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Last week the Supreme Court found in favour of the Financial Conduct Authority (FCA) and businesses in an appeal concerning an earlier judgment by the High Court. The case considered clauses in some business interruption insurance policies. The decision has been widely reported as a victory for businesses, with suggestions that thousands of businesses are in line for a payout.
But things aren’t quite that simple. Most businesses are unlikely to benefit, even if they held interruption policies. This Insight explains why.
What was the case about?
Business interruption insurance covers loss of income when firms are unable to operate as a result of unexpected events. The FCA and eight insurers went to court in 2020 to seek clarification about disputed words in various types of business interruption insurance policies. As set out in this Insight from last year, insurers were generally confident that only very specific policies were likely to cover losses arising from the pandemic. They had reviewed and updated wording after the 2002 SARS outbreak had alerted them to the potential costs of such an occurrence.
But many policy-holders questioned whether wording did in fact exclude them. Given the scale and complexity of the issues involved, the FCA launched a test case to provide clarity about a range of sets of wording.
What did the courts decide?
The High Court generally found in favour of the FCA and businesses. Both sides, though, sought further clarity through an appeal to the Supreme Court. That judgment came to different conclusions about some of the points at issue, but overall it widened the types of policies that should pay out. It also commented on how insurers should go about assessing the amount of compensation.
So why isn’t that a ‘landmark victory’?
The judgment is indeed a notable victory for consumers – but it only applies to particular wording in some clauses in some contracts. The FCA had earlier noted that the case would affect a maximum of 370,000 businesses that held one of 700 policies issued by 60 insurers. In 2018, there were almost six million businesses in the UK.
What isn’t clear though is what proportion of businesses with some form of interruption policy that figure represents. The general consensus is that few businesses overall will benefit. As early as March 2020, the Chancellor had said that “very few businesses have the requisite insurance”, while the Economic Secretary stated that 5% of businesses took out cover for non-specified diseases. After the latest judgment, Hiscox, one of the insurers directly involved, stated that fewer than a third of its business interruption policies would be affected.
How will businesses know?
Insurers should have written to all affected policy-holders in September 2020 to explain the situation.
Many insurers are updating their websites to set out the implications of the judgment for their policy-holders. Businesses may also contact their insurer or broker – but the level of interest in the case means that it may take some time to hear from them.
What will happen next?
- The FCA will publish questions and answers for policy-holders, as well as a list of policies that are “potentially” covered. Even given the broad decision of the High Court, insurers will need to review the content of individual policies.
- The FCA will also publish guidance about demonstrating the presence of coronavirus – a requirement of some policies.
- The Association of British Insurers has stated that insurers are working to deal with outstanding claims:
Customers who have made claims that are affected by the test case will be contacted by their insurer to discuss what the judgment means for their claim. All valid claims will be settled as soon as possible and in many cases the process of settling claims has begun.
What about other claims?
The decision is most unlikely to affect other business interruption claims. But customers who aren’t happy with how their claim has been handled may be eligible to follow the standard complaints procedure for financial services.
- Coronavirus: Problems with business interruption insurance, House of Commons Library.
- Coronavirus: Business interruption insurance, House of Commons Library.
- Business interruption insurance, Financial Conduct Authority.
- Insurance notes: Supreme Court hands down judgment in FCA’s Covid-19 Business Interruption Test Case, Herbert Smith Freehills.
- Coronavirus (COVID 19) Information Hub: Business insurance, Association of British Insurers.
About the author: Steve Browning is a researcher at the House of Commons Library, specialising in insurance.
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