Insurers’ appeals against the business interruption test case brought by the Financial Conduct Authority (FCA) failed at the final hurdle this morning, with the Supreme Court backing policyholders whose Covid-19 claims were dismissed last year.
The Supreme Court upheld the High Court’s judgment in September that largely went in favour of policyholders who argued that insurers had failed to cover legitimate claims on business interruption policies arising from a pandemic.
The FCA filed the test case against eight insurers, after identifying their business interruption policy wordings as capturing the majority of the key issues that could be at dispute in the legal proceedings brought in response to rejections of Covid-19 claims.
Hearings took place in July, representing a rapid turnaround for a case of this scale, and the insurance industry has waited anxiously for the result.
Much of the litigation centered on business interruption policy add-ons, which covered losses resulting from any occurance of a notifiable disease within a specified geographical radius, typically 25 miles, of the insured premises.
Many insurers refused to honour policies when the UK entered lockdown in March 2020, arguing that they didn’t cover global pandemics.
The FCA argued for policyholders that the ‘disease’ and ‘prevention of access’ clauses in the representative sample of 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 in September said that most of the disease clauses and certain prevention of access clauses provide cover and that the pandemic and the government and public response caused the business interruption losses.
Six insurers appealed against those conclusions for a number of the disputed policy types, but the Supreme Court dismissed those appeals, for different reasons from those of the High Court.
On the FCA’s appeal, the Supreme Court ruled that business interruption cover may be available for partial closure of premises and as full closure, and for mandatory closure orders that were not legally binding.
The Supreme Court also ruled 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.
Sheldon Mills, executive director for consumers and competition at the FCA, comments: “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.”
‘An important and keenly awaited decision’
Responding to the judgment, Roger Franklin, a committee member for the London Solicitors Litigation Association (LSLA) and head of insurance litigation at Edwin Coe, called this “an important and keenly awaited decision for the many thousands of commercial policyholders seeking to recover losses caused by Covid 19”.
Franklin continues: “It’s been a desperate time for small businesses, and this positive judgment is like the arrival of a financial vaccine for them. The FCA is to be commended for taking the initiative in clarifying these issues, as are the lawyers involved (many of whom are LSLA members) and the court system for bringing the case to such a swift conclusion.”
He adds: “It’s also important to recall that the potential claims considered in the judgment arose out of the first lockdown. There have since been two more lockdowns, so the financial hit to the insurance industry will be significant.”
“From an insurance litigation perspective, the decision is highly relevant not just in the context of the current pandemic, but for the cover provided for general wide area damage claims, and insurers will no doubt be reviewing policy wordings and special circumstances clauses over the coming weeks.”
Huw Evans, director general of the Association of British Insurers (ABI), focuses his reaction on what affected policyholders can expect going forward.
He says: “The insurance industry expects to pay out over £1.8 billion 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.”
Evans adds: “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.”