Business interruption insurance during the coronavirus pandemic - High Court test case

Introduction

The coronavirus (Covid-19) pandemic and the Government controls imposed as a result are causing a substantial level of loss and distress for businesses, in particular for SMEs. A large number of claims are being made to insurers under the terms of business interruption (BI) insurance policies.

There is continuing and widespread concern about the lack of a positive response of some of those BI insurance policies, and the basis on which some insurers are making decisions in relation to claims.

On 1 May 2020, the Financial Conduct Authority (FCA) released a statement[1] that we intend to obtain court declarations aimed at resolving contractual uncertainty in selected BI insurance policies. Acting in the public interest, the FCA will put forward policyholders’ arguments to their best advantage. We are aiming to obtain legal guidance in this way more quickly and at a lower cost to policyholders than would be the case if they took their own court actions.

The FCA recognises that many claims will already be the subject of negotiation or other dispute resolution processes. This proposed action is not intended to impact this normal claims process. It is designed to assist policyholders, and particularly SMEs, whose claims are being refused when they think the firm should respond. 

The intended action will not prevent individuals from pursuing issues through negotiated settlement, arbitration, court proceedings as a private party, or taking eligible complaints to the Financial Ombudsman Service.

The result of the test case will be legally binding on the insurers that are parties to the test case in respect of the representative sample considered. It will also provide persuasive guidance for the interpretation of similar policy wordings and claims, that can be taken into account in other court cases including in Scotland and Northern Ireland, by the Financial Ombudsman Service and by the FCA in looking at whether insurers are handling claims fairly.

We wish to ensure that policyholders and insurance intermediaries are properly engaged throughout this process. 

Invitation to policyholders and insurance intermediaries to provide information

The coronavirus pandemic will have affected policyholders in different ways. The issues relevant to the intended proceedings will therefore be wide-ranging and complex. We recognise that the intended proceedings will better achieve our consumer protection and market integrity objectives if they cover as broad a cross-section of policies and issues as is compatible with an expedited court process. We are reviewing extensive material provided by insurers to do this. 

On 15 May 2020, we invited policyholders of BI insurance who are in dispute with their insurers over the terms of their policies to send us their arguments by 20 May 2020 if they wished us to take them into account as part of the test case. Further detail can be found on the business interruption insurance webpage[2].

On 1 June 2020, we invited policyholders, insurers, other stakeholders and their legal advisers to provide comments by 3pm on 5 June 2020 on the proposals published on 1 June. Further detail can be found on the business interruption insurance webpage[2].

We will treat information we receive as confidential and covered by the FCA’s litigation privilege (meaning we would be entitled not to produce it to a third party or the court).

Given the volume of information we expect to receive, we cannot commit to replying to individual communications.

The FCA’s legal team

We have instructed Herbert Smith Freehills, a leading law firm with a highly regarded practice representing policyholders. The team at Herbert Smith Freehills is led by Paul Lewis.

We have also instructed an external team of highly experienced counsel, including Colin Edelman QC, Leigh-Ann Mulcahy QC and Richard Coleman QC.

How the FCA will be available to policyholders

The FCA will be available to policyholders throughout the court process:

• We have created a dedicated webpage on business interruption insurance[3] where we will provide information, updates and access to documents including court 'pleadings' and a form to sign up for updates[2].
• The FCA and our solicitors, Herbert Smith Freehills, will be available for discussion with action groups and policyholders and their legal representatives, for example at workshop style meetings.
• Our legal team at Herbert Smith Freehills set aside time on 3 and 4 June to speak directly with as many policyholders and intermediaries as possible, given the time constraints. Further detail can be found on the dedicated webpage.
• Further opportunities for consultation will be made available as the case proceeds to trial.

How the FCA intends to engage with policyholders

We intend to engage with policyholders at key stages of the court action, including:

• Considering those arguments and factual circumstances communicated by policyholders and insurance intermediaries to us.
• Using the arguments, policies and fact patterns put forward by policyholders by 20 May 2020 to inform the sample of policy wordings and assumed facts (or 'fact patterns', which are a set of illustrative factual assumptions) to be used in the court proceedings and considering comments received by 5 June 2020 on the proposals published on 1 June 2020 making public all the ‘pleadings’ in the test case.
• Where policyholders and action groups have appointed legal representatives to represent them, having discussions during the preparation of the FCA’s pleadings and submissions.
• Publishing other material relevant to the test case – subject to certain statutory limitations discussed below. 
• We expect to issue a further invitation to policyholders and other stakeholders to provide us with comments shortly after 23 June, when the insurer parties in the test case file their Defences. This will help us ensure that stakeholder comments are reflected in our Reply and skeleton arguments (written submissions) prepared for the final court hearing. 

Limitations on the FCA sharing information

There are statutory limitations on the information about firms, people and markets that we can release to the public.

• Those explained in our guide to information we can and can’t share[3], which derive from s.348 of the Financial Services and Markets Act 2000. We are unable to disclose confidential information without consent unless a specific statutory 'gateway' to disclosure applies.
• Limitations on our ability to disclose 'inside information', which is information that could have a significant effect on the price of securities issued by insurers which are admitted to trading in a UK or EU trading venue.  We may only disclose inside information where it is necessary to perform our functions properly.
• Limitations on the disclosure of personal data in the General Data Protection Regulation (GDPR) and the Data Protection Act 2018. When engaging with the FCA on business interruption (BI) insurance, your submission(s) may contain personal data. For further information on how and why we use personal data, see our privacy notice[4].

We will also need to maintain legal privilege in communications we receive from third parties to which privilege attaches. We may also need to keep confidential certain legal documents we or our advisers generate to avoid undermining our position in the test case.

However, we can release documents which have been made available to the public or are not subject to these limitations. So we will publish such information and documents on our webpage and in email updates. We intend to engage with policyholders as far as possible while upholding our statutory and common law duties.