Covid-19 Test Case to Proceed Urgently

Covid-19 Test Case to Proceed Urgently
UK Financial Conduct Authority to bring COVID-19 test case for business interruption claims

Introduction
The COVID-19 pandemic has been a hugely significant worldwide event.  The pandemic and subsequent government controls have caused many businesses – in particular SMEs – distress and substantial losses.  Most claims for COVID-19-related business interruption (BI) losses have been excluded in New Zealand because BI policies here generally do not cover losses resulting from pandemics.  This is not always the case in other parts of the world.

In the United Kingdom, the FCA announced on 1 May 2020 its intention to seek legal clarity around BI insurance policy response in relation to the large number of COVID-19-based claims made under BI policies.  Christopher Woolard, Interim Chief Executive of the FCA, said that whilst the majority of UK BI policies would not cover the current pandemic, “there remain a number of policies where it is clear that the firm has an obligation to pay out on a policy”.  As a result, the FCA is bringing a test case in the High Court of Justice on behalf of SMEs which is designed to promptly resolve a number of key issues and to provide greater clarity for insureds and insurers alike moving forwards. The FCA has retained the services of Colin Edelman QC, Leigh-Ann Mulcahy QC, Richard Coleman QC and Herbert Smith Freehills to assist it in the case.

Having approached 56 insurers and reviewed over 500 relevant policies from 40 insurers, the FCA has put together a sample of 17 policy wordings which capture most of the key issues in dispute.  The FCA will put forward policyholders’ arguments to their best advantage in the public interest at the Court hearing.  The FCA hopes a five-to-ten-day trial can take place in late July 2020 (in about five weeks’ time). 

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 of BI policies considered.  It will also provide persuasive guidance for the interpretation of similar policy wordings which can be taken into account (including in Scotland and Northern Ireland) by the Financial Ombudsman Service and by the FCA in looking at whether insurers are handling claims fairly.  No doubt, New Zealand too will be influenced by the resulting judgment. 

Comment (Craig Langstone)
For insurers worldwide with an existing BI COVID-19 exposure, this case will be of considerable importance.  Furthermore, many of the issues to be considered will be of wide application, for example the necessary causal link that must be established between the loss and interference to the business.  We will continue to monitor developments as the case proceeds with a view to informing the NZ insurance industry.  Watch this space. 

Relevant links
First announcement by FCA
Statement on approach by FCA
Update on progress by FCA
FCA policy wordings sample

Partner Craig Langstone