June 18, 2020
COVID-19 Business Interruption Update: FCA Test Case First Hearing and Guidance for Insurers
First Hearing – Case Management Conference (CMC)
On 16 June the first hearing (Case Management Conference) of the FCA Test Case took place remotely at the Commercial Court. At the hearing, the court granted an order that the case will be expedited in accordance with the proposed timetable (i.e. with a final hearing from 20 July to 30 July) and that the Financial Markets Test Case Scheme will apply. The court confirmed that the case will be heard by a 2-judge panel consisting of Mr Justice Butcher and Lord Justice Flaux.
There was some early disagreement between the FCA and Insurers as to the scope of the declarations sought from the court by the FCA, in particular whether the court should make any ruling as to the actual prevalence of COVID-19 in the UK during the relevant period, and the extent to which any such finding would depend on fact and/or expert evidence. These matters will be considered further at the second CMC on 26 June.
The insurers’ Defences are due to be filed on 23 June and at that stage we will see the full extent and basis on which the insurers will resist the declarations sought by the FCA.
The second CMC will be live-streamed on 26 June via https://fl-2020-000018.sparq.me.uk/
Guidance to Insurers
The FCA’s guidance for insurers and intermediaries has now been finalised and came into effect on 17 June. It is equally useful for policyholders seeking to understand the process and how their claim may be affected. Important points to note include the following.
Summary of Test Case
In summary, the core questions that the test case seeks to resolve are:
i. issues of coverage in relation to ‘disease’ and ‘denial of access’ clauses (including any relevant exclusions); and
ii. causation (including any relevant ‘trends clause’ or equivalent wording).
The test case is not seeking to resolve, in particular:
- coverage issues relating to clauses that have an exhaustive list of diseases which does not include Covid-19
- coverage issues relating to clauses which require the disease to be present on the insured premises
- issues concerning misselling of policies
- other issues flowing from the determination of the questions in the test case such as aggregation, additional causation issues specific to loss of rent and similar claims under a property owner’s policy, and the specific quantum of any particular claims
Insurers are required to examine each of their relevant policy wordings to determine whether the outcome of claims under the policy will be affected by the resolution of the Test Case.
Insurers are to notify the results of their review to the FCA by 8 July. The FCA then intends to publish a comprehensive list of insurers and policy wordings that will be affected by the outcome of the Test Case.
The guidance also sets out quite detailed requirements for communicating with policyholders during the Test Case.
In particular, by 15 July 2020 insurers should individually notify policyholders whose claims or complaints for business interruption losses related to the coronavirus pandemic under relevant non-damage business interruption policies are outstanding or have already been declined (or had an adjustment or deduction for general causation) of:
- whether their claim or complaint is a potentially affected claim or a potentially affected complaint and the implications of that (including the FCA’s expectations of the insurer in respect of such claims or complaints under this guidance), or
- the reasons why their claim or complaint is not a potentially affected claim or potentially affected complaint, and the implications of that.
Insurers are required to continue to communicate with policyholders as and when any developments occur in the case that may affect the outcome of their claim.
Any policyholder whose claim has been declined or remains outstanding should therefore follow up with their insurer or broker if they have received no communication by 15 July at the latest.
Clock Stopped on Time Limits
Time limits for making claims or taking any other step under policies, or for making complaints to the FOS are suspended from 17 June until final resolution of the Test Case.
Whilst most claims should already have been notified before 17 June, this means that any other time limits expressed in the policy, for example in relation to proving calculations of loss, or taking action against the insurer will not apply while the test case is ongoing. That does not stop policyholders from taking such steps or pursuing their claims.
The guidance expressly recognises that claims may be settled between insurers and policyholders while the test case is ongoing. However, when making any offer to settle, insurers should inform the policyholder about the test case and its implications. In particular, they should tell the policyholder whether the final resolution of the test case may affect the insurer’s decision about their claim, and the implications of accepting or rejecting an offer made on a full and final settlement basis.
