2nd February 2021

Unpicking the recent Business Interruption insurance ruling

After some insurers refused to pay out under Business Interruption policies for claims resulting from COVID-19, the Financial Conduct Authority (FCA) escalated claims to court. In what has been headline news, the Supreme Court has ruled largely in favour of policy holders.. What does this mean for businesses?

After some insurers refused to pay out under Business Interruption policies for claims resulting from COVID-19, the Financial Conduct Authority (FCA) escalated claims to court. In what has been headline news, the Supreme Court has ruled largely in favour of policy holders.. What does this mean for businesses?


As part of Business Growth Week, we’ll be sharing practical legal advice on helping your business thrive in a post-COVID world.

Businesses that have been forced to close to customers as a result of COVID-19 have been left with significant losses. For nearly 400,000 policy holders that had taken out Business Interruption (BI) insurance covering losses over and above those caused by material damage to property, it was hoped a claim on the policy would act as a safety net. However, some insurers were refusing to pay out.

After the FCA escalated the matter on behalf of policyholders, the Supreme Court has now handed down its judgment giving welcome clarity to those affected on how their insurers should be handling their claims. In this quick guide, we’ll take you through what the Supreme Court ruling on BI insurance claims could mean for your business.

What are the different types of BI Insurance?

BI insurance covers losses caused by interruptions to your business that mean you have no choice but to pause operations.

Most policies only cover against losses caused by material damage to business premises (such as a fire). The Supreme Court ruling doesn’t affect these policies. However, some policyholders had purchased extensions to cover interruptions not related to property damage. These include:

  • Disease clauses – when an infectious or notifiable disease occurs within the vicinity of a premises, up to a specified radius
  • Prevention of access clauses – when premises cannot open because of public authority closures or restrictions
  • Hybrid clauses - which combine the main elements of the disease and prevention of access clauses

The FCA asked the Court to clarify whether insurers should pay out for policyholders that had taken out these extensions and asked it to confirm what approach insurers should take to claims based on the most common policy wordings.

 

What were the key points of the Supreme Court BI ruling?

  • Disease clauses – The Supreme Court said that interruption caused by one or more incidences of COVID-19 within the specified geographical area should be covered under a policy containing this type of clause.
  • Prevention of access and hybrid clauses – The Supreme Court concluded that an instruction given by a public authority, even if it is not legally binding, does count as a restriction of access. These clauses may use the terms “inability to use” or “prevention of access”, and it was agreed that a partial closure does count, but losses are only recoverable for the part of the business that had to close. Pay outs should also be calculated on what the business would have earned had there been no COVID-19.

What does the BI ruling mean for businesses?

Not all businesses will be able to claim on their BI insurance – for example, those that only had cover for property-related damage. However, the FCA predicts that the Supreme Court decision will impact c400,000 policy holders who had purchased policy extensions extending cover for notifiable diseases and prevention of access to business premises. Check your policy to see If your business did have this type of cover, even if an initial claim was previously rejected by your insurer. If you think you should be covered, you can check against the FCA’s Policy Checker to give you an initial view of whether or not that is likely to be the case. If the FCA confirms that you should be covered, speak to your insurer or broker as soon as you can to progress your claims.

The Supreme Court was specifically considering losses caused by the lockdown started in March 2020, but the ruling covers subsequent lockdowns as long as the policy terms stay the same. You will, however, need to submit separate claims for losses incurred during each lockdown.

If your insurer still refuses to pay the claim, and you believe they are acting against the Supreme Court ruling, you should immediately seek legal advice and escalate the issue through the Financial Ombudsman.

What happens next?

There will be a large backlog of claims for insurers to tackle now that the ruling has landed. However, the FCA has said that it will be working with insurers to get through the claims and it has suggested that they may need to offer interim payment.

Do you have any questions on this ruling? Join our interactive webinar this Thursday between 16:00 and 17:00. Our legal expert Caroline Watson will be expanding on this topic and taking questions. Secure your spot here.

You can also contact our Business Growth Hub team directly if you need any further clarity about your policy, or for advice on handling disruptions to your business.


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