UK insurers must payout on the majority of business interruption claims made during the COVID-19 pandemic, the High Court has ruled today in a landmark test case.
The decision means that 370,000 policyholders – mostly small businesses – who suffered losses due to lockdown restrictions could share billions of pounds in damages.
Judges ruled that most “disease” and/or “denial of access” clauses in a representative sample of insurance policy wordings should have provided cover during the COVID-19 pandemic.
The test case was brought forward by the Financial Conduct Authority (FCA) to clarify the scope of business interruption insurance, and insurers have agreed to have any appeal heard on an expedited basis.
“Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders,” said Christopher Woolard, interim chief executive of the FCA. “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 have disputed liability for business interruption during the COVID-19 pandemic, with most policies for small businesses only containing basic cover as a consequence of property damage.
In response, the FCA selected a representative sample of policy wordings issued by eight insurers for the High Court to review. The judgment is complex, and runs to over 150 pages, but the FCA’s legal team at Herbert Smith Freehills have published a summary on their website.
Although the decision will bring welcome news for many policyholders, it did not confirm that the eight defendant insurers are liable across all of the 21 types of policy wording in the sample.
However, the test case did clarify that the COVID-19 pandemic and government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid.
“The judgement might also lead to more claims being made in the coming weeks and, in the longer term, these rulings will have an impact on how insurance policies are worded and potentially sold,” commented Mohammad Khan, UK general insurance leader at PwC.
“There will be a renewed focus on policy wording standardisation which may impact the freedom of brokers to set slightly different wordings for their clients.”
Meanwhile, financial services company DBRS Morningstar said that the High Court decision could cost insurers up to £10bn, and may also have international consequences.
Marcos Alvarez, senior vice president and head of insurance, said: “The implication of the High Court decision could extend beyond the British insurance industry given the level of integration between insurers and reinsurers on a global scale, the relevance of the London Market, and the common-law precedent that could be used in other jurisdictions.”
Author: Chris Seekings
Image credit: iStock