Reassessment of Claims following Final Resolution
Upon final resolution of the Test Case, insurers should reassess all potentially affected claims, apply the judgment, and promptly inform the policyholder of the outcome of the reassessment.
Aaron Le Marquer is a partner at Fenchurch Law
June 17, 2020
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #9 (The Good). UK Acorn Finance Ltd v Markel (UK) Ltd
Welcome to the latest in the series of blogs from Fenchurch Law: 100 Cases Every Policyholder Needs to Know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#9 (The Good)
The next case selected for consideration from our collection of 100 Cases Every Policyholder Needs to Know is UK Acorn Finance v Markel.
This case considered the scope of contractual discretion exercised by an insurer under an Unintentional Non-Disclosure clause and whether that discretion had been exercised in a fair and arbitrary way when considering whether a misrepresentation made by the insured was fraudulent or intended to deceive.
UK Acorn Finance Ltd (“UKAF”) was a bridging finance lender who had obtained judgments in default in excess of £13m following allegedly negligent overvaluations on a number of agricultural properties. The Judgments were obtained against Westoe 19 (formerly named Colin Lilley Surveying Ltd (“CLS”)) who had entered into liquidation.
UKAF issued a claim against Markel pursuant to s.1 and s.4 of the Third Parties (Rights Against Insurers) Act 1930 for indemnity under a professional indemnity insurance policy issued by Markel in favour of CLS.
Markel sought to avoid the policy on the basis of alleged misrepresentations and non-disclosures made by CLS prior to renewal regarding the work it had done with sub-prime lenders. Before the Court, a lot of emphasis was placed upon whether or not the question raised by the Markel prior to renewal regarding work done with sub-prime lenders was understood by the insured and what was actually meant by “sub-prime lenders”. The term was not defined in the policy or within the renewal documentation. It was apparent that a lot of correspondence had been passed between Markel, CLS’s broker and CLS on this issue but ultimately, CLS confirmed it did not do work with sub-prime lenders.
The policy contained an Unintentional Non-Disclosure Clause (“UND clause”) which stated:
“In the event of non-disclosure or misrepresentation of information to Us,
We will waive Our rights to avoid this Insuring Clause provided that
(i) You are able to establish to Our satisfaction that such non-disclosure or misrepresentation was innocent and free from any fraudulent conduct or intent to deceive…”
Relying on the UND clause, Markel alleged that misrepresentations made by CLS regarding its work with “sub-prime” lenders were fraudulent and/or intended to deceive and consequently, avoided the policy and declined the claim.
The Court’s decision
Whilst there were a number of issues for the Court to determine in relation to whether the alleged misrepresentations were warranties, inducement and waiver, the crux of the Court’s decision was whether, in light of the UND clause, Markel was entitled to avoid.
The Claimants argued that it was for the Court to decide, as a matter of fact, whether the representations relied upon by Markel were free from any fraudulent conduct or intent to deceive, i.e. by the Court stepping into the shoes of the decision-maker. Markel disagreed and argued that the Court’s role should be limited to determining whether Markel’s decision to avoid the policy was one that was open to a reasonable decision-maker to make on a Wednesbury unreasonableness basis.
Construction of the UND clause was considered in light of numerous authorities and in particular, the Supreme Court judgment of Braganza v BP Shipping Limited  UKSC 17. The nature of the UND clause is one by which “one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts” – as per Lady Hale in Braganza.
Following Braganza, where such a term is present in a contract permitting one party to exercise a discretion, there is an implied term that the relevant party “will not exercise its discretion in an arbitrary, capricious or irrational manner” (Mid Essex Hospital Services NHS Trust v Compass Group UK  EWCA Civ 200.
When seeking to imply a Braganza implied term to give effect to the UND clause, the Court identified the need for consideration of the principles applicable to implied terms, as set out in Marks and Spencer Plc v BNP Paribas securities  UKSC 72. Those principles are, namely:
i. Terms are to be implied only if to do so is necessary to give the contract business efficacy or if it was so obvious that it goes without saying;
ii. The term is a fair one or one that the court considers the parties would have agreed had it been suggested to them; and
iii. No term may be implied if it would be inconsistent with an express term.
