Tens of thousands of businesses will receive insurance payouts covering losses from the first national pandemic lockdown. The ruling from the Supreme Court has delivered its judgment in the Financial Conduct Authority’s (FCA)’s business interruption insurance test case.

The Supreme Court has substantially allowed the FCA’s appeal on behalf of policyholders. This completes the legal process for impacted policies and means that many thousands of policyholders will now have their claims for coronavirus-related business interruption losses paid.

Sheldon Mills, Executive Director, Consumers and Competition at the FCA, said “Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. This test case involved complex legal issues. 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.”

“As we have recognised from the start of this case, tens of thousands of small firms and potentially hundreds of thousands of jobs are relying on this. We are grateful to the Supreme Court for delivering the judgment quickly. The speed with which it was reached reflects well on all parties.”

Many policyholders whose businesses were affected by the Coronavirus pandemic suffered significant losses, resulting in large numbers of claims under business interruption (BI) policies.

Most SME policies are focused on property damage and only have basic cover for BI as a consequence of property damage.   But some policies also cover BI from other causes, in particular infectious or notifiable diseases (‘disease clauses’) and prevention of access and public authority closures or restrictions (‘prevention of access clauses’). In some cases, insurers have accepted liability under these policies.  In other cases, insurers have disputed liability while policyholders considered that they had cover leading to widespread concern about the lack of clarity and certainty.

The FCA’s aim in bringing the test case was to urgently clarify key issues of contractual uncertainty for as many policyholders and insurers as possible. The FCA did this by selecting a representative sample of 21 types of policy issued by eight insurers. The FCA’s role was to put forward policyholders’ arguments to their best advantage in the public interest. 370,000 policyholders were identified as holding 700 types of policies issued by 60 insurers that may be affected by the outcome of the test case.

The High Court’s judgment last September resolved most of the key issues but, because the FCA were unable to reach agreement, insurers and the FCA made ‘leapfrog’ appeals to the Supreme Court (without going to the Court of Appeal first).

The judgment brings to an end legal arguments under 14 types of policy issued by six insurers, and a substantial number of similar policies in the wider market which will now lead to claims being successful.

The FCA’s decision to bring the test case has removed the need for policyholders to resolve many key issues individually with their insurers.  It enabled them to benefit from the expert legal team assembled by the FCA, providing a comparatively quick and cost-effective solution to the legal uncertainty in the business interruption insurance market.

The test case was not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers. Today’s judgment does not determine how much is payable under individual policies, but provides much of the basis for doing so.

Following the High Court’s judgment, insurers decided to pay claims on some policies and the FCA asked insurers to progress claims on other policies that the High Court said provided cover so that they could be settled quickly following the appeals to the Supreme Court.

The FCA says it will now work with insurers so that they rapidly conclude their claims processes on claims that the Supreme Court has said should be paid, providing interim payments wherever possible.

Each policy needs to be considered against the detailed judgment to work out what it means for that policy. Policyholders with affected claims can expect to hear from their insurer soon. Policyholders with questions should approach their broker, other advisers or insurer.  Policyholders who remain unhappy following their insurer’s assessment of their claim may be able to refer their claim to the Financial Ombudsman Service, whose role is to resolve individual disputes.

Commenting on the Supreme Court’s decision Federation of Small Businesses (FSB) National Chair Mike Cherry said “Today’s judgement is a big victory. It cements the high court’s decision to grant businesses left on the brink the insurance pay-outs they are rightfully owed. For many, it has been a long and difficult road to get to this stage so this will bring clarity and hope to the thousands of firms which have been left in financial limbo for almost a year.”

“While this is good news, and while the law has to follow procedure, it’s disappointing that so many small businesses have had to wait to get the money they desperately need under policies they believed were there to protect them, policies they bought in good faith.”

“Businesses deserve to be protected in a timely way, but instead they have been failed by their insurers and are now trying to make up for lost time. Providers must now pay-out quickly, and consider the steps they can take to progress these claims in a swift and seamless manner. Any paperwork required of claimants shouldn’t be onerous or time-consuming. ”

“Small businesses contribute trillions to the economy. The Financial Conduct Authority (FCA) was right to argue that disease or denial of access clauses within interruption policies should trigger pay-outs in the event of coronavirus-linked disruption. We are hugely grateful for its work in this space.”