Government COVID-related restrictions resulted in significant financial losses being incurred by businesses, particularly SMEs. This has led to a number of insurance claims under business interruption (BI) insurance policies. The majority of BI claims were rejected by insurers primarily on the basis of policy wording. This article reviews the recent Supreme Court judgment handed down in respect of the test case on BI insurance claims.
BI typically provides insurance against the interruption of an insured’s business as a result of an insured peril. The problem faced by many businesses is that BI cover is typically bought alongside a property damage policy meaning that losses had to flow from an incident of property damage - typically not the case in most instances of COVID-19. Non-damage recovery therefore became problematic.
Insurers – who had reviewed and updated their policy wording after the 2002 SARS outbreak put them on notice - were confident that only very specific policies would cover losses arising from the pandemic. Many policy holders, suffering significant losses as a result of the pandemic and related government restrictions, challenged that position.
FCA Test Case
In recognition of the impact on insurers and policyholders of the uncertainty surrounding BI policies, in May last year the Financial Conduct Authority (FCA) with the cooperation of certain insurers, announced its intention to bring an expedited test case on behalf of policy holders (FCA v Arch Insurance (UK) Ltd and others). The case was brought using the Financial Markets Test Case Scheme.
This was the first such case to be heard under the Scheme which is designed to enable a claim of general importance to the financial markets to be determined in a test case without the need for a specific dispute between the parties.
Decision
The High Court judgment was handed down on 15th September and was largely in favour of the FCA. Subsequently 6 of the 8 insurance companies appealed that decision - as did the FCA in respect of those issues on which it had not succeeded. Proceedings were “leapfrogged” to the Supreme Court (bypassing the Court of Appeal) which handed down its judgment on 15th January 2021 - substantially allowing the FCA’s appeals and dismissing those of the insurers.
The judgment confirmed that the insurance clauses subject to the appeal provided cover for BI claims caused by COVID-19. The practical effect is that more policyholders will have valid claims and certain pay-outs will increase. The FCA estimates that some 370,000 policyholders will now be able to recover losses relating to businesses interruption caused by the pandemic. Whilst the Test Case concerned specific policy wording, it is thought that some 700 types of policy, and as many as 60 different insurers, could be affected.
In Conclusion
Whilst the Supreme Court decision was considered a victory for businesses there are several important points to note:
While 370,000 business policyholders may benefit there are more than 6,000,000 business in the UK. The number of businesses whose policies cover BI is unknown but the consensus is that the vast majority will not benefit from this decision.
The Supreme Court judgment does not amount to blanket acceptance of BI claims.
The judgment applies only to specific types of policy wording. Insurers will not be liable where policies contain explicit exclusions.
Businesses will therefore need to review their policies against the Supreme Court judgment.
Any policyholder must ensure that they comply with the notification requirements of their policies.
Losses will need to be proven and businesses will need to provide the requisite information and documentation (e.g. business contracts affected). The FCA is proposing to publish guidance about demonstrating the presence of coronavirus - a condition of certain policies.
Businesses should contact their insurer or broker to ascertain the position. Insurers are updating their websites to explain the implications of the Supreme Court decision for businesses.
Insurers will contact businesses whose claims are affected by the case. All valid claims will be settled as soon as possible and that process has begun. The FCA issued clear guidance to insurers in that regard.
The FCA will publish a policyholder Q&A and details of policies potentially covered (fca.org.uk).
