Business interruption insurance test case judgment – some good news at last

The Supreme Court has today (15 January 2021) delivered judgment in the Financial Conduct Authority’s (FCA) business interruption insurance test case.

Responding to the judgment (a copy of which you can download below), the FCA’s press release states as follows:

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, commented:

“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.”

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 today’s judgment decides

Today’s Supreme Court judgment is complex, runs to 112 pages and deals with many issues. A summary of the key points is below. The FCA’s legal team at Herbert Smith Freehills have published a bulletin on their website, which may be referred to for further detail.

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.

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.

What today’s judgment means for policyholders

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 FCA’s decision to bring the test case has removed the need for policyholders to resolve many key issues individually with their insurers.  It enabled them to benefit from the expert legal team assembled by the FCA, providing a comparatively quick and cost-effective solution to the legal uncertainty in the business interruption insurance market.

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. Today’s 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 we 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.

We will now work 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 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.

Next steps

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.

Commenting on the judgment, Richard Leedham, Partner at Mishcon de Reya who represented the Hiscox Action Group has said:

The judgment should be a massive boost to all businesses reeling from a third lockdown who can now demand their claims are paid. In a detailed analysis of insurance law on proximate cause and causation, the Supreme Court has clearly and efficiently torpedoed the academic and convoluted arguments of insurers and laid down clear guidance as to how these claims should be paid.  In commenting that it is no surprise that the Court has come to this view, in an even more comprehensive way than the Commercial Court did, the Supreme Court has also paved the way for additional claims for delayed payment. It is a resounding but long overdue success for business, although tragically not to be enjoyed by those that have already gone.  

UKHospitality chief executive Kate Nicholls has commented:

Businesses took out policies in good faith and it is right that insurers stick to these agreements and honour claims. Should this result in pay-outs to policy holders – a point which is still not clear at present – this could provide an additional lifeline that many businesses desperately need. It could be the difference between keeping staff members on or being forced to let them go; it could mean the survival of a business that was previously staring collapse in the face ….. Hopefully, this outcome will give many small businesses in the hospitality sector peace of mind and possibly some financial support they need to begin rebuilding.

Emma McClarkin, Chief Executive of the British Beer & Pub Association has added:

This landmark ruling is great news for pubs and brewers who hadn’t received payouts on Business Interruption insurance thus far. It is a glimmer of hope in what is an incredibly tough time for our sector. The lack of payouts over insurance claims has added to the terrible woes and uncertainty our sector has faced over the last 10 months. It is why the BBPA backed the FCA in its campaign to resolve the issue. While our sector is far from out the woods yet, this announcement helps resolve some of the uncertainty it has faced on insurance cover and is warmly welcome.

Night Time Industries Association (NTIA) Chief Executive Michael Kill has said:

This is a moral victory for thousands of businesses that have been placed under unnecessary financial hardship because of the legal process that has been drawn out much longer than was necessary by insurers ….. It is now very important that insurers do the right thing and expedite the payment process.

Philip Kolvin QC, advisor to the NTIA, has added:

This resounding, common sense judgment represents a wholesale rejection of the insurers’ Kafkaesque interpretation of their own policies.  “Insurance till you need it” is a poor advert for the insurance industry: the Supreme Court is to be congratulated for seeing through it.  We have to thank the brilliant team at the Financial Conduct Authority. We placed trust in them and they repaid it with a performance of unswerving determination and professionalism. At a time when the industry feels bruised and let down by the State, it is a relief to see a national body working so hard to right a wrong. I am delighted that that those who took our advice and let the Authority run the case on their behalf have secured this result without having to pay a penny to lawyers or litigation insurers. Their compensation will be paid without deduction, which will be a blessing in these difficult times. Industry, the FCA, government and insurers must now all pull together to ensure that businesses can get insurance against pandemics that pays out promptly without the need for litigation or even the involvement of the legal profession. This litigation-fest must never happen again.