Insurers have been urged to “move quickly” to pay claims to thousands of small businesses after the Supreme Court ruled their policies “will provide cover” for business interruption caused by the Covid-19 pandemic.
In a landmark £1.2 billion case over businesses’ ability to claim on insurance for coronavirus-related disruption, the UK’s highest court “substantially allowed” an appeal by the Financial Conduct Authority (FCA) on Friday.
The City watchdog last year brought the test case, which could affect around 370,000 businesses, over the wording of business interruption insurance policies, which some insurers argued did not cover the Covid-19 pandemic.
The FCA’s executive director of consumers and competition Sheldon Mills said the Supreme Court’s judgment “decisively removes many of the roadblocks to claims by policyholders”.
— Financial Conduct Authority (@TheFCA) January 15, 2021
He called on insurers to “move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible”.
In September, the High Court ruled on several “lead” insurance policies issued by eight separate insurers – a ruling the FCA described as “a significant step in resolving the uncertainty being faced by policyholders”.
But the regulator also said that judgment “took something away with one hand after giving more substantially and in detail with the other” and brought a “leapfrog” appeal to the Supreme Court, bypassing the Court of Appeal.
Six of the insurers – Arch, Argenta, Hiscox, MS Amlin, QBE and RSA – also appealed against aspects of the High Court’s ruling, as did the Hiscox Action Group (HAG), which represents around 400 businesses insured by Hiscox.
Announcing the Supreme Court’s ruling on Friday, Lord Hamblen said: “The appeals of the Financial Conduct Authority and the Hiscox Action Group are substantially allowed and the insurers’ appeals are dismissed.”
The @UKSupremeCourt has today delivered its verdict on the appeals heard in the #businessinterruption insurance test case. The response from ABI Director General, Huw Evans, can be read here – https://t.co/wcMx1u126p
— ABI (@BritishInsurers) January 15, 2021
The court considered various types of clauses which featured in a number of insurance policies including “prevention of access clauses”, which are triggered by “public authority intervention preventing access to, or use of, the business premises”.
Summarising the Supreme Court’s decision, Lord Hamblen said the High Court’s interpretation of those clauses was “too narrow”.
The judge added: “An instruction given by a public authority may amount to a ‘restriction imposed’ if it carries the imminent threat of legal compulsion or is in mandatory and clear terms and indicates that compliance is required without recourse to legal powers.”
The Supreme Court also ruled on “trends clauses”, which generally require losses to be calculated by reference to how the business would have performed “had the insured peril not occurred”.
In the court’s written ruling, Lord Hamblen and Lord Leggatt – with whom Supreme Court president Lord Reed agreed – said: “The trends or circumstances for which adjustments should be made do not include trends or circumstances arising out of the same underlying or originating cause as the insured peril, namely the Covid-19 pandemic.”
A very welcome decision by the Supreme Court
This will be a lifeline for tens of thousands of hairdressers, bars, restaurants and other small businesses that did the right thing and closed their doors to protect the health of the nation https://t.co/kWPtjeEZcp
— Kwasi Kwarteng (@KwasiKwarteng) January 15, 2021
They concluded: “Although we have accepted some of the insurers’ arguments on their appeals, in no case has that affected the outcome of the appeal. It follows that the insurers’ appeals are dismissed.”
In a separate concurring judgment, Lord Briggs, with whom Lord Hodge agreed, said of Lord Hamblen and Lord Leggatt’s judgment: “The practical effect of their analysis is that all of the insuring clauses which are in issue on the appeal to this court – not including those clauses where the issues appealed by the FCA are academic – will provide cover for business interruption caused by the Covid-19 pandemic, and that the trends clauses will not cut it down in the calculation of the amounts payable.”
Lord Briggs added: “On the insurers’ case, the cover apparently provided for business interruption caused by the effects of a national pandemic type of notifiable disease was in reality illusory, just when it might have been supposed to have been most needed by policyholders.
“That outcome seemed to me to be clearly contrary to the spirit and intent of the relevant provisions of the policies in issue.”
The judge also said it was “clear from the use of the definition of a ‘notifiable disease’ in most of the relevant clauses, and equivalent wording in the remainder, that Covid-19 – when it appeared – fell squarely within the types of disease for which all the relevant disease and hybrid clauses provided cover”.
Recently appointed Business Secretary Kwasi Kwarteng said the Supreme Court’s decision “will be a lifeline for tens of thousands of hairdressers, bars, restaurants and other small businesses that did the right thing and closed their doors to protect the health of the nation”.
Richard Leedham, a partner at law firm Mishcon de Reya who represented HAG, hailed the result as “a landmark victory for a small group of businesses who took on a huge insurance player and have been fully vindicated”.
Mr Leedham added: “Today’s outcome is one of the most significant for business in modern times.
“The result should leave Hiscox and the rest of the insurance industry in no doubt that they should immediately start doing the right thing and settle these claims.”
Huw Evans, director general of the Association of British Insurers, said the judgment brought “clarity” to the issue and said all “valid” claims will be settled as soon as possible.
He added: “The insurance industry expects to pay out over £1.8 billion in Covid-19 related claims across a range of products, including business interruption policies.
“Customers who have made claims that are affected by the test case will be contacted by their insurer to discuss what the judgment means for their claim.”