Business Interruption Insurance – a ‘financial vaccine’ for small and medium sized businesses

In a judgment on Friday 15 January 2021, the Supreme Court allowed four of the Financial Conduct Authority’s (FCA) grounds of appeal, dismissing the insurers’ appeals in a move that could affect around 370,000 policy holders.

The proceedings were brought by the FCA in 2020 under the Financial Markets Test Case Scheme to clarify policy cover wording relating to business interruption losses as a result of the COVID-19 pandemic. The Supreme Court’s judgment in Financial Conduct Authority (Appellant) v Arch Insurance (UK) Ltd and others (Respondents) clears the way for millions of pounds to be paid for business interruption cover for losses caused by infectious diseases.

Many companies had made insurance claims but were refused a pay out when insurers argued the pandemic was not covered by their business interruption policy wording.  But now, thousands have been told they are covered for losses caused by the pandemic after the ruling by Britain’s highest court.

The case related to policies that did not explicitly specify which infectious diseases were covered and was brought by the Financial Conduct Authority as a test case, representing policyholders with 21 different policy wordings, to try to resolve the dispute over the circumstances in which the insurance companies are obliged to pay out.

These include whether it was due if a business closed in line with government guidance, rather than as a legal requirement, and whether losses could be claimed for the overall impact of the pandemic, not just where cases of the disease were known to have occurred in a geographic radius of the business.

Typically, the policy may say that the claim must relate to a notifiable disease within a radius of 25 miles. Generally, businesses could not prove that their losses were resulting from the disease occurring in that radius, so their claims were being refused.

Perhaps the most important aspect of the court’s judgment is the ruling that compensation should be related to what a business would have generated in normal times, rather than the potentially reduced losses during the pandemic.  This will be a lifeline for businesses with this sort of policy in place and was significant in overturning an earlier ruling and setting a precedent for the future.

Not all business interruption policies include cover for infectious diseases, but anyone who believes they now have a valid claim must have it agreed by their insurers. This will require the business to demonstrate how their losses are comprised and how they are covered by the wording in their own policy. As each policy tends to have its own unique wording requiring interpretation there is scope for further legal battles. Given that many struggling businesses with business interruption cover are not able to afford to litigate against insurers, it is hoped that the FCA will intervene and come to their rescue.

According to the Association of British Insurance Brokers (ABI) pandemic insurance is not generally available anywhere in the world and most business cover is restricted to standard commercial insurance policies to cover against day-to-day risks such as fire, flood, theft and accidents involving employees.

The ABI has estimated that insurers in the UK will pay out over £1.2 billion in claims related to the pandemic, of which £900 million will be for business interruption.

Even where businesses have business interruption cover, few choose one that provides for claims due to a notifiable or infectious disease and those that do will usually find that it covers a narrow list  specific diseases. Furthermore, policies often only apply when the disease is present at the business premises to cover the interruption to trade caused by an illness such as Legionnaires’ disease or Norovirus and where the building needs to be closed and cleaned to deal with the specific incident.

Lockdown and tier restrictions since March 2020 have seen many businesses temporarily closing down or making significant operational reductions for weeks or months at a time, resulting in huge damage to their operations and loss of revenue.

Whilst this ruling may serve as a ‘financial vaccine’ for many SMEs, policy holders could face further legal battles. If you are a business and require advice on business interruption cover that includes cover for infectious diseases, please contact Adina-Leigh Collins or Bimal Kotecha in our Litigation department.