The practical implications of the FCA's test case judgment for the insurance sector

On 15 September 2020, the High Court handed down its judgment in the Financial Conduct Authority’s (FCA) test case.

The High Court has handed down judgment in the FCA’s Business Interruption Test Case with a decision that has been welcomed by policyholders.

Lord Justice Flaux and Mr Justice Butcher were tasked with considering complex and developed arguments from the FCA and insurers over a two-week remote hearing which went to the core of insurance policy construction and established tests on causation. In its decision, the High Court analysed the wordings of 21 lead policies but the impact of the decision will be far-reaching with an estimated 700 types of policy, and 370,000 policyholders affected by the ruling. The court reached decisions as to the correct interpretation of individual terms commonly found in such policies and found that, subject to individual circumstances and policy wordings, cover would prima facie be triggered under the majority of the lead policies.

The court found in the FCA’s favour on questions of causation, the proper construction of counterfactuals, the interpretation of "trends" clauses, and significantly on the correct understanding of the nature of the insured peril. The court accepted the FCA’s arguments that policyholders’ losses were proximately caused by one single insured peril, being the composite peril of interruption or interference with the policyholders’ business following the outbreak of a notifiable disease. Individual local outbreaks of coronavirus throughout the whole country formed "indivisible parts" of the national outbreak. It followed that, where policies applied a radius requirement to the trigger of cover, it would be sufficient for there to only be one instance of the disease within the applicable radius, whether or not it had been diagnosed.

When considering causation, the court concluded that the correct approach would be to show that the loss claimed was proximately caused by the composite insured peril. It therefore found in the FCA’s favour and held that all elements of the composite insured peril must be stripped out when

constructing the appropriate counterfactual to establish the extent to which a policyholder’s loss was caused by an insured peril. While the judgment separated the lead policies into three distinct categories (disease clauses, hybrid clauses, and prevention of access clauses) all categories required the removal of the existence of coronavirus for the purpose of the counterfactual. The court found that insurers’ approach of removing the occurrence of coronavirus within the vicinity of the business, but including the occurrence of coronavirus in the UK as a whole mischaracterised the insured peril and resulted in "fallacy and unreality".

It followed from the court’s findings in relation to policy construction and the proper identification of

the relevant (composite) insured perils that there was one cause of loss. Accordingly, the court did not need to consider the application of Orient Express, Silver Cloud or Wayne Tank as the debate as to interdependent and independent causes was no longer relevant. However, this did not prevent the Court from dealing with the Orient Express decision relied on by insurers and commenting that there were ‘several problems’ with its reasoning, including, crucially, the misidentification of the insured peril and that it provided illusory cover.

Over the coming days, insurers and policyholders will take stock of the decision and the impact it may have on individual claims and/or certain policy wordings, including those not considered in the test case. Few expect the decision to be the final word on all aspects of non-damage business insurance claims, but the true implications of the decision from a practical perspective really do remain to be seen. The FCA have already indicated that the parties have discussed the possibility of an expedited appeal, which could move straight to the Supreme Court, and a consequentials hearing is to be listed shortly to allow permission applications to be heard. What remains to be seen is the extent of any appeal and the issues to be considered in further detail.

Read the full judgment.

We will report further on this decision in the coming days and analyse its impact on the development of insurance law and its implications for policyholders and insurers.