Time to check your policies following the Supreme Court’s ruling over Covid-19 Business Interruption Insurance

The Financial Conduct Authority is backed by the Supreme Court but what does it mean for policy holders?

In November we published an article that commented on the serious issue that had arisen over insurers rejecting business interruption insurance claims of businesses that had been forced to close because of Covid-19. Initially, the High Court made a judgement in favour of policy holders, which was appealed by the affected insurers and heard by the Supreme Court. As of 15th January 2021, the High Court’s judgement has been largely upheld by the Supreme Court. The Judgement means that more policyholders who had to close their business premises during the first national lockdown due to Covid-19 will now be able to make valid insurance claims, but will pay out be quick enough to avoid insolvency?

In this article we briefly summarise the Supreme Court’s judgement and look at what the judgement means for policy holders.

The Supreme Court’s Judgement

The UK Supreme Court ruled that insurers must pay out business interruption cover to hundreds of thousands of companies that were forced to close during the first national lockdown. The judgement means that 14 of the 21 types of policy that were included in the hearing may provide cover, along with many similar types of policy in then wider market.

The focus of the case was on ‘non-damage extensions’ to business interruption insurance. Policies for interrupted business often offer cover only if a company is forced to close because of physical damage to a property. However, many insurance policies are sold with add-ons, which provide cover if a business is forced to close because of the outbreak of an infectious disease within a specified radius of a company’s premises, typically up to 25 miles.

Many insurers refused to pay out on claims after the country was first locked down in March 2020 and the coronavirus outbreak took hold, saying that such policies were not intended to cover global pandemics.

The Supreme Court ruled that cover may be available for partial, as well as full, closure of premises, and for mandatory closure orders that were not legally binding, such as instructions given by the UK government before relevant statutory instruments were passed to give those instructions force of law. It also ruled that valid claims should not be reduced because the loss would have resulted in any event from the pandemic.

What does the Judgement mean for Policy Holders?

The judgment will allow insurers and policyholders to focus on claims settlement, although each policy will still need to be considered on its own merits against the detailed judgment and the facts of each case.

It will be up to insurers to determine how much is payable under individual policies, based on the guidance in the judgment and further guidance to be published by the Financial Conduct Authority, which is currently in draft form.

Our advice

This is good news for businesses forced to close due to Covid-19. We do note, however, that as stated above, each policy claim will still need to be individually considered on its own merits and the size of any pay-out will still be down to the insurers. To this we would also add the time it might take for pay-outs to be made, which will be crucial to the cash flow and, therefore, future prospects of many businesses who are facing insolvency.

Sheldon Mills, the Financial Conduct Authority’s executive director for consumers and competition, said:

“Our aim throughout this test case has been to get clarity for as wide a range of parties as possible, as quickly as possible, and today’s judgment decisively removes many of the roadblocks to claims by policyholders.

We will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible. Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.”

This is also good news, but any delay in receiving a pay-out could still starve a business of much needed cash flow, forcing a company to close permanently and go through an insolvency procedure.

As such, the advice we gave in November remains the same:

“we will be looking at these insurance claims on all corporate insolvency appointments whether the claim has commenced or not. This could be a valuable asset which would lead to greater returns to creditors or even return a company to solvency.”

For further information or to discuss your company’s current financial situation please contact any of our offices, listed below, where out insolvency practitioners will be pleased to help you.