The United Kingdom's conduct regulator for insurers (and its intermediaries), the Financial Conduct Authority (the "FCA"), is seeking a court declaration to resolve contractual uncertainty in business interruption ("BI") insurance cover (the "Test Case"). In this article we consider why the Test Case is being brought and how it may affect similar business interruption insurance disputes over coverage in Hong Kong.
The COVID-19 pandemic has brought severe difficulties to individuals, firms and the world economy, with regulators in the financial and/or insurance sector navigating around the global climate of uncertainty in order to minimise the unprecedented impact of temporary financial distress. Many policy holders hoping to rely on business interruption cover have been disappointed as insurers have refused to pay out in relation to such policies, and this has added to the increasing financial pressure many businesses are facing in this turbulent time.
On 15 April 2020 the FCA issued a “Dear CEO letter”  as a means to draw the insurance industry’s attention to areas where the FCA has high-risk concerns as a result of the failure to pay out on policies in which epidemics and pandemics are not specific exclusions. In particular, it delivers a clear message on the FCA's regulatory objective in supporting businesses and consumers during the current crisis. Where there is an obligation for insurance firms to pay out on the insurance policy concerned, those claims should be assessed and settled quickly.
The message in the Dear CEO Letter is also in line with the FCA's general expectation of insurance firms as stated in the FCA Handbook  and as reinforced in its statement dated 1 May 2020 that insurance firms will have to "communicate their approach and decisions clearly to their customers and to promptly and appropriately investigate any complaints that they receive" .
Whilst the Test Case is envisaged to be heard in the second half July (with a 5-10 day court hearing), there remain uncertainties about the timeline as it is subject to, for example, the consent of the court and the possibility of appeal brought by either the FCA or the insurers. Given the importance of the Test Case result, the parties have already envisaged the possibility of a leapfrog appeal, bypassing the Court of Appeal to the Supreme Court .
The Test Case's details, timeline and progress
The FCA announced on 1 May 2020 its intention to bring the Test Case to the English court as soon as possible for an authoritative declaratory judgment regarding the meaning and effect of certain BI insurance policy terms where there remain unresolved uncertainties, in particular regarding the coverage of the policy (i.e. whether a policy which provides cover in principle for BI losses without the need for physical/ property damage may cover losses resulting from COVID-19 pandemics) and the causation issue (i.e. whether as a matter of law and fact and in light of the policy the necessary causal link to any loss suffered by customers which is the subject matter of claims under the policy can be established, including the impact, if any, of any trends clauses or similar/ equivalent provisions).
The FCA's BI insurance Test Case draft guidance issued on 1 June 2020 is available here and the representative sample of policy terms to be tested by the Test Case issued on 9 June 2020 is available here.
Effect of the Test Case on policyholders in Hong Kong
Hong Kong, together with the rest of the world, suffered from economic recession in the first quarter of 2020. The real GDP contracted notably by 8.9% year-on-year. One of the industries being severely hit is the retail industry – this observation is demonstrated by the approximately 44% and 37.5% year-on-year fall in retail sales in March and April 2020 respectively. Despite various rounds of anti-epidemic funding launched by the Hong Kong SAR Government, individuals and SMEs remain seriously affected and under stringent financial constraints. They may dip into their existing BI insurance policy, once described as a life buoy which people would first turn to whenever the unexpected or the unpleasant comes, and subsequently find themselves disappointed and frustrated with the cumbersome policy provisions, arduous insurance claiming processes and potential claim exclusions.
Although Hong Kong law would generally be the applicable law governing the insurance policy here, the Test Case decision that will be handed down from the UK courts, particularly if it goes all the way to the UK Supreme Court, will be of high persuasive value to Hong Kong Courts. This is firstly because the wording of the insurance clauses selected by the FCA for the Test Case are broad, generic and representative, allowing a wide range of issues to be covered. More importantly, the representative feature of the sample means that it would not be difficult to identify a similarly worded provision in some of the Hong Kong BI insurance policies. The Hong Kong courts have not considered the interpretation of a BI provision in the context of an epidemic (the closest case being New World Harbourview Hotel Company Limited & Ors V Ace Insurance Limited & Ors  HKCU 792  where the Court of First Instance made reference to the classic definition of "damage" as "physical loss, loss of use, damage or destruction”) and we expect a UK precedent which is favourable to the insureds would encourage business owners who suffered loss during the COVID-19 pandemic to litigate the same issue in Hong Kong. We also expect the FCA Test Case result to generate implications for other common law jurisdictions as well. In the US, there have already been around 150 law suits filed in the federal courts surrounding BI insurance as a result of the pandemic and resulting government-ordered restrictions. In Australia, it appears that certain policyholders are being denied insurance claims arising from BI issues caused by the pandemic and therefore have resorted to lodging complaints (a reportedly notable number of at least 3,000 complaints) with the Australian Financial Complaints Authority which may potentially lead to follow-up actions by the Australian regulator.
We will write again when we know more about the Test Case.
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The content on this Article seeks to provide you with general information on the FCA Test Case. The information contained herein is not legal advice in respect of the application of Hong Kong law and/or UK law and should not be relied upon or act on as such. It is subject to changes without further notice and may not be fully up-to-date.
 The FCA's Dear CEO Letter dated 15 April 2020, titled Insuring SMEs: Business Interruption, retrieved at https://www.fca.org.uk/publication/correspondence/dear-ceo-insuring-sme-business-interruption-coronavirus.pdf
 Including but not limited to guidance from the FCA on firm's obligations under the FCA Principles for Business (PRIN) in particular
- Principle 6: A firm must pay due regard to the interests of its customers and treat them fairly),
- Principle 7: A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading); and
- Principle 11: A firm must deal with its regulators in an open and cooperative way, and must disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice.
and other relevant sections in the FCA Handbook.
 FCA statement - insuring SMEs: business interruption, retrieved from https://www.fca.org.uk/news/statements/insuring-smes-business-interruption
 Business Interruption Insurance Test Case Framework Agreement dated 31 May 2020 between the FCA and certain Insurers as set out in the Schedule of this Agreement, retrieved from https://www.fca.org.uk/publication/corporate/bi-interruption-test-case-framework-agreement.pdf
 Note the case was subsequently appealed and a final decision was given by the Hong Kong Court of Final Appeal (2012) 15 HKCFAR