The High Court released its decision today. It’s 150+ pages long and covers a host of issues. The FCA reports that the court generally found in favor of the policyholders. Notably, the insurance policy provisions that the court considered were the “non-damage wordings,” many of which differ significantly from the policy provisions at issue in the U.S. business interruption cases. While there is much grist for the mill in the decision (and I particularly enjoyed the court’s discussion of principles of interpretation), the decision does not address the key threshold issue in the U.S. cases: can the policyholders demonstrate that they have satisfied the “physical loss of or damage to property” requirement?
Reading the Particulars of Claim and transcripts from the FCA test case proceeding in the UK, I learned about another important difference between the test case and the US cases. The scope of the test case is limited to non-damage policy wordings. That means the court in that case will not address potential interpretations of “physical loss of or damage to property” and similar wordings that insurers rely heavily on in the US cases.
For example, in Gavrilides Management Company et al. vs. Michigan Insurance Co., the presumptive first Covid-19 insurance coverage case decided in the US, Judge Joyce Draganchuk granted the defendant insurance company’s Motion for Summary Disposition. Judge Draganchuk granted the motion on the procedural grounds that the plaintiff failed to allege any “physical loss of or damage to” property, not on the merits of the argument that there was “physical loss of or damage to property.” Nevertheless, she made her views of the merits of that argument plain. Watching the video of the argument on YouTube, I heard her say (as the transcript confirms), “The plaintiff just can’t avoid the requirement that there has to be something that physically alters the integrity of the property. There has to be some tangible, i.e., physical damage to the property.” I heard that as suggesting that she didn’t think restaurants could make that showing. Judge Draganchuk was unimpressed with the argument that “the physical requirement is met because people were physically restricted from dine-in services,” calling it “nonsense.”
Because the plaintiff didn’t allege physical loss or damage, Gavrilides doesn’t tell us much about how other cases or judges will come out. Our reading of the motions to dismiss and other documents filed in other cases shows that there are many different arguments (and defenses) courts have yet to hear. Moreover, case law interpreting the “physical loss” and/or “physical damage” requirements is still relatively undeveloped in the US, and some lawyers claim that it differs between states. Such causal requirements are likely to be the center of gravity in many cases in the US, but the UK test case won’t provide much, if any, guidance on that issue.
When I teach insurance law, I always remind my students that private insurance can implicate our most important values. Here is a statement from QC Edelman in the FCA test case that illustrates this point:
“In times of emergency and crisis, the public understands the difference between what the government was telling them to do in March of this year, and exhortations like to eat more fruit and vegetables and drink less alcohol. Behind the government’s announcement telling people what they must do was an appeal to comply voluntary in order to avoid or minimise the government being enforced to invoke the law. I want to say the fact that in a free society governments impose their will in this way, rather than operating as if is this was a Police State, is what marks us out as a society where people realise that freedom comes with social responsibility.“
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.
As the individual claims and class action complaints we are collecting pile up in the U.S. court system, attention in the UK has turned to a test case between the Financial Conduct Authority (“FCA”) and eight large insurance companies. The FCA is an independent financial regulatory body responsible for protecting consumers and financial markets, as well as promoting competition.
In mid-March, the FCA sent letters to insurance companies outlining expectations for handling COVID-related business interruption claims, followed in mid-April with a letter to insurance company CEOs. On May 1st, the FCA announced its intention to bring a test case in the High Court in London. The FCA collected and analyzed information from insurance companies about their business interruption policies and wordings, as well as their intentions and decisions to approve or deny related claims. From those submissions, the FCA identified a representative sample of policy wordings and solicited arguments from policyholders about why particular wordings should provide coverage. The FCA then compiled and released a list of 17 commonly used policy wordings from policies issued by 8 leading insurers that, in the FCA’s view, encompassed a majority of the key disputed issues. The FCA also released a proposed set of assumed facts, proposed questions for determination, and a proposed issues matrix.
Proceedings in the High Court officially began on June 10th when the FCA filed its Claim Form and Particulars of Claim, which serve as its pleading. The first case management conference took place on June 16th, at which the Justice ordered that the case be expedited. Insurers are expected to file defenses on June 23rd, with a second case management conference set on the 26th to resolve any outstanding procedural matters before trial. Replies and skeleton arguments are scheduled for the first half of July, followed by an 8-day court hearing on July 20-23 and 27-30.
As of now, the closest parallel to the FCA test case in the U.S. are the competing MDL aggregation applications in Philadelphia and Chicago. While the procedure is completely different, the benefits of case aggregation through the MDL process overlap with the benefits of the UK test case (i.e., efficiency, timeliness, lower litigation costs). It will be interesting to see if either MDL application gets approved and if so, which will prevail. A subsequent blog post will compare and contrast the UK test case procedure with the MDL procedure in the U.S.