UK’s Financial Conduct Authority (FCA) has initiated a test case to bring certainty on issues related to insurance cover for covid-19 related financial losses. It is seeking declarations from the UK High Court on the operation of several non-damage business interruption (BI) extensions.

In a legal briefing, Herbert Smith Freehills (HSF) Brisbane partner Mark Darwin said there was uncertainty over cover for covid-19-related financial losses because of the absence of any “physical damage” to insured properties, which typically triggered BI and that could lead to controversial claims.

HSF was representing FCA to advocate policyholders’ position on the issues, which would be equally significant to non-damage BI claims in Australia, according to Darwin.

Darwin said FCA, in co-operation with eight UK insurers, had initiated the test case to bring some certainty on the issues, seeking declarations from the UK High Court on the operation of several non-damage BI extensions. The hearing started on July 20 and was expected to conclude in early August.

Darwin said policyholders had been looking for policy triggers under “non-damage” BI extensions, eg where the businesses had been interrupted by infectious diseases or regulatory actions. Insurers had protested pandemic-related losses were never intended to be covered, leaving policyholders either without cover or “considering their next move in what will inevitably be regarded by insurers as a controversial claim”.

The UK test case was considering several issues raised in the debate over cover in two broad categories – “the coverage issues”, ie whether the various circumstances policyholders relied on did trigger the policy coverage; and “the causation issues”, ie whether the losses were caused by the policy trigger or by the wider impact of covid-19 in the community.

The causation issues included consideration of the “adjustments clause”, which typically required a consideration of trends and other circumstances, which would have affected the business anyway in estimating the hypothetical results that would have been achieved before, comparing those with policyholders’ actual results.

Darwin said, on the coverage issues, the position was similar in Australia, where policies extended BI cover if an infectious disease was located at the insured premises but then excluded diseases, eg covid-19, which were notifiable under the Biosecurity Act.

The policyholders’ position was that if other non-damage extensions applied to trigger the cover, there was no reason to construct the policy to imply an intent to exclude pandemics generally.