason to not apply the Supreme Court's reasoning in respect of disease clauses to NDDA clauses as well. Mrs Justice Cockerill decided that, on the basis of the wording of the policy and the Supreme Court's judgment in the test case, COVID-19 was capable of being a danger within one mile of the premises in question, which caused the premises to be closed by a statutory body and suffer interruption. Therefore, the policy did provide cover. The key basis for Mrs Justice Cockerill's decision was that, although the claimants accepted that there was a need for a case of COVID-19 within the one-mile geographical limit, it was wrong to say that the risk must be exclusively local (i.e. it must only happen within that geographical limit). Where such policies use general language in the NDDA clause, Mrs Justice Cockerill held that it does not follow that the clause would only apply to events with a very local significance. As such, policies that include general wording in the NDDA clause would provide cover for pandemic-related losses. In this case, the general nature of the phrase “a danger” assisted the High Court in deciding that the clause could extend to events that also occurred outside of the geographical limit and therefore the NDDA did not limit the policy coverage to local events only. The comment that may sit uncomfortably with the FCA is that Mrs Justice Cockerill makes it clear that the argument that eventually succeeded in this case was not one run by the FCA in the test case. She states: “it might be said to be strange that if this is the correct construction, that it has taken at least three iterations of the argument to reach this point”. Overall, this case highlights that each policy wording and factual matrix should be taken on its own merits. However, policyholders should be aware that it is very likely Corbin & King will be appealed.

Conclusion

One key question is, after businesses with NDDA clauses have had coverage denied by insurers, waited for the FCA High Court decision only to be denied again, then waited for the Supreme Court decision only to find out it didn't apply to them, do they have any fight left in them to go back in the ring for another round with their insurer?However, this case now opens the door for policyholders with NDDA clauses and hybrid clauses to claim that their business interruption insurance policy does provide cover for the losses suffered. As such, there is scope for these businesses to finally bring a claim for the losses suffered during the pandemic.

How we can help

The recent decision in Corbin & King throws a lifeline to policyholders with NDDA clauses who may have concluded before the latest judgment that their claim was over. We are experienced in reviewing business interruption insurance policies to determine whether the policy does provide cover and would be happy to assist policyholders in placing pressure on insurers and bringing actions against them to confirm cover in light of the latest decision.

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If you have any queries in relation to business interruption insurance losses arising from COVID-19 or the effects of the judgment, please contact Adam Edwards or Daniel Meyer. [1] https://www.linkedin.com/posts/adam-edwards-043720ba_fca-statement-insuring-smes-business-interruption-activity-6661926271863267329-qUgD