The hotly anticipated judgment in the Financial Conduct Authority’s (FCA) test case on business interruption and Covid-19 claims will be handed down next week in a ruling set to have far-reaching consequnces for both carriers and policyholders.
With so much at stake and to make sense of the issues at hand, we speak to Bryan Cave Leighton Paisner LLP’s Jonathan Sacher and Richard Jennings about what the industry can expect on judgment day…
- Ruling scheduled for 15 September will hang on how the Court interprets policy wordings
- Could lead to new approach to BI loss assessment
- Clarity on whether BI losses were caused by Covid-19 or the lockdown
- Judgment will carry ’considerable force’ whichever way it falls
- ‘Almost certainly’ be an application for appeal
Whilst some of us have spent the summer embracing staycations like never before, spare a thought for Mr Justice Butcher and Lord Justice Flaux who have presumably spent the last 6 weeks or so busier than ever, as they draft one of the most significant judgments for the (re)insurance industry in many years.
Following an 8-day trial at the end of July, we were told that a judgment in the FCA’s Test Case could be handed down as early as mid-September. True to form, it was announced on Wednesday evening that one of the Commercial Court’s first, and most significant, insights into the insurance ramifications of the Covid-19 pandemic will be with us on 15 September.
With that in mind, now seems an appropriate time to briefly consider what to look out for in the Court’s judgment and what is likely to happen in the weeks and months which will follow.
Q: What should we look out for in the High Court judgment?
The judgment will likely be extensive, and will no doubt run to many pages. Whilst we can expect the Court to comprehensively deal with all of the issues that were put before it, we have picked out four key issues/themes that the market should pay particular attention to when the judgment is handed down:
(a) How have crucial words in insurance policies be interpreted?
The particular wording in a policy or reinsurance contract will always be of paramount importance, and the Test Case is no different. The Court will be required to interpret a number of terms in the policies at issue, and it will be interesting to see whether the Court preferred the FCA’s or the insurers’ arguments. What is required for one circumstance to “follow” another circumstance? Is a nationwide pandemic an “emergency” for the purpose of these BI wordings? Were businesses “prevented” or “hindered” from using or accessing their premises when the country was put into lockdown? How close (geographically) must something be for it to occur in the “vicinity” of an insured premises?
”Insurers will want to pay close attention to what the Court says about what a policyholder may use as evidence in order to discharge its burden of showing there was a case of Covid-19 within a particular area”
We use these words all the time in our day-to-day lives. The Court now has the unenviable task of ascribing them meaning for the purpose of the policies, with billion-pound consequences. Individuals in the market charged with drafting and updating the wording of BI policies will want to focus on the judicial interpretation of these, and other, key terms.
(b) Prevalence of the disease
Much was made at the Case Management Conferences of the FCA’s use of the Imperial College London and Cambridge University data for the purposes of calculating an “undercounting ratio” (the amount by which reported Covid-19 cases under-represent the actual number of Covid-19 cases). The prevalence and existence of the disease is a hot topic in the Test Case given that so many of the clauses at issue have geographical limits applied to them.
Though the Court will not be dealing with the merits of the undercounting ratio (or “actual prevalence”), insurers will want to pay close attention to what the Court says about what a policyholder may use as evidence in order to discharge its burden of showing there was a case of Covid-19 within a particular area. This is unlikely to be the last word on the matter though, as there is potential for there to be a second (much shorter) first instance hearing on the substance of the Imperial/Cambridge data, as well as an appeal of the impending judgment.
(c) What is the proximate cause of the loss?
Causation was a fiercely contested subject during the trial, and the arguments were wide ranging.
The FCA argued, amongst other things, that the existence of Covid-19 and all of the consequences of the pandemic (including lockdown) form one indivisible cause of the losses suffered by policyholders. Not so, said the defendant insurers, who argued that a simple application of the but-for test of causation is all that is required (i.e. ‘but for’ the existence of x, would y have happened).
There may be scope for the Court to rule that the existence of the virus and the lockdown can constitute separate causes of loss.
“Given the sums involved (on both sides) there will almost certainly be an application for permission to appeal, particularly so if the Court finds in favour of the FCA”
The Court’s determination of this point will be watched closely by both reinsurers and their cedants in the context of their reinsurance recoveries and their approach to aggregation. Quite aside from issues about whether Covid-19 is an “occurrence”, “event” or “catastrophe”, market participants will be looking to see how the Court’s ruling will impact their ability to argue that there is more than one “occurrence”, “event” or “catastrophe” should it suit them commercially to do so.
Interestingly, many property catastrophe reinsurance wordings refer to a “catastrophe” rather than an “event” or “occurrence”. We wait to see whether the Court’s judgment could cause problems in the reinsurance world, including for cedants needing to prove losses were “directly occasioned” by a catastrophe.
(d) How should losses be calculated?
The case of Orient Express Hotels v Assicurazioni Generali has served as the leading authority on the application of trends clauses for a decade, but that looks set to change. The applicability of this case was a central part of the trial, and the Court will need to decide whether to apply, distinguish or cast doubt upon the principles set out in that judgment. Is the appropriate measure of loss to compare actual loss with the loss that would have been suffered by restaurants or hotels had they been able to remain open whilst the pandemic still ravaged the country? If this is the law (which would delight insurers in this case) previous criticism of Orient Express Hotels as merely an appeal from an arbitration won’t be able to be levied on the Test Case, further embedding the principle into law.
Q: What will happen going forward?
It is rare to see a ‘first instance’ decision argued in front of two judges (one of whom is a Lord Justice, usually presiding over cases in the Court of Appeal). With such an experienced first instance Court, any judgment will carry considerable force. Whichever side comes out on top will likely feel bullish about their prospects.
However, given the sums involved (on both sides) there will almost certainly be an application for permission to appeal, particularly so if the Court finds in favour of the FCA.
”Whatever happens, we can expect a flurry of activity after the first instance judgment is handed down on Tuesday”
There have been murmurings as to whether the FCA have the appetite for an appeal should they lose at first instance. Don’t forget, the FCA strongly resisted the proposal made by insurers that there should be a second short hearing dealing with the “undercounting ratio” referenced above.
Further, should the decision go heavily against the FCA, they may see their role as complete: They brought the case to get break the impasse between insurers and policyholders, and a first instance decision would do just that. The FCA may ultimately decide their resources are better directed elsewhere. Though this seems unlikely, it is not beyond the realms of possibility.
Should permission to appeal be granted, it is likely that any appeal will ‘leapfrog’ the Court of Appeal and go straight to the Supreme Court. Discussions in judicial circles may well have already taken place in this regard. Expect any leapfrog appeal to be fast-tracked, such that the case is heard either at the end of this year, or early next.
Whatever happens, we can expect a flurry of activity after the first instance judgment is handed down on Tuesday as policyholders, insurers, reinsurers and their legal advisers get to grips with the Court’s ruling, and what this means for them commercially.
What the industry needs, ultimately, is closure on this issue. It looks as though policyholders and (re)insurers will have to wait a little bit longer, though, to get the certainty they crave.
Jonathan Sacher is co-head of the multi-disciplinary insurance sector at Bryan Cave Leighton Paisner.
He has acted in a number of high profile reported Insurance and reinsurance cases covering: hurricanes, personal accident, life, financial institutions, war risks, and most classes of business.
Richard Jennings is an associate in the Insurance/Reinsurance team, sitting within the firm’s Commercial Disputes group.
He has a range of experience advising on contentious insurance and reinsurance matters, as well as on general contractual and commercial disputes. Richard’s experience extends to disputes settled by way of international arbitration and in proceedings before the High Court.