Insurers Offer 'Unrealistic' Defense In Test Case, FCA Says

By Martin Croucher
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Law360, London (July 6, 2020, 2:45 PM BST) -- Legal arguments used by insurers to dismiss claims made by businesses hit by the national coronavirus lockdown rely on definitions beyond what a "reasonable person" buying insurance would understand, the Financial Conduct Authority has said.

The FCA made the argument on Friday in its reply to the defenses of eight insurance companies involved in a High Court test case, which will determine liability in a wide range of contested policies for business interrupted by the COVID-19 outbreak.

The City regulator is seeking a definitive court judgment on 17 policy wordings, which could decide whether insurers pay out to hundreds of thousands of businesses forced to close when the country went into lockdown in March.

Insurance companies relied in their defenses, which they filed June 24, on arguments that are unintelligible to the average, "unsophisticated" buyer of insurance, the FCA said.

"They depend upon adopting unduly restrictive meanings of particular words and approaches to proof as to the presence of COVID-19, and causal tests prescribing unrealistic, impractical counterfactuals, depriving the cover clause of much of its apparent and intended scope — none of which reflect what the reasonable person in the position of the parties would understand," the FCA said in its response.

The court case will look specifically at so-called non-damage extensions to business interruption policies, which offer cover if a premises was forced to close because of an outbreak of infectious disease. Other extensions being tested offer cover if a public authority blocks or denies access to a premises.

Many of the insurers share policy wordings that restrict cover when a disease outbreak occurs outside a specified geographical radius around the business, which ranges between one mile and 25 miles.

The FCA said in its particulars of claim that it should be possible to determine whether there was a single case of COVID-19 within that radius, therefore ascertaining liability.

Insurers MS Amlin and Ecclesiastical said in a joint defense that, even if there was a single case of the disease within that area, the national lockdown was not enacted with "reference to or reliance upon the specific case or cases within the relevant area" and was therefore not the so-called proximate cause of the financial loss. 

In a separate move, insurers have sought to argue that losses would have occurred even without the lockdown.

Hiscox said in its defense that in the "counterfactual scenario," in which COVID-19 is present but the government has not ordered a lockdown, businesses would have still faced an economic hit as people avoided going out for fear of catching the disease.

The watchdog said it would respond in detail to the legal arguments put forward by insurers in its skeleton argument, which it will file on Friday. Insurers will file their skeleton arguments just four days later, next Tuesday, as the case moves rapidly ahead.

QBE and Aviva policyholders have intervened in the test case, which will take place on July 20 and will last for eight days.

The FCA is represented by Colin Edelman QC of Devereux Chambers and Leigh-Ann Mulcahy QC and Richard Coleman QC of Fountain Court Chambers, instructed by Herbert Smith Freehills LLP.

The QBE and Aviva policyholders are represented by Philip Edey QC of Twenty Essex chambers.

Hiscox policyholders are represented by Ben Lynch QC of Fountain Court Chambers, instructed by Mishcon de Reya LLP.

Arch Insurance UK is represented by John Lockey QC and Jeremy Brier of Essex Court Chambers, instructed by Clyde and Co LLP.

Zurich Insurance PLC is represented by Andrew Rigney QC and Caroline McColgan of Crown Office Chambers and Craig Orr QC and Michelle Menashy of One Essex Court, instructed by Clyde and Co LLP.

QBE UK Ltd. is represented by Mark Howard QC of Brick Court Chambers and Rachel Ansell QC of 4 Pump Court, instructed by Clyde and Co LLP.

Argenta Syndicate Management Ltd. is represented by Simon Salzedo QC and Michael Bolding of Brick Court Chambers, instructed by Simmons & Simmons LLP.

Ecclesiastical Insurance Office PLC and MS Amlin Underwriting Ltd. are represented by Gavin Kealey QC and Andrew Wales QC of 7 King's Bench Walk, instructed by DAC Beachcroft LLP.

Hiscox is represented by Jonathan Gaisman QC of 7 King's Bench Walk, instructed by Allen & Overy LLP.

RSA is represented by David Turner of 4 New Square, instructed by DWF Law LLP.

The case is The Financial Conduct Authority v. Arch Insurance and others, case number FL-2020-000018, in the High Court of Justice of England and Wales.

--Additional reporting by Paige Long. Editing by Ed Harris.

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