Business interruption insurance in the pandemic

Background to the case

Many businesses adversely affected by the coronavirus pandemic have turned to their business interruption insurance policies in the hope that they would provide some much needed financial support. Many SMEs unfortunately soon found that their policies were restricted to losses caused by property damage and so did not cover the negative effects of the pandemic on their businesses, but others were relieved to discover that they held policies providing more extensive cover for business interruption including:

• ‘disease clauses’ which provide insurance cover for loss caused by the occurrence of a notifiable disease at, or within a specified distance of, the relevant business premises;
• ‘prevention of access clauses’ which cover losses due to prevention or hindrance of access to, or use of, the relevant premises as a result of government or local authority restrictions;
• hybrid clauses – covering losses due to prevention or hindrance of access to, or use of, premises as a result of government or local authority restrictions relating to a notifiable disease.

However, even those policyholders with more widely-drawn policies soon realised that making a successful claim would be anything but straightforward. Although in some cases insurers accepted liability, in many more cases liability was denied based on the insurers’ narrow interpretation of the policy wording. This led to disagreements with policyholders who felt their losses should be covered, resulting in widespread uncertainty and a general lack of clarity across an issue affecting many thousands of businesses.

In order to resolve this, the FCA brought a test case for the benefit of policyholders against eight insurance companies in relation to a representative sample of policy clauses and has taken it all the way to Supreme Court. Although the test case involved a sample of only 21 types of policy, it is estimated that 700 different policies held by 370,000 policyholders and issued by 60 insurers could be affected by the outcome.

The key findings

The much anticipated Supreme Court decision was handed down on Friday 15 January 2021 and is good news for businesses holding these types of policy.  The Supreme Court’s key findings include determinations that:

• cover may be available to policyholders for partial closure of business premises as well as for an inability to use business premises for a certain part of their business activities – for example, a restaurant which has continued operating a take-away service but has had to suspend its dine-in offering during the pandemic may now be entitled to cover;
• cover may be available for mandatory closure orders even if they were not legally binding;
• disease clauses will cover interruption caused by the wider government response to the pandemic as well as losses caused by cases in the local area, provided that there has been at least one case of coronavirus within the radius specified by the policy. Given the prevalence of disease across the country it is likely that most policyholders with this type of clause will be entitled to cover;
• valid claims should not be reduced because the loss would have resulted in any event from the pandemic;
• claims should not be reduced to reflect a downturn in business which had occurred as a result of the pandemic but before the specific insured peril occurred – losses should be calculated as if there had been no coronavirus pandemic at all.

Action to be taken by affected businesses

As a direct result of this decision, more policyholders will now have valid claims and some pay-outs by insurers to affected businesses will be higher. Businesses affected by the pandemic which have so far failed to recover under this type of policy – because they believed or were told that they did not have a valid claim – should revisit their policies in light of this decision and, if appropriate, contact their broker or insurer.

Businesses with ongoing claims should also consider whether the value of their claims should be increased as a result of this decision. In particular, any policyholder who is currently considering a full and final settlement offer from their insurer should seek advice before accepting the offer.

Policyholders who have previously launched a claim or a complaint with their insurer can expect to hear from them by Friday 22 January 2021. Any policyholders who wish to launch a claim or complaint against their insurer or refer a complaint to the Financial Ombudsman Service may continue to do so. Those that already have complaints at the FOS should await further information from the FOS.

Help from the FCA

The FCA has published a policy checker, which allows businesses to check whether the wording of their policy matches those considered in the test case, policyholder FAQs including general advice on how to make a claim and draft guidance for policyholders on how to prove the presence of COVID-19 if required by the relevant policy. It also plans to publish a list of business interruption policies that potentially respond to the pandemic based on data it will gather from insurers. The Supreme Court judgment will be shortly be distilled into a series of declarations by the FCA. These and other developments can be followed on the FCA’s dedicated business interruption insurance webpage.