What the FCA court case means for businesses forced to close by coronavirus

More than a million businesses forced to close during coronavirus lockdown may know whether insurers will have to pay previously rejected business interruption claims in a matter of months.  

Earlier this month the City watchdog announced it was seeking a legal judgment from the British courts to clarify whether insurers should pay claims made by firms forced to close by the lockdown. 

This is Money now understands that the Financial Conduct Authority is planning to bring the first trial instance to the High Court as early as July, meaning that a judgment could be forthcoming just weeks after that.  

It comes after hundreds of struggling firms banded together to launch class action lawsuits against insurers including Hiscox and QBE.

The firms argue that specific clauses in their business interruption insurance policies should cover them for the income they’ve lost due to having to close.

However, the insurers have argued that the firms are in fact not covered – a move which has now led to the FCA’s attempt to clarify what the insurance policy wordings actually mean. 

The FCA wrote to insurers at the start of May asking for examples of policies where they ‘may consider there is no doubt about wording and decline to pay a claim, but customers may still consider there is genuine uncertainty about whether their policy provides cover’.

More than 150 different policies have been submitted and This is Money understands that these will now be examined and a number of test cases will be put before the High Court. 

Depending on the ability of the Court to process the case, a judgment could then be forthcoming by the end of the summer. 

Who is the FCA insurance case relevant to?

While the FCA has clarified that the majority of business interruption customers are not covered for coronavirus, there remains a dispute over policies which contain certain ‘non-damage’ extensions. 

These extensions cover disruption to a business not caused by physical property damage – for example, if there was an outbreak of disease in the area which led to the premises being closed by a public authority. 

It’s clauses like this that have been the main point of contention between firms and their insurers and it’s likely these are the types of wordings that the FCA is looking at. 

Insurers argue that the policy wordings were never intended to cover coronavirus – a stance that hasn’t gone down well with policyholders. 

If insurers are declared liable by the High Court, claims for lost income amid business interruption caused by the coronovirus lockdown are likely to spiral into hundreds of millions of pounds.  

Any firm that has been forced to close and lost income as a result of the Government lockdown with a business interruption policy that they believe should pay out for a claim relating to coronavirus has been encouraged to get in touch with the FCA as soon as possible. 

It’s understood that several action groups are already in discussions with the regulator, as well as a number of insurers and legal experts.  

What is the FCA case trying to achieve?

The regulator wants as clear an answer as possible on as many policies as possible. If there’s grounds to push insurers to pay out off the back of a legal judgment, then the regulator is likely to push. 

However, cases like this are not straightforward. There are likely to be hundreds of different policy wordings just for the area relating to business closures caused by infectious disease.  

Judgments can only apply to the specific case it considers, raising questions around whether hundreds of thousands of policyholders will be left no better off following the FCA case. 

In a bid to address this, This is Money understands that the FCA is aiming to bring a number of test cases to the High Court in July. These are likely to include a range of policy wordings from a range of insurers for a range of business types. 

For example, nurseries taking business interruption insurance with one insurer may have reasonably similar wordings in their policies. 

Similarly, policies taken by pubs may have wordings that have enough commonality to allow a test case to be taken which would have implications for similar policy wordings following the judgment. 

It’s not yet clear how many test cases will be brought, but any judgment that follows will only be legally binding for that insurer and that policyholder. 

It’s thought, however, that judgments on enough test cases will provide very persuasive guidance on whether other insurers should pay out on similar policies. 

Crucially, the FCA move will not provide any guidance or judgments on how much insurers should pay out on claims, as this will be determined by each individual policy.

Why has the FCA sought legal clarification? 

It’s likely the regulator needs to be seen to be doing something so they aren’t criticised for failing to act in a time of crisis.  

It also really matters for our economy that as many businesses as possible survive the recession caused by the coronavirus and social lockdown measures.  

The FCA wants to achieve legal clarity on enough policy wordings to provide a rock solid basis for telling insurers they can’t wriggle out of paying these claims. 

Where businesses have lodged a formal complaint with their insurer and then with the Financial Ombudsman Service, it’s likely the FCA would also expect any FOS decisions to refer to these legal judgments too.  

There’s still some uncertainty about whether insurers will have to follow this guidance, however.  

Will insurers pay out after the case? 

Even if the Court rules that some policies have been triggered, one of the defences insurers will likely fall back on are so called ‘trends clauses’. 

These are one of the key features of a traditional business interruption policy and help to figure out how much the business is owed once they have claimed.

Crucially however, these clauses set the damages at what the business would have earned if they hadn’t closed – and while the country remains in lockdown, for many businesses that won’t be very much, if anything.  

This is Money understands that the FCA is looking for legal clarity on this point as well as the other clauses mentioned. 

This is important as it will influence the amount businesses will be entitled to receive.  

Richard Wise, partner at law firm Addleshaw Goddard said: ‘Addressing how certain “trends and adjustment” clauses operate is vital, as it goes directly to the question of what many policyholders will be paid.

‘In some instances a declaration that coverage is triggered could be meaningless if, for example, a restaurant has to then calculate its lost profit by being put in the counterfactual position of being open for business in a country otherwise in lockdown and therefore with no customers.’    

How long will it take?

In many ways this is the nub of the issue. Firms are struggling now, and an insurance payout in 12 months’ time won’t pay staff and suppliers today.

The answer to this is no-one knows, but This is Money has it on good authority that the FCA is pushing hard to get the first stage of these court proceedings in front of the High Court in July. 

There’s no telling how long a judgment will take following this, it could be weeks or it could be months. 

However, the regulator has said its court action is designed to resolve the uncertainty as ‘promptly as possible’.

Richard Wise said: ‘Even if the scope of the case can be agreed to allow trial and then judgment quickly this summer, the prospect of an appeal cannot be ruled out so a settled answer in only a few months seems unlikely.

‘While the desire of the FCA to take action to try to protect SMEs is hard to criticise, greater clarity around the process it envisages and consultation with policyholders is needed. 

‘There may also be unintended consequences; insurers may cite the case as a reason delay the progress of FOS referrals or other claims of all sizes that involve the same issues as the FCA proceedings.’