Background
Many policyholders whose businesses were affected by the Coronavirus pandemic suffered significant losses, resulting in large numbers of claims under business interruption (BI) policies.
Most SME policies are focused on property damage and only have basic cover for BI as a consequence of property damage. But some policies also cover BI from other causes, in particular infectious or notifiable diseases (‘disease clauses‘) and prevention of access and public authority closures or restrictions (‘prevention of access clauses‘). In some cases, insurers have accepted liability under these policies. In other cases, insurers have disputed liability while policyholders considered that they had cover leading to widespread concern about the lack of clarity and certainty.
The FCA’s aim in bringing the test case was to urgently clarify key issues of contractual uncertainty for as many policyholders and insurers as possible. The FCA did this by selecting a representative sample of 21 types of policy issued by eight insurers. The FCA’s role was to put forward policyholders’ arguments to their best advantage in the public interest. 370,000 policyholders were identified as holding 700 types of policies issued by 60 insurers that may be affected by the outcome of the test case.
The High Court’s judgment last September resolved most of the key issues but, because we were unable to reach agreement, insurers and the FCA made ‘leapfrog’ appeals to the Supreme Court (without going to the Court of Appeal first).
What does the judgement determine
The Supreme Court judgment is complex, runs to 112 pages and deals with many issues. In summary, 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 (Covid-19) 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.
It should be noted that the judgment focussed primarily on policies where notifiable diseases were not specified. It remains the case that the majority of business insurance policies specify covered diseases, with COVID-19 typically not included, and hence they do not provide cover for business interruption in respect of the Covid-19 pandemic.
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.
The FCA’s legal have published a bulletin on their website, which may be referred to for further detail.
What today’s judgment means for policyholders
This does open wider potential for claims within the Finishes and Interiors Sector as the judgment brings to an end legal arguments under 14 types of policy issued by six insurers, and a substantial number of similar policies in the wider market which will now lead to claims being successful.
The test case was not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers. The judgment does not determine how much is payable under individual policies, but provides much of the basis for doing so.
Following the High Court’s judgment, insurers decided to pay claims on some policies and the FCA has 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.
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 soon.
Next steps
In short, check your wording – if you have “disease clauses” or “prevention of access clauses” that referenced notifiable diseases without specifying the diseases which were covered and you can identify a quantifiable loss then you may be able to make a claim. If this is the case, make contact with your broker and explore with them the potential and how to structure your claim. Remember – Policyholders with questions should approach their broker, other advisers or insurer. Policyholders who remain unhappy following their insurer’s assessment of their claim may be able to refer their claim to the Financial Ombudsman Service, whose role is to resolve individual disputes.
If you need a second opinion or wish to discuss you clause/claim, please contact the FIS on 0121 707 0077 or sent outline details (including policy wording and an outline of what you believe you claim entitles you to) to info@thefis.org and we can arrange to have the policy reviewed.
The Supreme Court’s judgment will be distilled into a set of declarations. The FCA and Defendant insurers are working as quickly as possible with the Supreme Court to enable the Court to issue its declarations.
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 BI policy types that potentially respond to the pandemic based on data that we will be gathering 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.
The FCA will continue to keep policyholders appraised of matters as they progress, through its dedicated webpage.
Additional Information
The judgment is available on the Supreme Court’s website.
