A consideration of arguments on the principles of contractual construction in the FCA test case on business interruption insurance.
Like many industries across the country, we are closely following the FCA's novel test case seeking clarity on business interruption insurance during the coronavirus crisis. The 10-day trial starts in the High Court on 20 July. Businesses – particularly SME policyholders, who the FCA is taking a strong stance in favour of in the case – may stand or fall depending on the case's outcome.
Although this case relates to insurance policies, what the Court is essentially carrying out is an exercise in contractual construction, clarifying the objective meaning of the wording of the policies in question. The Court has clear guidance from the Supreme Court on this issue – most recently in Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173 – and, as the FCA comments in its 300+ page skeleton argument for the hearing, the general principles of contractual construction "are unlikely to be controversial".
While this appears to be so for the most part, differences between the parties on this issue have inevitably arisen, and the Court's approach is likely to have wider application beyond cases concerning the interpretation of insurance policies.
One such issue the Court might need to resolve is the role of the longstanding doctrine of contra proferentem. Understandably, the FCA seeks to rely on this rule, which they say requires the Court to apply a construction in favour of the insured where there is ambiguity about the construction of the policies.
The insurers have questioned the utility of the doctrine. They argue it is "out of step" with the principles of contractual interpretation and consider it "instructive" that the principle has not been mentioned in any of the recent Supreme Court decisions on contractual construction.
However, the insurers' attempt to do away with the doctrine seems ambitious to us. Their suggestion that the principle is, at most, a port of last resort, seems to be common ground – but it does not mean the doctrine has no place in the Court's consideration at all.
Given the test case concerns standard "off the shelf" policies, primarily for "unsophisticated" SMEs, the Court might look to the doctrine of contra proferentem if it is unable to resolve ambiguities in the policies. The insurers' argument that the policyholders were commercial parties who entered into the policies largely on the advice of brokers in a competitive insurance market seems unlikely to ring true with most of the SME policyholders affected by this case.
It therefore seems unlikely that the insurers' efforts to do away with this doctrine will be successful, and ambiguous clauses will continue to be construed against the party who proposed or drafted them. That said, the Court will be careful not to construe the wordings so strictly that it defies all business common sense.
