High Court decision on coronavirus insurance is welcome for potential claimants – E-Ming Fong

Guidance has been highly-anticipated, writes E-Ming Fong

E-Ming Fong is a Partner, Harper Macleod LLP.

On 15 September, the High Court in London handed down its decision in the Financial Conduct Authority v Arch Insurance (UK) Ltd and Ors – providing highly-anticipated guidance on the operation of non-damage business interruption insurance, with particular reference to the effects of Covid-19. Although success was mixed, the judgment is likely to be welcomed by those wishing to make claims.

The Financial Conduct Authority (FCA), representing the interests of policyholders (many were small to medium enterprises), raised proceedings against eight insurer defendants. Two classes of litigants were also given permission to intervene in the proceedings. Those classes were formed by a number of policyholders with an interest in the outcome of the case.

This type of group action has been a part of English litigation for some time and a change in law in Scotland (from 31 July) means group proceedings can now be brought before the Court of Session.

The FCA estimated the decision could impact as many as 370,000 policies. If insurers seek to avoid paying out, Scottish business owners may find litigation necessary. If so, affected policyholders could combine separate claims into a single group-litigation, benefiting from the new Scottish procedure.

The proceedings were a “test case” to determine issues of principle in relation to policy coverage for certain types of business interruption insurance during the pandemic. Many such policies restrict cover to business interruption caused by damage to or destruction of business premises. However, a number of policies extend cover to business interruption caused by, among other things, disease.

The Court considered 21 “lead” policy wordings (although each policy will turn on its own words, there were common clauses) and identified three categories of cover: “disease clauses”; “clauses preventing access to premises”; and “hybrid clauses” (a blend of disease and access clauses).

For disease clauses, the insurers argued the disease (Covid-19) which caused business interruption had to be within the “vicinity” of the business affected before cover should apply. In general, the Court didn’t accept this argument, holding that individual outbreaks formed an indivisible part of the UK-wide infection.

Generally, the Court interpreted clauses preventing access restrictively. However, where a business was prevented from operating by legislation (or instruction which immediately preceded legislation) cover should apply from the date the business was forced to close.

On hybrid clauses, the court rejected arguments that cover in relation to these policies should be restricted to local outbreaks. However, where cover was contingent upon “restrictions imposed”, a narrow meaning was applied. Thus, cover will extend where the restriction was mandatory but not where it was advisory. The Court also considered policy wording which required an “inability to use” required more than an “impairment” to use.

Appeals by either or both sides are likely and will seek to go straight to the UK Supreme Court.

The decision is of only persuasive authority in the Scottish courts, but confirms the need to consider each insurance policy and claim individually. Policyholders who have had claims rejected may need to consider the possibility of action against insurers for refusing cover. Those who have not already made claims should review policies without delay.

Any Scottish insurance policy also needs to be construed in line with Scottish laws and regulations at the relevant time. Depending how the relevant restrictions impact upon interpretation of the policy wording, a different result may ensue, depending which side of the Border a claim is brought.

E-Ming Fong is a Partner, Harper Macleod LLP.