Based upon the wording of the UND clause, in particular that the insured is to demonstrate to the satisfaction of the insurer that the misrepresentation was innocent and free from any fraudulent conduct or intent to deceive, the Judge concluded that it was wrong, as a matter of principle, to conclude that the Court could substitute itself for the contractually agreed decision-maker, as observed by Lady Hale in Braganza.
On the basis that Markel had a power to exercise a discretion or form an opinion as to relevant facts (i.e. whether the misrepresentations were innocent or fraudulent), the Judge considered it was necessary to imply a Braganza term in order to eliminate the possibility of the defendant making decisions in an “arbitrary, capricious or irrational manner”. The Judge considered that such an implied term was necessary to give the UND clause business efficacy and because the necessity for implication of such a term is so obvious that it goes without saying. The implied term did not contradict the agreement of the parties; on the contrary, it was giving effect to that which both are treated as having intended. As such, the test in Marks and Spencer Plc v BNP Paribas was satisfied.
Having determined the construction of the contract and the need for a term to be implied in accordance with Braganza, the Judge concluded the real issues which arose were three in number:
i. Did Markel, via its loss adjuster (who conducted the claims investigation):
a) fail to take into account any facts and matters that he ought to have taken into account; or
b) take into account any facts and matters that he ought not to have taken into account;
ii. would the decision have been the same even if any such errors had not occurred; and
iii. was the decision one that no reasonable decision-maker could have arrived at on the material that ought properly to have been considered.
When considering these issues in accordance with the principles identified in Associated Provincial Picture Houses Ltd v Wednesbury Corporation  1 KB 223, the Judge noted that it was necessary to bear in mind the often quoted direction in Re H (Minors) (Sexual Abuse: Standard of Proof) that “the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probabilities”. Applying that notion to the wording of the UND clause, it required the decision-maker at Markel to bear in mind that it is inherently more probable that a misrepresentation had been made innocently or negligently, rather than dishonestly, based on an analysis of all the evidence. The more serious the allegation against the insured, the stronger the evidence of such dishonesty or fraud is required.
Whilst the Judge expressed that it would be a mistake to expect an insurance company in the position of the Defendant to adopt the same microscopic investigation as a Court, having considered all of the evidence, he concluded that Markel failed to approach the dishonesty issue with an open mind or bearing in mind that it was more likely that a misrepresentation has been made innocently or negligently rather than dishonestly. The Judge felt that too much weight was given to certain evidence, leading Markel to the conclusion that the misrepresentation was dishonest, resulting in the decision-maker failing to properly take into account other relevant evidence which should have been taken into account.
Ultimately, the decision was not one that Markel could safely arrive at if in reaching that decision, it had taken account of factors which ought not to have been considered or failed to take account of factors that ought to have been considered.
Implications for the policyholder
This decision illustrates the approach taken by the Courts when applying the principles in Braganza where one party to a contract has a discretionary power to make a decision as to a matter of fact, in particular in relation to Unintentional Non-Disclosure clauses. Insurers will need to be mindful of the need to act in a manner which is not arbitrary, capricious or irrational and should take extra care to ensure that sufficient evidence is obtained to support a conclusion where the allegations made are severe. The decision is a useful tool for policyholders who have made innocent misrepresentations to insurers prior to inception and renewal but also serves as a reminder that in circumstances where questions asked by an insurer are unclear or ambiguous, the insured and its broker should make effort to ensure they fully understand the questions being asked to avoid any later disputes.
June 1, 2020
COVID-19 Business Interruption Update: Further details of FCA Test Case
The FCA has now published details of its proposed test case in which it seeks to determine a number of coverage issues common to a majority of declined COVID-19 business interruption claims.
