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Business Interruption insurance

The FCA Business Interruption Test Case

Introduction

On the 13th July 2021, the Supreme Court ordered that the High Court declarations made in the Business Interruption test case be varied, following its judgment on the 15th January 2021. These declarations record the outcome of the judgments made and determine whether the test case policies potentially cover Business Interruption losses arising from the pandemic and in what circumstances.

The judgment provides both policyholders and insurers with clarity as to whether customers have cover, can make a valid claim and if so, the amount due to them. Insurers remain obligated to contact all policyholders who have wordings that are the subject of the test case. Sutton Winson will also contact all our clients who we believe have a potential claim for Business Interruption losses sustained due to COVID-19, as a result of the Court’s judgement.

Below is a summary of the judgment and facts leading to the case being brought.

Background

Following the outbreak of COVID-19 the body representing insurers, The Association of British Insurers’ (ABI), issued a statement indicating:

  • It’s never been the intention of the insurance market to pay for the consequences of a pandemic
  • Protection ought to be provided by Governments or separately funded schemes similar to arrangements put in place for Terrorism & Flood in the UK
  • It’s unlikely that insurers have sufficient funds to cover such losses 

What quickly became apparent was that certain insurers non damage extensions to their Business Interruption (BI) wordings (i.e. Denial of Access, Notifiable Diseases and Actions of Public Authorities)  were not as clear as others. In consequence, a legal challenge by the regulator, the FCA, was inevitable.

The Test Case 

Whilst the FCA acknowledged the majority of policyholders didn’t have cover, their focus, as stated above, was on the Non-Damage BI extensions of some insurer’s wordings where they believed ambiguity existed and potential cover was provided.

In May 2020, the FCA announced their intention to obtain a court declaration for a test case and to resolve contractual uncertainty around BI cover. The FCA said they had identified a representative sample of policy wordings to be examined in the test case and insurers had been invited to participate in the proceedings.

In July 2020, an 8 day court hearing took place with a judgement being handed down on the 15th September 2020. Given that certain insurers had said they would appeal the High Court decision, certificates were granted for a ‘leapfrog’ appeal to the Supreme Court. This was the fastest way to get legal clarity for all parties and to enable pay-outs on eligible claims.

Sutton Winson's (SW) response

At SW, we followed developments closely and set up a dedicated team to ensure a flow of information both to our customers and staff, posting regular updates on our website.

We were very pleased that the regulator stepped in to bring the test case before the courts and for the ultimate clarity the judgement now brings.

What did the Supreme Court decide?

On the 13th July 2021, the Supreme Court ordered that the High Court declarations made in the Business Interruption test case be varied, following its judgment on the 15th January 2021.

How have the insurers reacted to the judgement?

The ABI fully support all valid claims being settled as quickly as possible.

Managing expectations

Unfortunately some of the recent Press reports have not provided the context or clarity required. As a result, expectations of an insurer pay-out may have been raised unnecessarily.

It is worth noting that the FCA did not appeal the original High Court decision where certain insurer policy wordings were deemed to be clearly constructed. As a result, cover for the pandemic is excluded. Therefore, for these policyholders, the Supreme Court ruling will unfortunately not change anything.

The majority of UK businesses will still find that their BI cover won’t provide cover for the consequences of the pandemic. The court’s decision only applies to a limited number of policies which inadvertently included an element of cover.

The future

Those insurers who were identified as having ‘ambiguous’ policy wordings and who ‘unintentionally’ provided cover, have already taken steps to amend their policy wordings. Therefore, the insurance industry now has to work closely with the government to provide a long term solution, to help businesses cope with the financial consequences of any future pandemic.

Next steps

The implications for the small number of our customers is now receiving our immediate attention. We will shortly be communicating more fully with those customers who are impacted by the Supreme Court judgement.

Useful links

  • For guidance proving the presence of COVID-19 in a particular area, based on the Supreme Court’s declarations, click here to view the FCA's guidance.

  • For checking whether your insurance policy may cover business interruption losses due to COVID-19, click here to use the FCA's policy checker.

  • For the latest public information from the UK Government click here

  • For health advice and guidance from the NHS click here

  • For up-to-date travel advice from the Foreign & Commonwealth Office (FCO) click here

  • For the most recent information from the World Health Organisation (WHO) click here

  • For further information about UK Government support for businesses, click here

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