UK insurers will be forced to pay out billions in business interruption (BI) claims triggered by the COVID-19 pandemic after the UK’s highest court ruled in favour of policyholders.
On January 15, 2021, the UK Supreme Court found in favour of small firms receiving payments from BI policies, in a ruling that upheld a previous judgment made by the UK High Court in September 2020 in a test case on the issue.
The 2020 test case, presented by the Financial Conduct Authority (FCA), was based on 21 samples of policy wordings issued by eight insurers. The High Court largely ruled in favour of policyholders, deciding that most of the disease clauses provide cover for losses connected to COVID-19.
In November 2020, the Supreme Court granted permission for the FCA and a group of re/insurers including Hiscox, RSA, MS Amlin and Arch to appeal the decision.
But in mid-January, the Supreme Court backed the original ruling, publishing a complex judgment that ran to 112 pages and dealt with many issues.
The FCA has estimated that around 370,000 small businesses will be affected by the outcome and that claims resulting from BI claims could reach more than £1 billion.
Arguing in favour of policyholders, the FCA said that the ‘disease’ and ‘prevention of access’ clauses in the representative policy samples provided cover in the circumstances of the coronavirus pandemic.
The High Court judgment last September said that most of the disease clauses and certain prevention of access clauses provided cover and that the pandemic and the government and public response caused the BI losses.
Six insurers appealed the conclusions for 11 of the policy types, but the Supreme Court has dismissed those appeals for different reasons from those of the High Court.
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 provided cover.
This means that more policyholders will have valid claims and some payouts will be higher.
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.
Each policy will need to be considered against the detailed court judgment to work out what it means for that policy. The FCA is set to publish a set of Q&As for policyholders to assist them in understanding the test case, as well as a list of BI policy types that potentially respond to the pandemic based on data that it will gather from insurers.
“We will be working with insurers to ensure that they now move quickly to pay claims.” Sheldon Mills, FCA
Sheldon Mills, executive director, Consumers and Competition at the FCA, said: “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 the January 15, 2021 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.”
Insurers and industry bodies have warned that the judgment could have “huge ramifications” for insurance beyond BI.
Hiscox, which participated in the FCA’s test case alongside seven other insurers, noted that the ruling has added a further $48 million net of reinsurance to 2020 COVID-19 estimates for BI, and started the claims settlement process.
The re/insurer said fewer than one third of its 34,000 UK BI policies may respond as a result of the judgment. In a statement it said: “The Supreme Court largely confirms the outcome of the High Court’s ruling that, except in rare circumstances, cover is restricted to Hiscox policyholders who were mandatorily closed.
“As previously stated, Hiscox’s exposure to potential BI claims arising from further UK government restrictions to contain the spread of COVID-19 has been running off at approximately 8 percent per month from June 2020, with residual exposure to be fully run off by the end of June 2021.
“Following the judgment, the group estimates exposure to restrictions already announced in 2021 at less than $20 million if restrictions extend to the end of March.”
Matt Connell, director of policy and public affairs at the Chartered Insurance Institute (CII), said: “This pandemic has had a disastrous effect on our society, our way of life and our economy, so I genuinely hope this will provide a conclusion to a difficult journey many people and businesses have had to experience over the last year.”
However, he warned: “The judgment will have huge ramifications for insurance beyond BI and it is important this is also looked at as openly as possible.
“Clients deserve this transparency at the point of purchase—not after a legal battle.”
Christopher Croft, LIIBA
“The CII has long discussed the importance of trust and confidence in insurance and we believe both can be restored if this process remains open and transparent to the public,” he added.
The message was echoed by Christopher Croft, CEO of the London & International Insurance Brokers’ Association, who argued that “clients deserve this transparency at the point of purchase—not after a legal battle”.
“The industry’s reputation has been damaged by the debate over exactly what is or is not insured, and we need to think hard about how we redress that and introduce absolute clarity into the product our customers buy,” said Croft.
“Everyone in the insurance value chain needs to be committed to ensuring that customers understand exactly what it is they are getting, in language they recognise and presented in a way which makes sense to them.”
Image: Envato Elements / dolgachov