FCA business interruption insurance test case — Supreme Court judgment
The Supreme Court handed down its judgment on the 15th January 2021 bringing good news to small businesses amidst the pandemic.
In June 2020 the Financial Conduct Authority brought the business interruption test case (“Test Case”) to the High Court to seek clarification on whether certain non-damage “disease clauses” and “prevention of action” clauses in business interruption insurance policies would cover policyholders for losses that arise as a result of the UK government coronavirus restrictions. Many insurers had refused to pay out business interruption claims on the basis that only specialist insurance policies were covered for losses suffered as a result of the coronavirus measures.
The defendants in the Test Case consisted of eight insurers who had similar sample policy wording in their business interruption insurance policies which the High Court considered and in September 2020 held that policyholders would be able to establish cover under policies containing “disease clauses” and that the “inability to use” premises would require a complete inability to use the premises rather than part of the premises. The defendants appealed the High Court’s judgment to the Supreme Court.
The Supreme Court judgment
We look at each clause that the Supreme Court considered:
Disease Clauses
Not all the effects of the coronavirus measures were insured under this clause. This clause only covers the effect of the particular case or cases of Covid-19 within the policyholders local area.
Prevention of Access and Hybrid Clauses
The term “inability to use” premises did not mean a complete inability to use them, but could also cover an inability to use part of them or an inability to use them for a discrete purpose.
Causation
A policyholder need only therefore show that there was at least one case of Covid-19 in their local area.
Pre-Trigger Losses
The Supreme Court overturned the High Court’s decision allowing insurers to use trends clauses to reduce the quantum of claims based on Covid-19 where some, but not all of the elements of the insured losses had occurred. For example, where a business had closed in reliance on Government advice before it subsequently became mandatory for them to do so.
What will be the impact of the Judgment?
This decision is positive for small businesses that suffered losses as a result of having to make difficult decisions to close or reopen their businesses as the UK government puts in place temporary measures. The Supreme Court has made it clear that losses are covered under the policy giving small businesses the relief they need during the pandemic.
Going forwards premiums for business interruption insurance may increase and insurers could lose their risk appetite for business interruption insurance for some policyholders. It could also mean that some businesses may find it difficult to renew their business interruption insurance at all or without the assistance of finance to help spread the cost. Insurance premium finance service providers will adapt and be providing more options or products for businesses that need assistance.
The Supreme Court judgment will not be welcomed by insurers who have been reported to have suffered substantial losses not only due to the pandemic but also the UK’s departure from the EU. The UK risks losing a substantial amount of business from the UK financial services market as the UK no longer has passporting rights into the EU.
