The UK Business Interruption Insurance Test Case

By Robert Ishak and Freshta Nawabi

On 15 September 2020, the United Kingdom (UK) High Court handed down its decision in the COVID-19 Business Interruption insurance test case:The Financial Conduct Authority v Arch Insurance (UK) Limited and others [2020] EWHC 2448 (Comm).

The Financial Conduct Authority (the FCA), the regulator of insurers, had brought forward proceedings as a test case to determine issues of principle concerning the extent of policy coverage. Ultimately, the High Court ruled that claims by policyholders could be indemnified under some policies for business interruption losses arising in the context of the COVID-19 pandemic and the consequent advice of and restrictions imposed by the UK Government.

Factual Background and Context

On 2 March 2020, the UK recorded its first death of an individual who tested positive for COVID-19. Following this tragic event, the UK government put an “action plan” in place to contain, delay, research and mitigate the outbreak. Part of this response was to introduce social distancing requirements to limit contact and prevent further outbreaks.
 On 21 March 2020, the Health Protection (Coronavirus, Business Closure) (England) Regulations 2020 (“the 21 March Regulations”) were made, with equivalent provisions introduced in Wales. The regulations provided for the closure of certain businesses, with a significant impact on the operation of small businesses.

Outcome

The FCA launched this test case to determine whether businesses who held business interruption insurance that were forced to close due to the COVID-19 pandemic, were entitled to be compensated by their insurer. These claims were made under clauses in policy wording such as “Notifiable Disease”, “Prevention of Access-Non Damage”, and “Enforced Closure” and “Murder, suicide or disease” clauses.

The High Court decided that insureds could be indemnified and that, subject to the limits of the policy they held, compensation should be awarded such that it returns the insureds to the position they would have been in had the pandemic never taken place. This judgment is believed by many to have resolved the lack of clarity that existed for many policyholders making business interruption claims, and the wider market (Mia Wallace, Insurance Business Australia, 15 Sep 2020).

However, that being said, there has been some opposition to certain elements of the High Court’s decision. On 16 September 2020, QBE issued a statement to the Australian Securities Exchange advising it is considering options to appeal the Court’s decision to rule in favour of insureds with respect to one of QBE’s notifiable diseases policy wordings (Insurance News, 16 September 2020). There is therefore still some uncertainty about the ways in which claims by policyholders might be resolved.

Possible effect for Australia

Following in the footsteps of the UK, in mid-August 2020, the Insurance Council of Australia (ICA) filed a Business interruption test case in the Supreme Court of New South Wales. The ICA indicated that the outcome of this test case will be used in determining complaints arising in respect of business interruption claims with the infectious disease exclusion. Whilst this case is currently pending before the NSW Court of Appeal, it will be interesting to see whether the ruling in the UK test case will have any bearing on the Court’s decision. Having said that, apart from a similar factual basis, the wording of the policies in the UK are different to policies in Australia and so a different outcome would not be all that surprising.