FCA Test Case: Business Interruption Insurance Update

05 August 2020

Author: Rachel Craig
Practice Area: Corporate - M&A, COVID-19


We have recently highlighted that the Financial Conduct Authority (“FCA”) is bringing a test case seeking clarity on the interpretation of non-damage business interruption insurance (“BI”) policies for losses suffered as a result of the disruption caused by the coronavirus (COVID-19) pandemic. Our previous article is accessible here.

The trial has now concluded in the High Court and judgment is awaited.

A number of insurers who agreed to participate are defendants in the case, and their BI policy wordings were considered in detail at trial. The FCA estimates that the policies being considered in the case cover approximately 370,000 policyholders.

The FCA argued at trial, inter alia, that, “from the beginning, the danger and emergency of COVID-19 posed a national threat”. In the FCA’s view, the restrictions which were consequently imposed by the UK Government (and the devolved administrations in Scotland, Wales and Northern Ireland), “prevented activity on the part of individual and businesses in combination, collectively causing losses. That’s why [the FCA] contend[s] that the disease and public authority action and the specific types of public authority action form an indivisible whole.” Furthermore, the FCA argued, regardless of whether the requirements set down by the UK Government were specifically legislated for, “it wasn’t open to policyholders to breach the UK Government’s advice and guidance without risking a breach of their legal duties regarding the health and safety of employees, and as occupiers in relation to the public.”

In contrast, one of the insurers argued that taking the view that, “the single proximate cause is the disease everywhere and the government and human response to it” does not reflect an understanding of ‘peril’ in policy wording anywhere. Or as counsel for one of the insurers put it, “if you move away from the "but for" test or you purport to apply the "but for" test to something more than the insured peril, in other words, but for A plus B, you are moving away from fundamental principles of law.”

Regarding causation, insurers sought to argue that where there are two independent causes, where one is insured and one is not, the insured would fail to satisfy the burden of proof upon it. Similarly, where there are two causes that cannot be separated from each other, where one is insured and one is not, the insured would fail to satisfy the burden of proof upon it. Each cause, according to the insurers, needs to pass the “but for” test.

There has thus been interesting discussion in the case around the interpretation of insurance policies. The FCA contends, on the one hand, that insurance is different from a normal contract; the insurers argue, on the other hand, that insurance is “a species of contract” and so the rules in terms of causation, construction, breach and damages are the same as those which apply to any other contract.

Accordingly, defence counsel for one of the insurers asked the court to “adopt entirely conventional approaches to the identification of the insured peril, the application of long-established rules of causation, and the principles applicable to the construction of contracts and to do so without… the wholesale rewriting of insuring clauses, trends clauses and exclusions, according to what the FCA assert[ed] would be a reasonable landing point and therefore must have been in the contemplation of the parties or the intention of the parties at the time of contracting.”

The court heard from two of the insurers that, “You have to construe this contract as at the date it was made, or these contracts as at the date when they were made, not with the benefit of COVID-19 hindsight.”

We will provide a further update following judgment and in respect of any further guidance published by the FCA thereafter. In the meantime, your attention is drawn to the existing FCA guidance (highlighted in our recent article). If you have any queries, the Corporate Team at Carson McDowell would be happy to help.