UK appeal court gives business insurance policyholders a win

While U.S. courts have mostly sided against business owners seeking COVID-19-related business interruption insurance, an appellate court in London handed policyholders a significant victory Tuesday, finding mostly in their favor in the first consolidated test case challenging insurers.

In an attempt to offer guidance to hundreds of thousands of policyholders seeking business interruption coverage in the United Kingdom amid the pandemic, the test case, brought by the Financial Conduct Authority -- a non-governmental financial regulatory agency -- considered 21 representative sample policies from eight major insurance carriers, including some who do business in the United States. Following the expedited proceedings that began in May in the Court of Appeals of England and Wales, Justice Sir Julian Martin Flaux handed down a 150-page judgment, interpreting most policies in favor of granting coverage.

While it does not provide binding precedent in the U.S., plaintiffs' attorneys such as William Shernoff of Shernoff Bidart Echeverria LLP said the ruling could strengthen their position in American courts or future negotiations with insurance companies.

"It seems like the bottom line is ... for most of these clauses, they interpreted them in favor of coverage and a lot of the clauses are similar, if not the same, as the policies in the U.S.," Shernoff said in a phone interview. "So I am sure plaintiff lawyers like myself will be using that to our best advantage because after all, U.S. law came from English law, especially insurance law."

He predicted American plaintiffs' lawyers "will be looking for whatever is in this test case to be useful and at least persuasive, if not binding. Some of these carriers that were in the test case actually have policies in the United States."

Among the eight insurance carriers chosen for the test case, Hiscox Ltd. responded in a statement Tuesday saying the judgment could lead to additional COVID-19 claims arising from business interruption to be less than £100 million net of reinsurance.

"The judgment clarifies that fewer than one-third of Hiscox's 34,000 UK business interruption policies may respond," the insurer said in a statement. "Coverage under these policies is essentially limited to those customers who were mandatorily closed by government orders, and then only in certain circumstances."

Hiscox went on to say the parties may also ask that any appeal proceed directly to the the U.K.'s Supreme Court, and expects a ruling on any such appeal to be made in October.

Restaurant and business owners in the U.S. claim their existing business interruption policies should have triggered coverage when state and local governments ordered businesses to close during the pandemic in March. However insurance companies in the U.S. denied claims, saying business interruption polices only cover physical damage or alterations to a property, not the consequences of a government ordered closure.

With policyholders seeking relief before they go out of business for good and insurers facing a potential industry-bankrupting event, the need to expedite litigation has become a top priority.

After an attempt to consolidate hundreds of COVID-19-related insurance lawsuits into a multidistrict litigation failed in the U.S. last month, the multidistrict litigation panel in Washington D.C. focused on three questions businesses said presented common issues: Do government closures trigger coverage? What constitutes "physical loss or damage" to property? Do any virus exclusions apply?

"These questions, though, share only a superficial commonality," ruled the panel.

Finding no common defendant in the actions, there is little potential for common discovery, it ruled. However the panel remains open to coordination by insurers as a way to eliminate inconsistent pre-trial rulings. It requested further briefing on the matter as to why cases against each of the four major insurance companies -- Certain Underwriters at Lloyd's of London; Cincinnati Insurance Company; the Hartford Insurers; and Society Insurance -- should not be centralized.

Facing a similarly daunting task across the pond, the Financial Conduct Authority asked the U.K. Court of Appeal to provide an urgent declaratory judgment to resolve contractual uncertainty in business interruption policies and to provide guidance on whether common policy wordings cover COVID-19 claims.

While the U.K. court reached different conclusions in respect of each policy, it found in favor of the financial authority on the majority of the key issues, in particular that coverage is triggered under most disease and "hybrid" clauses, certain denial of access and public authority clauses, as well as causation and trends clauses, according to the authority.

"The test case has also clarified that the COVID-19 pandemic and the government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid even if the policy provides cover," the authority said in a statement Tuesday.

"We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market," said Christopher Woolard, the authority's interim chief executive. "We are pleased that the court has substantially found in favor of the arguments we presented on the majority of the key issues."