Friday’s Supreme Court ruling on business interruption policy wordings may also be used by the Financial Ombudsman Service, increasing the potential exposure for insurers

The FCA is not going to “shy away” from taking an “interventionist approach” following its role in the ongoing test case around Covid-related business interruption (BI) claims, said Pamela Freeland, principle associate at law firm Weightmans.

Speaking at the company’s webinar on 13 January – two days prior to the Supreme Court’s final ruling on the BI test case – Freeland said the regulator had placed itself “front and centre of the debate” and that moving forward, “it may intervene more frequently on other high-profile matters”.

Although the FCA initially stated its purpose for the test case was for consumer protection and market integrity, Freeland added that “others have questioned the FCA’s motives”.

She continued: “This is really high profile and the FCA has placed itself front and centre of the debate, which has gained quite significant public interest. [The FCA has] raised its profile and [this] could be used to support arguments as to why the FCA provides a really important public service.

“[The] slightly cynical standpoint is that its been a bit self-serving, which I accept to an extent. But I don’t think FCA intervention in principle is unusual. The FCA has taken an interventionist approach on other matters, such as reforms to insurance pricing for example. It’s just that such topics don’t have the same profile and have not gained as much wide-ranging interest as we have seen here with the test case.

“It may however be an indication that the FCA is not going to shy away from taking on similar high-profile action in the future and that it may intervene more frequently on other high profile matters if it thinks such action is justified and the costs associated with doing so are justified. We might see more of this type of intervention from the FCA in the future.”

Despite the Supreme Court being scheduled to deliver its judgment on Friday morning, Freeland added that “the decision will not provide the answer to all questions, not even related to BI claims themselves”.

This means that “in the months that follow, other issues may have to be addressed and that may be by way of further litigation, it may be by way of private arbitrations”.

“I definitely think there will be more litigation and more forums for dispute resolution on aspects of BI that aren’t completely covered as a result of the judgment coming out on Friday,” she said.

Wider implications

There are also “wider potential legal implications depending on what the decision says on Friday”, Freeland continued.

She explained: “For example, the way in which a composite insured peril is defined or applied may be altered and that might have significant impact. There might be revised further principles relating to the ‘but for’ test and the two stages of that ‘but for’ test, which could have a wide impact not just on the insurance sector, but beyond that.

“And also, we saw in the first instance [case] comments being made by the judges in respect of the principle of ‘contra proferentem’, which is a principle that applies in circumstances where there is a genuine uncertainty to the meaning of a particular clause, and that’s a very general insurance legal principle.

“The Lords may use this decision as an opportunity to clarify a general point of principle like that, which again could have far wider implications beyond just BI claims themselves.”

In addition, Freeland believes the Financial Ombudsman Service (FOS) will also be playing close attention to Friday’s result.

“It’s likely to be used by the FOS to assist with the determination of BI complaints that have been made, most of which have been held in abeyance pending the final decision in the test case,” she said.

“It could, therefore, shape thousands of claims and potential exposures for many insurers in that context alone.”

Potential claims

For Freeland, there are two main areas where claims could arise following the BI test case result.

Firstly, she believes some insureds may turn to the Enterprise Act 2016, which came into force in 2017 as a clause of the Insurance Act 2015.

This stipulates that insurers must pay claims within a reasonable timeframe, otherwise policyholders can make an additional claim for damages if their claim payout is particularly delayed.

However, Freeland said that claims of this nature are “misconceived” and will not be easy to action.

Primarily, this is because there is no set definition by the courts of what a ‘reasonable’ time to pay a claim is, so it will therefore be difficult to determine whether the time elapsed in any one case is ‘reasonable’ or not.

Plus, once the Supreme Court ruling is announced on Friday, insurers will need some time at least to apply it to their policy wordings and see which of their customers will be affected, Freeland added.

The second area where Freeland thinks claims may come in is around professional indemnity (PI) claims against brokers who advised their corporate clients on BI coverage; although she expects this will be a last resort, only used if policyholders have been unable to obtain a payout through any other route.

Policyholders will struggle to win claims here too, Freeland said, as the challenges resulting from the Covid-19 pandemic could not have been foreseen prior to March last year. Brokers would only have been able to base their advice on the known facts at the time of the policy’s inception, she explained.

In order to get ahead of potential PI claims, Freeland recommended that brokers revisit their assessment paperwork and other documentation now.