Business Interruption Insurance – FCA wins Supreme Court appeal on behalf of SMEs

The recent ruling by the Supreme Court on claims for business interruption losses resulting from the Coronavirus Covid-19 pandemic shows that having the correct business insurance cover in place can make the difference between a business surviving a crisis or going under.

Business Interruption Insurance Claims by SMEs

Many business insurance policies specifically exclude business interruption cover for pandemics. However, thousands more small to medium-sized businesses in industries ranging from the motor trade, taxi firms, HGV drivers, restaurateurs, and shopkeepers thought they were covered. Unfortunately, many were left in dire financial straits when insurance companies rejected claims submitted as a result of the effects of the Coronavirus Covid-19 pandemic.

Clearly, huge numbers of businesses suffered losses as a result of the disruption caused by the virus with people confined to their homes. They were also severely affected by the resultant Government-enforced closure of many businesses, to try to halt the spread of the virus. Unfortunately, the wording of many business insurance interruption clauses lacked clarity, leaving businesses unsure whether their claims would be valid or not. If the claims were to be disallowed, many SMEs would not survive the crisis.

FCA Take Test Case to the High Court

Recognising the severity of the situation, the Financial Conduct Authority (FCA) decided to take a test case to the High Court. As there were numerous different wordings in the business interruption clauses of the various policies, the FCA presented a test case based on a number of representative sample wordings. The conclusions drawn on the sample wordings could then be applied across the spectrum.

In all, up to 370,000 businesses were affected by the lack of clarity in these clauses. Many insurance companies faced payouts in excess of £100m if the High Court found against them, while on the other side, the survival of many SMEs was at stake. Broadly speaking, the High Court found mainly, but not wholly, in favour of the FCA action on behalf of the policyholders of SMEs.

Insurers and FCA Appeal High Court Ruling

Due to the considerable sums involved, the case was ‘leapfrog’ appealed to the Supreme Court and granted an expedited hearing. Though broadly content with the High Court ruling, the FCA nevertheless appealed four of the High Court rulings while the insurers appealed many of the findings.

Supreme Court Rules in Favour of FCA

Three weeks ago, the Supreme Court handed down its judgment, unanimously dismissing the insurers’ appeals while allowing the FCA appeals. This is positive news for policyholders up and down the country who suffered business interruption losses.

It is likely that many business interruption policies will be rewritten as a result of the Supreme Court ruling to make it absolutely clear which situations are covered and which are not.