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Business interruption claims and COVID-19: Good news for SME’s

Andrew Koffman

The High Court judgment, on Tuesday 15th September 2020, in the test case between the Financial Conduct Authority (FCA), on behalf of a number of policyholders, and various insurance companies over business interruption and COVID-19 has been hailed as a lifeline for SMEs.

Many SMEs will be very relieved at the result.  The FCA estimated that 370,000 businesses could be affected by the test case; however not all will have been successful. Two out of 8 insurers successfully defended the claims against them.

Now, following a breakdown of talks between the FCA and the insurers as to implementation of the judgment, the insurers who were unsuccessful (and also the FCA) have been granted permission to appeal direct to the Supreme Court, confirmed on Friday 2nd October 2020.

The FCA intends to continue discussions with the insurers and action groups in the meantime.

Pending the appeals, the position is as follows.

There is a huge amount of detail to be navigated (the judgment is 580 paragraphs long) and the outcome of any claim will always hinge on the wording of the policy and the circumstances of the particular business.

The test case involved 21 sample forms of policy wording taken from 8 different insurers’ policies.

In each case the court interpreted the wording according to normal principles of contract law.

Some of the policy clauses related to business interruption caused by disease, some to interruption caused by the denial of access to trading premises by Government regulations due to the pandemic and some were a hybrid of both types.

Most of the FCA’s arguments succeeded.  However, some insurance company share prices rose after the judgment was issued, suggesting a degree of relief among the insurance profession that the result was better for them than it might have been.

The appeals to the Supreme Court are likely to be heard by the year-end if the issues are not resolved beforehand.  For now there remains uncertainty as to the eventual outcome and whether insurers will pay out under policies pending the appeals.  The current impasse suggests that many of them will not.

A number of arguments relied upon by insurers were rejected by the High Court, examples being:

  • An attempt to distinguish between a localised outbreak of disease and a much wider pandemic where the policy wording appears to provide cover for the former only
  • An argument that the denial of access was the real reason for closure where the policy required disease to have been the cause
  • That they could rely on “trends clauses” (providing for the adjustment of profit/revenue figures to reflect underlying trends of the business when calculating loss) to adjust such figures downwards due to other aspects of the pandemic, e.g. in a claim for disease cover, the economic impact of the lockdown was a separate factor reducing the loss suffered by the business.

The FCA were less successful on the question whether the loss of business was due to Government advice on social distancing (e.g. hindrance due to queuing to comply with the 2-metre rule) rather than regulations that were imposed.  That did not amount to denial of access to premises.

Many other aspects of the 21 sample policies were also considered and ruled on.

There is a considerable way to go before the case can be said to be finally resolved.

It also remains to be seen what impact the decision (and of course the outcome of the appeals if they proceed) will have on policy wordings going forward.

However, as things currently stand, while many SMEs will definitely be better off if the original decision is upheld, that is by no means certain.  With their survival at stake in many cases, the uncertainty is set to continue for a while longer.

Business owners who have made a claim, or are intending to claim, for business interruption insurance will wish to review their position in the light of the decision, having regard to their own policy wording and other circumstances.

The insurer may up to now have denied liability.  The result of the court case may have weakened or even eradicated their grounds for doing so (again pending the appeals) but the business owner will need to be proactive.  Insurers were expected to contact their policyholders within 7 days of the original judgment and any responses should be considered carefully.

If in doubt, legal advice should be taken.

If you a have a business interruption claim and your insurer is disputing liability or loss we will be pleased to discuss it with you:

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Andrew Koffman

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