Great news for businesses but a catastrophe for insurers.

The news today that the Supreme Court has allowed the Financial Conduct Authority’s appeal on behalf of policyholders for coronavirus-related business interruption insurance losses.

In this blog and video, an important update on the business interruption insurance test case and what it means for thousands of policyholders will now have their claims for coronavirus-related business interruption losses paid.

Big news in the world of insurance today, with the Supreme Court delivering their judgement in the Financial Conduct Authority’s (FCA)’s business interruption insurance test case.

This line from the FCA’s press release: The Supreme Court 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.

If you’ve not been affected by this business interruption insurance saga, here’s the backstory for you.

Many of the businesses who suffered due to the Covid-19 pandemic suffered significant losses. Those that had insurance policies which included business interruption cover, made claims for those losses.

According to the FCA, most small business policies are focused on property damage and only have basic cover for business interruption as a consequence of property damage.

But some of these insurance policies also cover business interruption from other causes, in particular infectious or notifiable diseases (what is known as ‘disease clauses’) and prevention of access and public authority closures or restrictions (known as ‘prevention of access clauses’).

Some insurers accepted liability under these policies, due to these clauses.

Other insurers were less willing to accept liability, disputing the claims despite policyholders reasonably believing that they had valid cover in place. The FCA says this led to widespread concern about the lack of clarity and certainty.

So, the FCA brought a test case to court, designed to urgently clarify key issues of contractual uncertainty for as many policyholders and insurers as possible.

They picked a representative sample of 21 types of policy from eight different insurers. And then used these samples to put forward policyholders’ arguments to their best advantage in the public interest.

This test case ultimately has implications for 370,000 policyholders who held 700 types of policies issued by 60 insurers. In other words, it has a significant impact.

Last September, the High Court resolved most of the key issues in their judgement, but the FCA was unable to reach agreement, so the FCA and insurers made what are known as “leapfrog appeals” to the Supreme Court. Leapfrog because they didn’t go to the Court of Appeal first.

Today’s judgement from the Supreme Court is pretty complex. It runs to 112 pages and deals with myriad issues.

However, the FCA has helpfully summarised the key points of the judgement, so I’ll run through those now. There’s also a bulletin from the FCA’s legal team at Herbert Smith Freehills.

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   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 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.

Today’s judgement brings to an end the legal arguments under 14 types of policy issued by six insurers. It also ends legal arguments for what the FCA refers to as a substantial number of similar policies in the wider market, which will now lead to claims being successful.

For policyholders who were fighting their insurers over claims, today’s judgement means they won’t need to take individual legal action against their insurer. So, policyholders benefit from the FCA’s legal action, getting a fast solution to this legal uncertainty in the business interruption insurance market.

While the test case was never intended to cover all possible disputes between insurers and policyholders, it has resolved some of the key contractual uncertainties and ‘causation’ issues, which means policyholders and insurers have more clarity now. The judgement also doesn’t determine how much is payable under individual policies, although it does provide a basis for doing so.

Following the High Court’s judgment last year, insurers decided to pay claims on some policies and the FCA asked insurers to progress claims on other policies that the High Court said provided cover so that they could be settled quickly following the appeals to the Supreme Court. The FCA is now going to be working with insurers so that they rapidly conclude their claims processes on claims that the Supreme Court has said should be paid, providing interim payments wherever possible.

Each policy will need to be considered against the detailed judgment from the Supreme Court to understand what it means for that policy. Policyholders with affected claims should hear from their insurer soon. Policyholders with questions should approach their insurance broker, other advisers or insurer.

Policyholders who are still unhappy following their insurer’s assessment of their claim should be able to refer their claim to the Financial Ombudsman Service, which is the independent complaints resolver.

Next from the Supreme Court, following this judgement, is a set of declarations. That part of the process involves the FCA and insurers, and should happen pretty quickly.

The FCA is also going to publish a series of Q&As for policyholders, designed to assist them and their advisers in understanding the test case. And they are going to publish a list of business interruption policy types that potentially respond to the pandemic based on data that they will be gathering from insurers.

There’s draft guidance for policyholders on the FCA website, and it’s for how to prove the presence of coronavirus, which is a condition in certain types of policy.

We’ve also got a reaction from the CBI, the Confederation of British Industry. Flora Hamilton, CBI Financial Services Director, said:

At such an uncertain time, this court case provides much-needed clarity to companies across the UK, and relief for smaller firms struggling with cashflow. This is significant news for insurers, and regulators will need to work closely with the industry as policies, products and processes are updated to reflect this ruling.

I mentioned at the top of this blog that the judgement is a catastrophe for insurers.

One of the reasons the Supreme Court ruled against insurers was their reliance on a previous judgement, made in 2010, called ‘Orient Express’. That judgement was related to causation and the Supreme Court ruled the case was wrongly decided.

As a result, the judgement today has sider implications beyond the pandemic, and means that business interruption insurance policies are more likely to respond to other types of ‘wide area damage’, including storms or floods.

I should conclude by saying that insurers are not looking for every available loophole in a way to avoid meeting valid claims from policyholders.

This judgement today, I hope, shouldn’t damage our confidence in insurance policies to pay out when materials facts are fully disclosed during the application process, and when claims are submitted based on cover provided by the policy. Insurers do have a very high rate when it comes to paying out for valid claims. Please don’t let these legal wranglings between the FCA and insurers convince you otherwise.

Insurance is still a good thing to have in place.

Did you get caught up in this business interruption insurance saga?