Monday, 18 January 2021

COVID-19: Business Interruption Insurance Test Case Victory for Policyholders

On 15 January 2021, the Supreme Court delivered its judgement in an important test case for business interruption (BI) insurance and has substantially allowed an appeal on behalf of the policyholders.

Many thousands of policyholders will now have their claims for coronavirus-related BI losses paid.

The Financial Conduct Authority, in a press release, has said that tens of thousands of small firms and potentially hundreds of thousands of jobs were relying on this.

Most policies are focussed 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 accepted liability under these policies, but in other cases insurers disputed liability, leading to widespread lack of clarity and certainty.

To resolve this, the FCA brought a test case involving a representative sample of 21 types of policy issued by 8 insurance companies.

The Supreme Court found that a variety of insurance policy wordings covered BI losses resulting from the pandemic and public health measures taken by the government in response to the pandemic from March 2020.

The case involved complex legal issues and a summaryof the judgment is available on the Supreme Court’s website.

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 6 insurers) provide cover and that the pandemic and the government and public response caused the business interruption losses.

The 6 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.

The Supreme Court has ruled that cover may be available for partial closure of premises as well as full closure; 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 provide cover.

The judgment brings to an end legal arguments under 14 types of policy issued by 6 insurers, and a substantial number of similar policies in the wider market which will now lead to claims being successful. 

This will mean that more policyholders will have valid claims and some pay-outs will be higher.

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.

The FCA says it will work with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid and make 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.

Do remember though that this was a test case brought on the policies considered in that case - 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. 

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.

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 the FCA 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 FCA launched a consultation in December 2020 on that process, which 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.

One final thought from me – I assume we can expect the cost of this will end up being passed on to policyholders by increases to the cost of premiums in future.

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