Legal win for SMEs on Covid-19 insurance pay-outs

Tens of thousands of small businesses forced to close during the first lockdown are in line for insurance pay-outs, after the Financial Conduct Authority (FCA) won a test case set to cost insurers over £1bn in claims

The Supreme Court has substantially allowed the FCA’s appeal on behalf of a group of SME policyholders, meaning that claims for coronavirus-related business interruption losses will now be paid.

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 an estimated 370,000 policyholders holding 700 types of policies issued by 60 insurers.

The High Court’s judgment last September resolved most of these but, because the insurers and regulator were unable to reach agreement, insurers and the FCA made 'leapfrog' appeals to the Supreme Court.

The Supreme Court judgment, which runs to 112 pages has now provided the final ruling on several issues. Among them, it found that most of the  'disease' and 'prevention of access' clauses in the representative sample of 21 policy types provide cover in the circumstances of the pandemic, and that the trigger for cover caused policyholders’ losses.

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.

Response

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.’

The FCA will publish a set of Q&As for policyholders to assist them and their advisers in understanding the test case. The FCA will also publish a list of business interruption policy types that potentially respond to the pandemic based on data from insurers.

The FCA has published draft guidance for policyholders on how to prove the presence of coronavirus, which is a condition in certain types of policy. The consultation closes on 18 January, but the FCA is extending the closing date to 22 January only for any supplemental comments arising from the judgment. The FCA will issue finalised guidance as soon as possible after that.

Reaction

Richard Cameron-Williams, partner at BDO, said: ‘The Supreme Court judgment is a complete validation of the hard work that has been undertaken by the FCA and the legal representatives of the policyholders in challenging the coverage denials from insurers.

' Although there are likely to be nuances in the detail, the judgment rejected insurers arguments regarding pre-trigger trends – which may have substantially reduced the quantum of many claims – and broadened the scope for businesses which required an “inability to use” to trigger their policy.

‘While this gives finality to the framework for interpreting the cover afforded by the policies, the industry still faces a huge challenge in working through the vast numbers of claims, and it’s critical now that those businesses which are relying on the payments from their policies for survival, receive those pay-outs as soon as practically possible.’

Rob Benson, head of insurance, Grant Thornton UK, said: ‘The FCA has already issued guidance requiring insurers to make preparations to pay customers promptly following the conclusion of the appeals process, and it is vital that all valid claims are now settled as soon as possible in order to avoid causing any further damage to the industry’s reputation.

‘The fact that the judicial system has had to be further employed before these insurers have paid out will reinforce many stakeholders’ worst pre-existing opinions about the insurance industry.

‘Brokers have already been reconsidering which insurers to place business interruption cover with in light of the pandemic, and today’s judgment will further inform these decisions.

‘The Supreme Court’s ruling that the Orient Express case was wrongly decided removes one of the most significant precedents relating to business interruption, causation tests and liability.

‘All insurers will therefore need to review a huge volume of policy wordings in order to assess the resulting impact on their potential liabilities, and consider how best to respond to this.’

Useful links:

The Financial Conduct Authority v Arch Insurance (UK) Ltd and others

Summary of the judgment from FCA’s solicitors Herbert Smith Freehills

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