Business interruption insurance: Supreme Court judgment offers hope to thousands of businesses

The Supreme Court has handed down judgment in a test case brought by the Financial Conduct Authority (FCA) on behalf of UK based small and medium businesses. The case was brought as a means to determine the parameters and validity of claims brought under business interruption insurance policies.

Business interruption insurance covers policyholders for loss of income during periods when it cannot carry out business due to an unexpected event. Six of the world’s largest commercial insurers argued that only the most specialist policies provided cover for the unprecedented restrictions implemented as a result of Covid-19.

On 15 January, the Supreme Court rejected this position, instead finding largely in favour of tens of thousands of businesses who will now receive an insurance payout to cover business losses sustained as a result of the pandemic. The total value of such claims is estimated to be at least £1.2 billion.

Specifically, the Supreme Court was asked to determine the proper interpretation of four types of clauses commonly found in many business interruption insurance policies, categorised as follows:

1. Disease Clauses – clauses which, in general, provide cover for business interruption losses resulting from the occurrence of a notifiable disease, such as Covid-19, at or within a specified distance of the business premises;

2. Prevention of Access Clauses – clauses which, in general, provide cover for business interruption losses resulting from public authority intervention preventing or hindering access to, or use of, the business premises;

3. Hybrid Clauses – clauses which combine the main elements of the disease and prevention of access clauses;

4. Trends Clauses – clauses which, in general, provide for business interruption loss to be quantified by reference to what performance of the business would have been, had the unexpected event not occurred.

In its judgment, the Supreme Court held each of the above categories of clauses should properly be interpreted as providing cover for business interruption which can be shown to be caused by Covid-19. This decision will, therefore, present a lifeline for many businesses.

What the judgment means for insured businesses

There is a clear expectation on the part of both the Court and the FCA that affected policyholders are contacted by their insurer directly, and the FCA has stated that it intends to work with insurers to ensure claims that are affected by the Supreme Court’s judgment are now settled quickly.

Notwithstanding this expectation, those businesses who have suffered losses as a result of the Covid-19 pandemic, such as those in the retail, hospitality and manufacturing sectors, should undertake a review of their insurance policies to determine whether they are eligible to recover under the terms. Similarly, those businesses who have previously had an affected claim rejected by their insurer, should now be considering requesting their claim be reconsidered.

Finally, whilst it is clear the Supreme Court’s judgment will lead to many more claims now being successful, the FCA has warned that ‘the test case was not intended to resolve all possible disputes, but resolve some key contractual uncertainties’. In particular, we anticipate possible disputes concerning whether a specific policy’s business interruption clause falls within those categories considered by the Supreme Court and, if it does, how a policyholder’s loss should be quantified, to include whether any government support received in response to the pandemic should be deducted from those losses.

A copy of the Supreme Court judgment can be found here: https://www.supremecourt.uk/cases/docs/uksc-2020-0177-judgment.pdf