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TEST CASE TRIAL: UK Supreme Court hands down its judgment in the FCA Test Case – Policyholders Win!

We outlined in our previous blog HERE> why the FCA bought a claim to seek clarity on the meaning and effect of the wording in various non-damage business interruption (BI) insurance clauses.

The FCA identified approximately 370,000 policyholders as holding policies that may be affected by the judgment…. read more below:

The High Court Judgement in that case was handed down on 15th September 2020 and runs to over 150 pages

Here we provide a very top-level view of the judgment, but the outcome was positive for policy holders.

The Court found on the majority of the key issues that, when properly construed, many of the sample policy wordings that it was asked to consider for the purposes of the test case do provide cover for business interruption losses suffered as a result of COVID-19, but that each claim would have to be considered on its own merits.

Recap on Business Interruption Insurance

Many business owners will take out insurance to cover loss of profit and other expenses incurred by a business as a result of physical damage such as flooding or fire. Some policies include additional cover where there has been no physical damage. It is the latter that was in issue.

The court was asked to consider the wording of policies that fell into 3 areas: –

  • Disease Wordings: cover for losses which flow from the occurrence of a notifiable disease within a certain radius of the insured premises.
  • Denial of Access: cover for losses that flow as a result of prevention or hinderance of access to insured premises as a result of action taken by the government or other authority
  • Hybrid Wordings: cover for losses flowing from restrictions imposed on insured premises in relation to a notifiable disease.

To establish liability the FCA argued on behalf of policyholders that the “disease” and/or “denial of access” clauses amongst samples of the policy wordings did provide cover as a result of the COVID-19 pandemic. The insurers argued that there should be a narrow interpretation of the clauses.

In the majority of the cases, the court favoured the FCA’s broader interpretation of the various policy wordings and found that most of the relevant disease clauses, which broadly provide cover as a consequence of a notifiable disease within a specified radius of the insured premises did provide cover. Furthermore, the cover provided under these wordings was not limited to losses as a result of just local outbreaks of COVID-19.

The court interpreted some of the denial of access clauses, more narrowly than the disease clauses. As a result, whether policy will cover the loss will depend on the specific wording of the clauses within the policy and how the business was affected by the authorities response to the pandemic. Much will depend on whether the business closure came about as a result of a mandatory closure order, rather than advisory, and whether the insured business was ordered to close completely.

Causation & Trends Clauses

Policies will usually include the mechanism by which claims for loss of profit and other expenses should be quantified. Importantly they commonly include “trends” clauses. This means that business trends can be taken into account that would have impacted the business anyway, had the event giving rise to the claim not have happened. The operation of these clauses were considered as part of the judgment.

The insurers argued unsuccessfully, that the insured peril was the local occurrence of the disease alone and the wider effects of the pandemic including the resulting government measures would have had an impact on profit regardless, thus reducing any claim.

The court did not accept the insurers arguments that the pandemic and the government and public responses should be seen as different causes of loss. They had to be seen as a single cause. This meant that insurers could not make adjustments to profit figures.

Appeal to the UK Supreme Court

Unfortunately for policyholders, the FCA confirmed on the 29th September 2020, that it had filed a ‘leapfrog’ application to appeal to the Supreme Court. This application heard 2nd October 2020, where Leapfrog certificates for an appeal to the Supreme Court were granted to:

  • The FCA.
  • Arch Insurance (UK) Ltd.
  • Argenta Syndicate Management Ltd.
  • MS Amlin Underwriting Ltd.
  • Hiscox Insurance Company Ltd.
  • QBE UK Ltd.
  • Royal & Sun Alliance Insurance Plc.
  • Hiscox Action Group. 

UK Supreme Court Judgment

That appeal was heard on 16th and 19th November and judgment was handed down on 15th January 2021. The judgment runs to 112 pages.

Who Won?

The Supreme Court found in favour of policyholders, essentially upholding the findings of the High Court and in some cases broadening the coverage available. The insurers’ appeals were dismissed in their entirety.

Next Steps

Each policy needs to be considered against the judgment to work out what it means for that policy. Affected policyholders can expect to hear from their insurer soon. If you have questions you should approach your broker, advisers or insurer.

If you remain unhappy following your insurer’s assessment of your claim, you may be able to refer your claim to the Financial Ombudsman Service, whose role is to resolve individual disputes.

We provide in-depth, high quality legal advice to commercial clients ranging from sole traders and partnerships to small and medium-sized companies throughout the country

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