Hundreds of thousands of small businesses denied claims under business interruption (BI) insurance policies for losses arising from the pandemic are set to receive pay-outs, after the Financial Conduct Authority (FCA) won a test case against insurers in the High Court
Many policyholders whose businesses were affected by Covid-19 and who made claims on their insurance found providers disputed liability, notably where the claims focused on clauses covering infectious or notifiable diseases, and non-damage denial of access and public authority closures or restrictions (known as ‘denial of access clauses’).
The FCA’s test case, which used a representative sample of policy wordings issued by eight insurers, was aimed at clarifying key issues of contractual uncertainty for as many policyholders and insurers as possible, thus removing the need for businesses to resolve a number of the key issues individually with their insurers.
The regulator identified 700 types of policies across 60 different insurers and 370,000 policyholders as likely to be affected by the outcome of the test case. [The Financial Conduct Authority and Arch Insurance (UK) Ltd, Argenta Syndicate Management Ltd, Ecclesiastical Insurance Office, Hiscox Insurance Company Ltd, MS Amlin Underwriting Ltd, QBE Ltd, Royal & Sun Alliance Insurance, Zurich Insurance  EWHC 2448 (Comm)].
High Court judgment
The FCA argued for policyholders that the ‘disease’ and/or ‘denial of access’ clauses in the representative sample of policy wordings provide cover in the circumstances of the Covid-19 pandemic, and that the trigger for cover caused policyholders’ losses.
In a 150-page judgment, the court found that most, but not all, of the disease clauses in the sample provide cover. It also ruled that certain denial of access clauses in the sample provide cover, but this depends on the detailed wording of the clause and how the business was affected by the government response to the pandemic, including for example whether the business was subject to a mandatory closure order and whether the business was ordered to close completely.
The test case has also clarified that the Covid-19 pandemic and the government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid even if the policy provides cover.
For their part, the insurers relied heavily on a previous judgment called Orient Express in their submissions on causation. This was established during legal proceedings relating to a New Orleans hotel damaged during hurricane Katrina and which made a BI claim on the basis of the disruption caused by the weather. But the court ruled that the case does not reduce the liability of insurers where the policy provides cover.
However, the FCA cautioned that although the judgment will bring welcome news for many policyholders, it did not say that the eight defendant insurers are liable across all of the 21 different types of policy wording in the representative sample considered by the court.
Each policy needs to be considered against the detailed judgment to work out what it means for that policy. Policyholders with affected claims can expect to hear from their insurer within the next seven days.
The judgment does not determine how much is payable under individual policies, but will provide much of the basis for doing so.
It is possible that the judgment will be appealed, but any appeal does not preclude policyholders seeking to settle their claims with their insurer before the outcome of any appeal is known.
Christopher Woolard, FCA interim chief executive, said: ‘We are pleased that the court has substantially found in favour of the arguments we presented on the majority of the key issues. ‘Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders.
‘Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful.
‘Insurers should reflect on the clarity provided here and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgment says should be paid.
‘They should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.
‘If any parties do appeal the judgment, we would expect that to be done in as rapid a manner as possible in line with the agreement that we made with insurers at the start of this process. As we have recognised from the start of this case, thousands of small firms and potentially hundreds of thousands of jobs are relying on this.’
Mike Cherry, national chairman of the Federation of Small Businesses, said: ‘This ruling marks a big step forward. It can only be celebrated as a partial victory, however, as it still leaves many with little certainty around whether they will receive pay-outs for policies that have cost them thousands. And for many others with standard interruption cover, this judgement will have no bearing.
‘We echo the regulator’s call to insurers to reflect on the clarity provided by this judgement and do the right thing by policyholders, many of which are fearing for their futures after six months of serious disruption. They acted responsibly by taking out these policies, and having them honoured is crucial to encouraging more firms to do the right thing where insurance is concerned.’
Mel Stride, chair of the Treasury committee, emphasised the requirement for all those who should be paid to receive payments as soon as possible, and said the committee ‘will continue to monitor developments closely and press for further progress.’
Rafi Saville, forensic partner at accountancy firm HW Fisher, warned that it is now crucial for businesses to pay attention to the wording of any policies.
‘This a landmark case and one of the most controversial legal issues resulting from the coronavirus crisis.
‘The ruling is likely to considered as a partial victory and it could have a ripple effect for the entire marketplace, with its conclusions likely to be applied to other affected claims. However, the decision today could possibly add to the confusion experienced by many business owners.
‘Although the ruling may well be subject to an appeal, it becomes even more necessary for businesses to consult their insurance documentation with a view to understanding whether their Covid-related losses will be covered,’ Saville said.
Steven Skiba, legal director and commercial disputes specialist at law firm Shakespeare Martineau, pointed out that as well as giving guidance on how to interpret the wording of policies, the test case means both insurers and policyholders now have clarity that government-mandated measures such as lockdown count as a cause for business interruption.
Skiba said: ‘The issue of whether business interruption policies cover losses caused by the pandemic was one of the most controversial legal issues resulting from the coronavirus crisis, and this ruling could potentially cost insurers billions of pounds.
‘One of the biggest takeaways from the case is that the correct approach for assessing loss is to look at where the business would have been had the pandemic not happened.’
‘Before making a business interruption claim, it’s essential to seek expert support in gathering together the right supporting evidence for aspects such as lost revenues, forecasted revenues and any expenses incurred.
‘Paying close attention to information for the claims process from individual insurers is also vital to ensure the correct formatting and timings are followed, and to boost chances of claims going smoothly. Policyholders should then also carefully consider how the High Court’s judgment applies to the wording of their individual policies.’
Paul Smethurst, partner and forensic investigation specialist at Menzies, said that businesses may find that quantifying the losses caused by any coronavirus-related business interruption is not be straightforward.
Smethurst said: ‘As well as considering any obvious loss of profits based on a comparison with normal trading activity, they should consider any contracts that were lost, or failed to convert, due to the lockdown restrictions.
‘Businesses may have received enquiries that they were unable to fulfil, or respond to within the required timeframe, and these projected losses should also be taken into account.
‘Some businesses in the hospitality and leisure industry, such as pubs and restaurants, could lose out on quantity discounts that they might have expected to earn under normal circumstances. This could result in increased costs and reduced profitability going forward.
‘With the prospect of more local lockdowns in the months ahead, businesses must continue to keep detailed records of their commercial dealings in a format that could assist them in bringing further claims in a timely way in the future.’
The Financial Conduct Authority and Arch Insurance (UK) Ltd, Argenta Syndicate Management Ltd, Ecclesiastical Insurance Office, Hiscox Insurance Company Ltd, MS Amlin Underwriting Ltd, QBE Ltd, Royal & Sun Alliance Insurance, Zurich Insurance  EWHC 2448 (Comm)