Covid insurance ruling provides a lifeline for SMEs

Business Insights

On 15 September 2020, the High Court handed down its judgment in the eagerly awaited test case brought by the Financial Conduct Authority (‘FCA’) against 8 insurers. The case sought to determine whether policyholders could make business interruption (‘BI’) claims for losses arising from disruption and closure of their businesses caused by Covid-19.

FCA v Arch Insurance (UK) Ltd and others 2020 is a highly significant judgment in a case that the FCA brought to court and in which it represented the interests of BI insurance policyholders.

The Court found in favour of the policyholders on the majority of the claims, which involved consideration by the Court of 21 representative sample policy wordings. The ruling lends a major victory to policyholders and the thousands of businesses across the country who saw their trading interrupted by the coronavirus pandemic – the majority of whom are SMEs.

Unless successfully appealed, the judgment is legally binding on the defendant insurers regarding the interpretation of the representative sample of policy wordings. It also provides so-called "persuasive guidance" for the interpretation of similar policy wordings and claims, which can be taken into account in other court cases including in Scotland and Northern Ireland, by the Financial Ombudsman Service (‘FOS’) and the FCA in considering whether insurers are handling claims fairly.

Responding to the ruling, the FCA has said that:

“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 judgment says should be paid.”

What this will look like remains to be determined.

Why so significant?

On 26 March 2020, the government introduced the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 and similar provisions were also introduced in Wales, Scotland and Northern Ireland – providing for the closure of businesses up and down the land in the wake of the pandemic. Overnight, income streams almost completely disappeared.

The Association of British Insurers (‘ABI’) immediately published a set of principles to which their members were to adhere when settling BI claims occasioned by Covid-19. ABI guidance recognised the vital importance of cash flow to SMEs, stating:

'Insurers recognise that cash flow is critical for the survival of businesses at this time. Where a customer’s policy covers certain losses for business interruption as a result of COVID-19, insurers will pay the claim as soon as they receive evidence to support this’.

Insurers, however, chose to interpret BI policies restrictively and when BI policies failed to pay out for up to as many as 370,000 businesses, they had to make staff redundant, move out of premises or close altogether. Policyholders were also left in the desperate position of having paid out thousands of pounds on BI policies which afforded them no cover.

The FCA expects that insurers will now apply the judgment in assessing all outstanding claims, but significantly that expectation extends to re-assessing previously rejected claims.

What’s next?

As the Court looked at a representative sample of policies, each policy needs to be viewed on a case by case basis in the light of the judgment to determine whether the insured is covered. If cover is accepted in principle, the insured will also have to establish what is payable. If claims under policies are accepted, businesses can expect interim payments from insurers giving that much needed injection of cash.

A number of policyholders, previously denied cover, made complaints about their insurers to FOS. The Ombudsman has advised those businesses to await further information but FOS is expected to apply the judgment to on-going cases.

There is the real prospect of an appeal by insurers. If that happens, policyholders would face yet more delays. The parties have therefore agreed that they will seek to have any appeal heard on an expedited basis and this includes the possibility of any appeal being ‘leapfrogged’ directly to the Supreme Court. But that could easily stretch into the New Year.

The FCA have, however, said any appeal should not preclude policyholders seeking to settle with insurers before the outcome of any appeal is known. This could conceivably include settlement of claims brought by businesses who commenced litigation against insurers, which claims were effectively on-hold pending the judgment in the test case.

As to that, the FCA optimistically states: ‘policyholders with affected claims can expect to hear from their insurer within the next seven days’.

SMEs will hope they receive the pay-outs that are sorely needed in this unprecedented economic climate and bring to an end months of uncertainty and frustration.

By Julien Luke, Partner at UK law firm TLT