FCA Business Interruption Test Case – the real question?

At the time of writing, the Business Interruption test case brought by the FCA against eight insurers is in the third day of its eight-day hearing in the High Court, in front of Lord Justice Flaux (a Court of Appeal Judge fresh from ruling on the Shamima Begum case) and Mr Justice Butcher (a Commercial Court Judge in the Queen’s Bench Division).  The FCA have brought this case to streamline the route to clarity over whether, when and how business interruption policies should respond to the effects of the COVID-19 pandemic.

Judgement is expected in August/September, and while it will be legally binding on the eight insurers involved in the case, it is expected to provide a template for the wider industry in the UK and possibly even abroad.  An appeal to the Supreme Court seems likely (whichever way the High Court rules), so the picture may remain murky for some time.

The FCA have collated much information relating to the case on their website here, including documents of Agreed Facts, as well as the skeleton arguments of the parties and a link to watch proceedings live.

Three Key Issues

The FCA are requesting ruling on many detailed aspects of the policies, with it seeming that consideration is being given to almost every word of each contract. Some key topics to be addressed include:

  1. The applicability of modelling to determine whether coronavirus was present in a particular vicinity. Analogy is made to the legal applicability of actuarial models of the LMX spiral to reasonably determine Equitas exposure, but statistical and other models are slippery concepts in a legal forum so nothing should be taken for granted.
  2. Determination of causation – existence of COVID-19/government action and what needs to be proved. The FCA is arguing that COVID-19 could be assumed to have been everywhere at the time that the lockdown started, and this is sufficient causation.  Insurers argue that because lockdown was applied even where no cases were identified, citing the example of the Scilly Isles, the pandemic cannot be accepted as a trigger.  (The Scillies are 28 miles off the coast of Cornwall, potentially outside the radius within which reported cases must arise for policies to respond.)
  3. The application of Trends clauses to determine the amount of lost revenue, and what the correct counterfactual should be – the hypothetical scenario against which to measure lost revenue. The FCA is arguing that the comparison should be with a no-pandemic scenario, while insurers suggest that if the trigger is held to be the lockdown, a scenario of COVID-19 with no lockdown but with a marked drop in economic activity (as arose in Sweden) is the better comparator.

We await the judgement of the High Court in this test case with interest.  Will the ultimate ruling look to a narrow interpretation of the contract wordings in each case or will it cut through to some higher perceived objective?  If so, what might this be?

The real question?

Ultimately, will this prove to be simply a choice between two philosophies?

  • “SMEs are unsophisticated buyers who can assume they will get what is ‘written on the tin’.”
  • “Insurers are entitled to manage catastrophic aggregates through policy wordings.”

But perhaps there is a different question to ask:  Can insurers actually win here?  If they lose the case, they have damaged their reputation by picking and then losing the wrong fight.  But if they win the case, they may still lose, through damage to the industry’s reputation of being there when it really counts – Cuthbert Heath no more?