Tens of thousands of small businesses that were forced to close during the Covid-19 pandemic are now set to receive payouts on insurance claims following what was described as a “historic victory” at the supreme court.
Judges threw out the appeals from six insurers and largely supported the arguments made by the Financial Conduct Authority and a policyholder action group.
The FCA has previously estimated the value of claims affected at about £1.2bn, though some analysts have said several billion pounds could be at stake.
The Hiscox Action Group said insurers should be “in no doubt that they should immediately start doing the right thing and settle these claims”.
The case involves business interruption insurance, a key part of commercial policies which is meant to pay out if a firm cannot trade as usual owing to an unexpected event.
Thousands of small businesses, from restaurants and bars to hairdressers and guesthouses, claimed they should have received payouts from their insurers after the coronavirus lockdowns left them unable to trade. Insurers have been accused by some of relying on technical legal arguments to wriggle out of their responsibilities.
Many insurers had declined to pay out, arguing that business interruption policies were not designed to cover a government-imposed lockdown. This prompted the FCA to launch a test case to provide clarity.
One of the judges, Lord Briggs, delivered what the action group claimed was “a damning indictment” on the insurers’ words when he said the cover apparently provided for interruption caused by the effects of a notifiable disease causing a national pandemic “was in reality illusory, just when it might have been supposed to have been most needed by policyholders”.
Briggs said that outcome seemed to him to be “clearly contrary to the spirit and intent of the relevant provisions of the policies in issue”.
He added: “This was not, of course, a disease which anyone could have had specifically in mind when the policies in issue were written and marketed. But it is clear from the use of the definition of a “Notifiable Disease” in most of the relevant clauses, and equivalent wording in the remainder, that Covid- 19 (when it appeared) fell squarely within the types of disease for which all the relevant disease and hybrid clauses provided cover.”
The FCA originally said 370,000 policyholders could stand to benefit depending on the outcome of the case, though it is thought the current number is now lower than that.
The test case, which was heard by the supreme court in November, was brought by the FCA against eight insurers.
The high court found in favour of policyholders on the majority of the key issues in September 2020. However, hopes of rapid payouts were quickly dashed when six of the eight insurers – Arch Insurance, Argenta, Hiscox, MS Amlin, QBE and RSA – appealed. The FCA also decided to appeal against some elements of the ruling.
The high court found in favour of Zurich and Ecclesiastical, so they did not form part of the supreme court hearing.
The FCA brought the case after receiving a large number of complaints from small businesses, MPs and others about claims being refused during the weeks following the first national lockdown, which began on 23 March. It said there had been “widespread concern about the lack of clarity and certainty for some customers making these claims, and the basis on which some firms are making decisions”.
With many business interruption policies, the cover relates to physical damage to premises, which would not be eligible for payouts linked to the pandemic. However, in some cases the wording refers to an outbreak of a “disease” within the vicinity, or a “denial of access” to premises following public authority action taken due to an emergency.
The FCA hoped the test case would be the quickest route to clarity for both the companies and insurers without the need for each claimant to bring individual cases at a time when many smaller firms are facing the threat of going out of business.
The high court originally looked at 21 policy types, 13 of which ended up being considered by the supreme court.
In November, ex-footballer Gary Neville, who co-owns two hotels with former Manchester United teammate Ryan Giggs, tweeted: “We have paid BI [business interruption] insurance for years and they won’t pay out! Due to ‘technicalities’. So many in the same boat. @RishiSunak made a speech in parliament stating insurers needed to pay. It’s not happening.”
Industry body the Association of British Insurers has said business interruption policies “are not generally designed, priced or sold to cover unspecified global pandemics”.
It added that the FCA had itself confirmed that most business insurance policies are focused on property damage and do not cover pandemics.