The High Court has ruled that a majority of business owners who have Business Interruption Insurance (BII) and were forced to close during the Coronavirus lockdown may now be entitled to be compensated by their insurers. Although the test case will not provide answers for all possible disputes, it was brought after several insurers suggested that their policies did not provide cover arising from the Coronavirus pandemic. The case provides some key clarity for contractual and ‘causation’ issues and in many cases, businesses that were informed that they were not covered by the effects of Covid-19 will see that decision reversed and may now receive cover and compensation.
An estimated 370,000 policyholders are affected by this decision.
The case was brought by the Financial Conduct Authority (FCA), whose interim CEO said in a press statement:
‘We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market. 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. We are grateful to the court for delivering the judgment quickly and the speed with which it was reached reflects well on all parties.
‘Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. 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.’
What caused the FCA to bring the case?
In March 2020, British Prime Minister, Boris Johnson put the UK into lockdown. All but essential businesses were forced to close, and people were only allowed to leave their home once a day to exercise or shop for food or medicine.
Although almost all businesses have been open since mid-July, many are experiencing less custom as people avoid busy shops and job losses mean there is less discretionary money to spend.
Although most SME BII policies only cover property damage, some policies also cover business interruption resulting from other causes, including infectious or notifiable diseases (‘disease clauses’) and non-damage denial of access and public authority closures or restrictions (‘denial of access clauses’).
Insurers have paid out on some BII policies; however, there are many policies where insurers have not accepted liability where policyholders believe it exists. This had led to stress and uncertainty at a time when many businesses are fighting to stay afloat.
To quickly clarify policies and end confusion and uncertainty, the FCA brought a test case before the High Court. A representative sample of policy wordings issued by eight insurers was chosen to be presented to the Court. The FCA’s role was to put forward policyholders’ arguments to their best advantage in the public interest.
The Court’s decision
To establish insurer liability under the policy sample wording, the FCA argued 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.
The Court agreed, stating most, but not all, of the disease clauses in the samples, led to insurance cover. Regarding the ‘denial of access’ clauses contained in the sample, the Court declared that some did provide cover, but it depended on (i) the exact wording of the clause and (ii) how the business was affected by the Government’s response to the pandemic.
It was also clarified that the pandemic and the Government’s response were a single cause of the covered loss, a key requirement for the policy to pay out, even if cover is established.
What you should do if you have BII that has a disease and/or denial of access clause?
Insurers will now examine individual policies against the details of the judgment (which runs to 150 pages). The case has removed the need for SMEs to resolve key issues, such as whether a single cause exists, with their insurer. The case has resolved many uncertainties around policy wording and ‘causation’ issues. However, the Court did not determine if liability is present in individual cases or, if it is present, how much each policy should pay out.
The case may be appealed. If it is, the FCA has urged insurers to do this quickly as many businesses and their employees desperately need to know if their BII policy will pay out. In the meantime, the FCA has urged policyholders to contact their legal representatives for ongoing advice as this matter progresses.
At Quastels, we are committed to supporting SMEs who have been affected by Covid-19 and require expert legal advice and representation. Please contact Robert Kay, head of the Litigation and Dispute Resolution team, on 020 7908 2525 if you require further assistance.
Please note – this article does not constitute legal advice.