Around 370,000 policyholders now have greater clarity on whether their insurance contracts should cover pandemic-related losses.
Holders of business interruption insurance may benefit from a High Court ruling this week concerning losses caused by COVID-19 and lockdown.
The ruling, which responds to a test case brought by the Financial Conduct Authority on behalf of policyholders, finds that certain types of business interruption insurance contracts should provide cover for the effects of the pandemic.
Many small and medium-sized businesses (SMEs), who have been struggling since the pandemic took hold, have made claims to their insurers for losses caused by the UK’s national lockdown earlier this year.
This judgement helps to clarify which types of clauses included in insurance contracts should result in pay-outs. Importantly, it means that policyholders won’t have to resolve key issues individually with their insurers.
“The judgement will bring welcome news to a large number of policyholders”, wrote lawyers from Herbert Smith Freehills, which has acted for the Financial Conduct Authority on behalf of policyholders.
What are the details?
Most small and medium-sized businesses (SMEs) only have basic insurance cover for business interruption, in the case of property damage. However, some policies also cover business interruption more widely, through ‘non-damage’ clauses that refer to ‘disease’ or ‘denial of access’.
Some insurers have accepted liability under these clauses, while others haven’t – so the Financial Conduct Authority brought its test case in order to “resolve the lack of clarity”.
This week’s ruling finds that most of the ‘disease’ clauses, and some of the ‘denial of access’ clauses, should provide cover for business interruption. However, whether cover is provided or not depends on the detailed wording of each clause and how exactly the business was affected by the government’s response to the pandemic.
“We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market”, said Christopher Woolard, Interim CEO of the Financial Conduct Authority.
“Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat … and today’s judgement removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful”, added Woolard.
The ruling considered 21 different types of policy wording that commonly occur in business interruption contracts. It doesn’t say whether insurers are liable in the case of each wording, but provides general guidance that can be applied to specific clauses.
How does the ruling affect businesses?
There are around 370,000 policyholders who may be affected by the outcome of this week’s case, according to the Financial Conduct Authority.
Policyholders with affected claims should expect to hear from their insurer within the next week.
The insurers can appeal against the decision, and the Financial Conduct Authority will update policyholders through its website.
“St. James’s Place is committed to helping SME owners from a clear position of understanding their business, their challenges, their aspirations, and the commercial and tax context in which they are operating. It’s tremendously helpful that most of our Partner practices are SMEs themselves,” notes Tony Wickenden, Executive Director at St. James’s Place.
“Business owners need to ‘make the main thing the main thing’: by focusing on things like clear communication with clients and prospects, total concentration on client needs, clear and sensitive staff communication and care as well as good financial and fiscal housekeeping.”