Business Continuity Cover: Businesses Jubilant at Ruling
The business community at home – and businesses abroad who are insured in the UK insurance market - breathed a sigh of relief following the Supreme Court ruling that insurance companies must pay up to those forced to close during the first national pandemic lockdown.
Following the long-awaited ruling, insurers now face a massive bill under the terms of their business interruption cover, which many had argued did not apply to covid-related losses. The approach adopted by the insurers led to formal proceedings being brought by the financial regulator.
What’s the background?
Many insurance policies extend coverage beyond damage to matters other than physical damage, such as business interruption losses relating to infectious or notifiable diseases. But when businesses submitted claims under their policies during the first lockdown in March 2020, a number of insurers contended that the pandemic was beyond scope and did not amount to an event triggering payment under the policy. Their claims were refused.
The case was brought by the Financial Conduct Authority (FCA) following the lack of clarity around whether non-damage business interruption insurance covered rental income losses during the covid-induced lockdown. It has created a lot of uncertainty and financial hardship for businesses while they awaited the outcome.
In its proceedings, the FCA raised 21 sample wordings from eight insurance companies and asked for a determination on the issues of principle on coverage and causation within those wordings. The FCA substantially won its case, though it is important to note that the ruling does not cover all wordings. That said, the sample is sufficient to allow everyone to gain an understanding of just about all policies, according to Clive O’Connell, head of insurance and reinsurance at McCarthy Denning. Individual policies must still be carefully checked by the parties concerned.
The practical and financial outcome of the ruling will mean hundreds of millions of pounds due to insured businesses, and the rescue of countless jobs. The FCA earlier estimated that the decision would impact some 370,000 policies across all industries and sectors.
The FCA’s executive director of consumers and competition, Sheldon Mills, said when the ruling was handed down: “Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat… [the] judgment decisively removes many of the roadblocks to claims by policyholders.
Insurance companies are now facing pressure from the regulator to process payment of the outstanding claims quickly, with interim payments being made wherever possible. They will likely also be seeing a further raft of claims and notifications of potential claims by policyholders given that the UK is in lockdown 3.0, and a shorter lockdown was imposed last November.
Next steps
The Supreme Court is to issue a set of declarations from its 112-page judgment.
The FCA says it will publish a set of Q&As for policyholders and their advisers; and will also publish a list of BI policy types that potentially respond to the pandemic based on data to be gathered from insurers.
The regulator will also publish guidance for policyholders on how to prove the presence of coronavirus (a condition in some types of policy).
1The Financial Conduct Authority v Arch and Others [2020] EWHC 2448 (Comm)
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