Policyholders who had business interruption (BI) claims linked to the coronavirus pandemic but rejected by insurers have today been vindicated.

This is due to the High Court having ruled in favour of the FCA’s interpretation of non-damage BI policy wordings across the majority of key contention areas.

Today (15 September 2020), the High Court has handed down its verdict on the much-anticipated test case surrounding the clarity, meaning and interpretation of non-damage BI policy wordings for Covid-19 related claims.

In the 162-page judgment, Lord Justice Flaux and Mr Justice Butcher agree with the FCA’s arguments for a number of the case’s primary concerns, for example its interpretation of coverage triggers for disease and hybrid causes, certain denial of access and public authority clauses as well as its view on causation and trends clauses. 

Here, the FCA argued on behalf of policyholders that the ‘disease’ or ‘denial of access’ clauses in the representative sample of 21 policy wordings from eight different insurers provide cover in the circumstances of the Covid-19 pandemic.

Despite generally agreeing with this stance and confirming that there is cover arising from a number of the wordings, the judgment also said that not all participating insurers will be liable - each policy will need to be reviewed in conjunction with the published judgment.

The test case has also defined that the coronavirus pandemic and the government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid, even if the policy provides cover.

Significant step

Christopher Woolard, interim chief executive of the FCA, said: ”We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market. We are pleased that the Court has substantially found in favour of the arguments we presented on the majority of the key issues.

”Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders. We are grateful to the court for delivering the judgment quickly and the speed with which it was reached reflects well on all parties. 

”Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful.

”Insurers should reflect on the clarity provided here and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgement says should be paid.  They should also communicate directly and quickly with policyholders who have made claims affected by the judgement to explain next steps.

”If any parties do appeal the judgement, we would expect that to be done in as rapid a manner as possible, in line with the agreement that we made with insurers at the start of this process. As we have recognised from the start of this case, thousands of small firms and potentially hundreds of thousands of jobs are relying on this.”

Policyholders with affected claims should expect to hear from their insurer within the next seven days.

Landmark victory

Policyholder group the Hiscox Action Group (HAG) has deemed the verdict a “landmark victory” that could potentially benefit up to 370,000 businesses across the UK, with insurers potentially paying out around £4bn in overall Covid-related BI claims.

The group’s legal representative, Mishcon de Reya, has already written to insurer Hiscox asking for interim payments for its clients while full claim amounts are calculated.

Richard Leedham, partner at Mishcon de Reya, said: “Today’s judgement by the High Court is one of the most significant in recent years and will provide a lifeline for small businesses across the country.

”We joined the court case as we believed it was vital for businesses to have a voice in the proceedings and we are delighted they have finally been heard. We were delighted to support the FCA and its legal team.”

Mishcon de Reya also represented the Hospitality Insurance Group Action (HIGA), the second intervener group participating in the test case. Sonia Campbell, the partner representing HIGA, said: “I am delighted with today’s judgment and what this means for many thousands of policyholders. We identified at the very outset that many of these policies covered Covid-related losses and the judgment is a vindication of our position.

”For many hospitality businesses in particular, having their insurers pay out on their business interruption insurance policies is a matter of survival.

”Without this judgment, even more businesses will have been forced to the wall. The judgment means that many policyholders are a step closer to recovering losses from insurers. We do anticipate that insurers will apply for permission to appeal but we hope they will do the right thing and now start paying claims.”

Paul Lewis, partner and global head of insurance disputes at law firm Herbert Smith Freehills, which represented the FCA during the test case, added: “This is a really significant judgment. It brings guidance to how business interruption insurance wordings should operate in the context of the Covid-19 pandemic, which has had such a devastating effect on businesses across the country.

”The decision should bring welcome news to a significant number of policyholders who will need to read the judgment carefully and see how the principles laid down by the Court apply to their particular policy wording. The speed with which the proceedings were brought is testament to the hard work of the FCA, Herbert Smith Freehills and counsel teams to bring this urgent case to the courts.”

Devil is in the detail

Ashwin Mistry, executive chairman at Brokerbility, is ”not surprised that the judicial outcome is overwhelming in favour of businesses”. 

”My initial thoughts are that it will [be] welcome news for policyholders,” he continued.

Mistry also feels that the judgement will have implications far beyond just the eight insurers involved in the legal proceedings. 

”The devil will be in the detail whereby the judgement does not say that it applies to all the 21 different policies in question. Insurers will now have to write to all affected policyholders within next seven days, but I would ask will that also apply to those whom have not yet initiated a claim?” he added.

”Defendant lawyers have asked time to put their views across with the strong possibly of the intention of appeal, however the window is limited. Insurers will have to consider the judgement in its totality, consult internally as regards brand damage limitation and, of course, have dialogue with their respective reinsurers, who will play a major part in what happens next.

”There will still, in my opinion, be some challenges on the quantum side - including what policyholders did to mitigate their losses.

”It’s not over by a long shot. Brokers should be communicating with their policyholders immediately and also their insurer partners whom they deal with.”