Last week saw the announcement from the Supreme Court of the results of an appeal by the Financial Conduct Authority and various insurance companies, to determine the effect of policy wordings on business interruption insurance.

The Supreme Court ruled in favour of policyholders, meaning many will now have claims for losses due to Business Interruption, as a result of the virus, paid out where policies had the notifiable disease or pandemic clauses.

The main issues that were resolved included:

  • What sort of ‘government order’ triggers the insurance ? The Supreme Court held that instructions given by a public authority may amount to a “restriction imposed” if there is the threat of legal compulsion or it is mandatory and in clear terms.  Insurance companies and the first case in the matter had stated that there would need to be a threat of legal consequence if there was not compliance.  However the Supreme Court decided that compliance did not need to be under this threat.
  • Less is more, businesses don’t need to be investigators. It was decided that it was sufficient for a policyholder to show that at the time of any relevant Government measure where there was at least one case of COVID-19 within the geographical area covered by the clause, rather than having to show a specific case had caused the businesses to close.
  • Trading figures shouldn’t include periods in which businesses were already affected by the pandemic. When a business attempts to claim, the standard method of calculating losses was to look to an earlier period of trading.  The Supreme Court ruled that when calculating these losses, the insurers must not include any circumstances originating or caused by the ‘insured peril’.  So for example, the cover could not be denied due to a downturn previous to closure, caused by the pandemic.
  • Lockdowns rather than being otherwise directly affected by the virus will allow businesses to claim. Most importantly, a previous case regarding how policyholders could claim against closure or loss was overturned, meaning that although a business has not suffered closure or losses due to a direct effect of the coronavirus, but rather due to the lockdown of an area, insurance companies cannot deny the claim.

The decision, affecting thousands of businesses across the UK, is definitely welcome news, especially those in the hospitality industry, who were forced to close last March.  It is estimated that over 370,000 small businesses have been affected by the refusal to pay out on claims, totalling between £3.7 billion and £7.4 billion.  This is a colossal impact to our economy and we hope that this decision will help many more businesses survive.

 

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