FCA Fights To Stop Trends Clause Cap On Pandemic Payouts

By Martin Croucher
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Law360, London (November 18, 2020, 7:07 PM GMT) -- The Financial Conduct Authority pushed the U.K. Supreme Court on Wednesday to block insurers from penalizing businesses for closing when the government ordered them to in March, but before legislation was formally passed for the U.K.'s first lockdown.

FCA attorney Colin Edelman QC argued that because business slowed down earlier in March, insurers would unfairly be able to pay businesses only a fraction of their losses by saying that a downturn in revenue days before the official start of a lockdown was part of a trend.

Though the High Court largely sided with the FCA and policyholders in the test case, it ruled that the policies were only triggered when legislation actually mandated businesses clause. 

Edelman said Wednesday that by limiting the period of indemnity, the High Court was allowing businesses to be penalized for following government advice during a period of national emergency not seen since World War II.

"In that circumstance people would be expected to comply with what the government told them to do for the purposes of public safety, without regard to whether the government had passed legislation, or whether they were legally bound to do so," he said. "It was a matter of social responsibility."

The third day of the Supreme Court appeal in the test case, which will affect about 370,000 businesses, centered on small print in policies that affect how much a business can receive from a successful claim. Most of the first two days focused on the insurers' appeals of the bulk of the decision ruling the policies largely covered lockdown closures.

Ordinarily under a business interruption policy, a company would be able to claim for lost turnover as a result of a temporary closure.

But so-called trends clauses in policies mean that loss adjusters are able to reduce that compensation payout if a company was already suffering a downturn in business.

The High Court judgment in the test case meant the policies of Hiscox, MS Amlin and RSA were triggered only from the point where there was a mandatory legal requirement that they close.

That ruling was a blow for businesses that pulled down the shutters on March 20, when the prime minister advised all nonessential businesses to close, instead of March 21, when legislation was passed forcing them to do so.

In such cases, the FCA said insurers could look at the total lack of income on March 20 and argue that it was part of a "trend" and therefore adjust any claim payout to effectively zero.

On the other hand, a business that ignored the government's nonbinding instruction to close on March 20 and remained open until the day after would be able to claim a nearly full payout.

Justice Robert Reed, the president of the Supreme Court and part of the five-judge panel hearing the case, said the example was akin to a restaurant finding a rat infestation on Saturday night and not closing down until Monday morning, when the local authority could give a formal closure order.

"It would be extraordinary that the contract required the business to carry on trading on the Sunday in order to be able to recover compensation," he said.

The FCA is represented by Colin Edelman QC of Devereux Chambers, Peter Ratcliffe and Adam Kramer of 3 Verulam Buildings, and Max Evans of Fountain Court Chambers, instructed by Herbert Smith Freehills LLP.

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

Hiscox is represented by Jonathan Gaisman QC, Adam Fenton QC and Douglas Grant of 7 King's Bench Walk, and Miles Harris of 4 New Square, instructed by Allen & Overy LLP.

MS Amlin Underwriting Ltd. is represented by Gavin Kealey QC, Andrew Wales QC, Sushma Ananda and Henry Moore of 7 King's Bench Walk, instructed by DAC Beachcroft LLP.

QBE UK Ltd. is represented by Michael Crane QC of Fountain Court Chambers, Rachel Ansell QC and Martyn Naylor of 4 Pump Court, and Sarah Bousfield of Brick Court Chambers, instructed by Clyde and Co LLP.

RSA is represented by David Turner QC, Shail Patel, Anthony Jones and Clare Dixon of 4 New Square, instructed by DWF Law 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.

The Hiscox Action Group is represented by Ben Lynch QC, Simon Paul and Nathalie Koh of Fountain Court Chambers, instructed by Mishcon de Reya LLP.

The lead case is Financial Conduct Authority (Appellant) v. Arch Insurance (UK) Ltd. and others (Respondents), case number UKSC 2020/0177, in the Supreme Court of the United Kingdom.

--Editing by Amy Rowe.

For a reprint of this article, please contact reprints@law360.com.

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