Beyond the U.S. Business Income Cases

The FCA Test Case and the Difference Between “All-Risk” and “Insured Peril” Policies

Author: Jordan Einstein Date: 07.22.20

The FCA Test Case and the Difference Between “All-Risk” and “Insured Peril” Policies

There is at least one big difference between the insurance policies at issue in the UK test case currently taking place in the High Court in London and those at issue in the US cases. In the US, insurance companies typically issue “all-risk” property insurance policies, meaning insurers cover losses not explicitly excluded. By contrast, insurers in the UK commonly issue “insured peril” policies (sometimes called “named peril” policies), which cover only those losses caused by the “perils” specifically named in the policy (such as fire, lightning, wind, public authority). Thus, while many of the broad issues in dispute are the same in the business interruption litigation in both countries, some of the arguments for each side look quite different.

With an all-risk policy, the policyholder starts with an important advantage in the litigation.  All the policyholder has to do is to prove that there was the right kind of harm – typically “physical loss of or damage to” insured premises.  Then the burden shifts to the insurer to prove that an exclusion in the policy – such as the virus exclusion – applies to eliminate coverage for the loss or damage.

In contrast, with an insured peril policy, the policyholder has to prove, not only that there was the right kind of harm, but also that the harm was caused by one of the perils specifically named in the policy.  Only then does the burden shift to the insurer to prove that the loss or damage is specifically excluded.

The nature of the “insured peril” is already a hotly contested issue at trial in the test case. The FCA – relying on a number of different policy wordings in public authority, prevention of access, and disease clauses, among others – contends that the “insured peril” is Covid-19 broadly and that policyholders’ losses result from a combination of these causes which are all connected. Conversely, the insurers seek to define the “insured peril” more narrowly.

This fundamental difference in the structure of the coverage in the policies sold on the other side of the Atlantic means that a favorable outcome for an insurer in the UK test case may not be persuasive to US courts.  By contrast, because policyholders face a more difficult burden of proof in the UK test case, a favorable outcome for policyholders could prove quite persuasive to US courts.

Here is a link to the transcript of the first day of the FCA proceeding.