Following consideration of over 1200 submissions to its preliminary policyholder consultation process, 17 Policy wordings have been selected as a representative sample covering the broadest spread of common issues.
At present the FCA has indicated that 16 insurers have issued policy wordings within the list identified, eight of whom have been invited to participate in the proceedings:
• Arch Insurance (UK) Limited
• Argenta Syndicate Management Limited
• Ecclesiastical Insurance Office plc
• Hiscox Insurance Company Limited
• MS Amlin Underwriting Limited
• QBE UK Ltd
• Royal & Sun Alliance Insurance plc
• Zurich Insurance plc
It is anticipated however that other insurers who have issued policy wordings materially identical will also be affected by the court’s finding, and the FCA intends to issue a comprehensive list of affected insurers in July.
As anticipated, the focus of the proceedings is on the coverage provided by ‘non-damage’ extensions to business interruption policies, including Non-Damage Denial of Access, Infectious Disease, and Public Authority clauses.
The key issues that have been determined to be common to a majority of disputed COVID-19 BI claims include the following:
• What is meant by ‘interruption or interference’ and is closure required in whole or in part?
• Does “notifiable disease” or “human infectious or human contagious disease” include COVID-19?
• If the disease is required to be in the “vicinity of the insured premises” what does this mean?
• If the policy requires that the disease must exist within a geographical limit of the premises (e.g. 25 miles) what is required by way of proof?
• What is the meaning of an “occurrence” of notifiable disease or an “outbreak” of notifiable disease?
• What does a policyholder have to prove to show prevention or hindrance in access or use of premises?
• What is meant by “actions”, “advice”, “restrictions” imposed by government or other authority?
• What is meant by an “emergency likely to endanger life” (or similar)
• What is meant by “public authority” or “competent local authority”?
• What are the relevant causal links that must be established depending on the words used in the policy?
• Is there more than one potentially operative cause of loss, and if so what is the effect on recovery?
• What effect do any trends clauses have on the application of causation arguments?
• Do micro-organism, pollution or contamination exclusions act to exclude the losses?
Timeframe and Procedure
The FCA intends to file its claim on 9 June 2020, with Defences to be filed by 23 June 2020, and a final hearing is anticipated to be scheduled in the second half of July. In a Framework Agreement executed between the FCA and the participating insurers, it is expressly recognised that the FCA or any Insurer may appeal the decision of the court in relation to any particular issue, but the parties agree to explore the possibility of an expedited leapfrog appeal to the Supreme Court if necessary.
Alongside its announcement, the FCA has published:
• A proposed representative sample of 17 policy wordings;
• A preliminary list of affected insurers;
• Proposed Assumed Facts against which the determination will be made;
• Proposed Questions for Determination by the court arising from insurers’ reason fo declining claims; and
• Proposed Issues Matrix, showing which questions for determination by the court are engaged by each policy in the sample.
• The Framework Agreement agreed by the FCA and Insurers
All documents can be accessed at the FCA website https://www.fca.org.uk/firms/business-interruption-insurance
Policyholders, insurance intermediaries, insurers and other stakeholders are invited to provide comments by 3pm on Friday 5 June, to email@example.com
Taken together, the FCA’s proposed sample of policy wordings, sets of assumed facts, and questions for the court amount to an ambitious and comprehensive set of issues for determination. With eight insurers invited to participate and make submissions across such a broad set of issues in such a compressed timetable, case management will be challenging. Nonetheless, if successfully completed, and not subject to a protracted appeals process, the exercise has the potential to provide insurers, policyholders and intermediaries with a welcome degree of certainty in relation to the vast majority of outstanding COVID-19 business interruption claims. Disputes over discrete issues such as aggregation and quantification of loss will remain, particularly in relation to those policyholders with significant and more complex losses, but even for these policyholders the FCA’s test case should narrow the issues in dispute and reduce the overall costs and time incurred in pursuing claims through formal proceedings.
Aaron Le Marquer is a partner at Fenchurch Law