In good news for small firms, a Supreme Court ruling will see thousands have their disputed COVID-19 business interruption claims paid. It is expected that these pay outs could total over £1.2 billion.
Sure to be a relief to many businesses in the UK, the Supreme Court has ruled against some of the world’s largest commercial insurers who claimed that they should not have to pay disrupted business pay outs for the first national COVID lockdown because business interruption policies did not cover widespread disruption. This placed hundreds of thousands of small businesses in peril as the first national lockdown gripped the country.
The Supreme Court today (15 January) delivered its judgment in the Financial Conduct Authority’s (FCA)’s business interruption insurance test case.
It has substantially allowed the FCA’s appeal on behalf of policyholders. This completes the legal process for impacted policies and means that many thousands of policyholders will now have their claims for coronavirus-related business interruption losses paid.
Sheldon Mills, Executive Director, Consumers and Competition at the FCA, said: “Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. This test case involved complex legal issues. Our aim throughout this test case has been to get clarity for as wide a range of parties as possible, as quickly as possible, and today’s judgment decisively removes many of the roadblocks to claims by policyholders.
“We will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible. Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.
“As we have recognised from the start of this case, tens of thousands of small firms and potentially hundreds of thousands of jobs are relying on this. We are grateful to the Supreme Court for delivering the judgment quickly. The speed with which it was reached reflects well on all parties.”
Many policyholders whose businesses were affected by the Coronavirus pandemic suffered significant losses, resulting in large numbers of claims under business interruption (BI) policies.
Most SME policies are focused on property damage and only have basic cover for BI as a consequence of property damage. But some policies also cover BI from other causes, in particular infectious or notifiable diseases (‘disease clauses’) and prevention of access and public authority closures or restrictions (‘prevention of access clauses’).
In some cases, insurers have accepted liability under these policies. In other cases, insurers have disputed liability while policyholders considered that they had cover leading to widespread concern about the lack of clarity and certainty.
The aim in bringing the test case was to urgently clarify key issues of contractual uncertainty for as many policyholders and insurers as possible. The High Court’s judgment last September resolved most of the key issues but, because an agreement was unable to be reached, insurers and the FCA made ‘leapfrog’ appeals to the Supreme Court (without going to the Court of Appeal first).
What today’s judgment decides
The FCA argued for policyholders that the ‘disease’ and ‘prevention of access’ clauses in the representative sample of 21 policy types provide cover in the circumstances of the coronavirus (Covid-19) pandemic, and that the trigger for cover caused policyholders’ losses.
The High Court’s judgment last September said that most of the disease clauses and certain prevention of access clauses (12 policy types from the sample of 21, issued by six insurers) provide cover and that the pandemic and the Government and public response caused the business interruption losses. The six insurers (Hiscox, RSA, QBE, Argenta, Arch and MS Amlin) appealed those conclusions for 11 of the policy types, but the Supreme Court has dismissed those appeals, for different reasons from those of the High Court.
On the FCA’s appeal, the Supreme Court ruled that cover may be available for partial closure of premises (as well as full closure) and for mandatory closure orders that were not legally binding; that valid claims should not be reduced because the loss would have resulted in any event from the pandemic; and that two additional policy types from insurer QBE provide cover. This will mean that more policyholders will have valid claims and some pay-outs will be higher.
What today’s judgment means for policyholders
The judgment brings to an end legal arguments under 14 types of policy issued by six insurers, and a substantial number of similar policies in the wider market which will now lead to claims being successful.
The decision to bring the test case has removed the need for policyholders to resolve many key issues individually with their insurers.
Today’s judgment does not determine how much is payable under individual policies, but provides much of the basis for doing so.
Commenting on the verdict, Huw Evans, Association of British Insurers Director General, said: “Insurers have supported this fast-track legal process every step of the way and we welcome the clarity that the judgment will bring to a number of complex issues. Today’s judgment represents the final step in the appeal process.
“The insurance industry expects to pay out over £1.8bn in Covid-19 related claims across a range of products, including business interruption policies. Customers who have made claims that are affected by the test case will be contacted by their insurer to discuss what the judgment means for their claim. All valid claims will be settled as soon as possible and in many cases the process of settling claims has begun. Some payments have already been made where valid business interruption claims have not been impacted by the test case ruling.
“We recognise this has been a particularly difficult time for many small businesses and naturally regret the Covid-19 restrictions have led to disputes with some customers. We will continue to work together as an industry to ensure customers have the clarity they need when it comes to what they can expect from their business insurance policies.”
East Midlands Chamber (Derbyshire, Nottinghamshire, Leicestershire) Chief Executive Scott Knowles said: “Amid all the doom and gloom of lockdown restrictions, this is a positive day for small businesses, which were told last year their insurance policies would not cover interruption to business caused by the pandemic.
“Cashflow has been one of the biggest issues throughout this pandemic, with our Quarterly Economic Survey showing the amount of cash available to East Midlands companies falling in every quarter of 2020, with no sign of this trend reversing.
“As a result, many businesses have been forced to take on additional loans and, without the necessary Government financial support, many firms that would otherwise be viable are in extreme danger of going out of business. Today’s ruling could provide a lifeline to some of these companies, supporting them to trade beyond the coronavirus crisis.
“Time is now of the essence and it’s important those businesses that stand to benefit get the relevant support to allow them to realise their potential payments. To this end, we welcome the comments from the Association of British Insurers and the proactive approach the organisation and its members are taking to ensure small businesses affected are contacted.”