On 15 January 2021, the Supreme Court handed down judgment in what has become to be known as 'the FCA test case'.
The case relates to the interpretation of business interruption policy wordings and was brought by the Financial Conduct Authority (FCA) with the aim of seeking to obtain judicial clarity and therefore avoid individual pieces of litigation between insurers and their insureds on a hugely significant aspect of insurance coverage.
The test case had previously been considered by the High Court in England and following the High Court's judgment, both the FCA and some of the insurers involved appealed the decision. The Supreme Court, being the highest court in the land has now had the final say and this brings welcome clarity on a number of issues.
Eight insurers were party to the proceedings and a selection of policy wordings were collated with the aim that they were representative of the general business interruption insurance market. The FCA estimates that, in addition to the wordings scrutinised in the test case, some 700 types of policies held by 370,000 policyholders across 60 different insurers could potentially be affected, so the ramifications are huge.
Speaking to interpretation of an insurance policy, the Court held that "the core principle is that an insurance policy, like any other contract, must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean. Evidence about what the parties subjectively intended or understood the contract to mean is not relevant to the court’s task".
A key question for the Court to consider was the extent to which business losses should be assessed. A number of the sample policies referred to business closure as a result of a notifiable disease (of which Covid-19 is) within a certain radius. Did losses arise as a result of the occurrence notifiable disease within that radius, or did they arise because of the wider lockdown measures given the number of cases of disease in the wider area, indeed the whole country? The Court found that it is sufficient to prove that the business interruption losses was a result of Government action taken in response to cases of disease which included at least one case of Covid-19 within the geographical radius specified by the relevant clause in the policy.
The Supreme Court's judgment has been heralded as generally being in favour of insureds, who are typically small and medium-sized enterprises (SME's) and the decision may come as a lifeline for their businesses which have suffered considerably since March 2020 when lockdown measures were first imposed. The clarity given by the Court should now allow for policy wordings to be interpreted consistently and the FCA has confirmed that insurers are expected to contact their customers promptly to confirm whether or not, following the judgment, policies will pay claims.
Once insurers and policyholders have had time to digest fully the 114 page judgment, then application of the guidance in the judgment to particular policy wordings will need to be worked through.
