What just happened?

On the 15th of January 2021, the Supreme Court delivered its judgment on the Financial Conduct Authority’s (FCA)’s business interruption insurance test case, bringing clarity regarding whether insurers must pay claims on certain policies.[1]

What does this mean?

The FCA brought the case to clarify uncertainties concerning business interruption (BI) policies and estimated that 370,000 policyholders, particularly SMEs, may be affected by the cases outcome.[2] It followed as businesses tried to make claims under their BI insurance policies due to the impact of Covid-19, but some insurance providers refused maintaining that the policies did not cover these specialist circumstances.[3]

The Supreme Court dismissed the insurers’ appeals, providing that all of the clauses (disease clauses, prevention of access and hybrid clauses) considered on the appeal will provide cover for the business interruption caused by Covid-19.[4] It provides certainty for 14 out of 21 types of policy included in the sample that are issued by the six insurers, alongside many similar policies in the wider market.[5]

For policyholders with cover under such policies, this is great news. They will find that their claims are more likely be successful, and as such, it may provide them with support to continue business. The judgment will also prove to be cost-effective as businesses will not be required to resolve key contractual uncertainties with insurers individually.[6]

On the other hand, for the insurance industry, the financial repercussions are likely to be significant. It is estimated that the ruling could cost the sector hundreds of millions of pounds.[7] Wherever evidence of loss can be shown under certain policies, insurers will have started processing claims and paying out. Insurers are also likely to turn to reinsurance recovery, which is where insurance companies claim their losses from reinsurance companies.[8]

What is the impact on the legal industry?

Initially, law firms will experience a rise in businesses and insurers seeking legal advice on whether their policies are covered by the judgment. A rise in insurance litigation is also likely because the test case does not address all possible disputes or how much is payable under the policies.

There may even be scope for litigation arising from damages claims for unreasonable delay in payment by insurers, which is a right stemming from the Enterprise Act 2016. Such policyholders will have to establish there has been ‘unreasonable delay’ in payment, which has been cited by some lawyers as a space to watch. [9]

Another significant impact of the pandemic, and the judgment itself, will be that business interruption policies are likely to be worded differently in future. Insurers will likely start considering new Covid-19 and pandemic exclusions in their policies and in doing so, law firms will be instructed to advise on any regulatory or contractual issues. This will ensure that insurers are complying with the necessary regulations under the FCA’s Principles and that customers are being treated fairly through clear policies. [10] Therefore, this may be a short-term win for policyholders, but in the longer term, it may result in more expensive insurance.

On a global scale, the Supreme Court decision may also impact decisions in countries such as Canada, a common law jurisdiction. This is given that Canadian courts tend to follow UK courts in the interpretation of similar wordings. [11]

Written by Sheelpa Maroo

Assessing firms:
#RPC #Clyde&Co #Kennedys #PenningtonsManchesCooper #BLM #MishcondeReya #HerbertSmithFreehills #DWF #DLAPiper #HoganLovells #Shoosmiths

The judgment can be accessed on the Supreme Court’s website: https://www.supremecourt.uk/news/latest-judgments.html

References:

[1] ‘Supreme Court judgment in FCA’s business interruption insurance test case’ (Financial Conduct Authority, 15th January 2021) < https://www.fca.org.uk/news/press-releases/supreme-court-judgment-business-interruption-insurance-test-case > Accessed on 2nd February 2021

[2] IBID

[3] Kevin Peachey, ‘Insurers must pay many small firms for Covid lockdown losses’ (BBC, 15th January 2021) < https://www.bbc.co.uk/news/business-55661702 > Accessed on 3rd February 2021

[4] ‘Supreme Court hands down judgment in FCA’s Covid-19 Business Interruption Test Case’ (Herbert Smith Freehills, 15th January 2021) < https://hsfnotes.com/insurance/2021/01/15/supreme-court-hands-down-judgment-in-fcas-covid-19-business-interruption-test-case/> Accessed on 3rd February 2021

[5] ‘Supreme Court backs FCA on Covid business interruption insurance’ (Pinsent Masons, 15th January 2021) < https://www.pinsentmasons.com/out-law/news/supreme-court-fca-covid-business-interruption-insurance > Accessed on 3rd February 2021

[6] IBID [#1]

[7] IBID [#2]

[8] Susie Wakefield, ‘Business interruption insurance cover: Supreme Court FCA test case decision’ (Shoosmiths, 18th January 2021) < https://www.shoosmiths.co.uk/insights/articles/business-interruption-insurance-cover-supreme-court-fca-test-case-decision > Accessed on 3rd February 2021

[9] Mia Wallace, ‘Fenchurch Law on what happens next after the Supreme Court’s business interruption ruling’ (22nd January 2021) < https://www.insurancebusinessmag.com/uk/news/breaking-news/fenchurch-law-on-what-happens-next-after-the-supreme-courts-business-interruption-ruling-244309.aspx > Accessed on 7th February 2021

[10] Lydia Savill and Ellie Rees, ‘Changes to insurance policy coverage in light of Covid-19: mid-term adjustments, renewals and product suspensions’ (Hogan Lovells, 20th April 2020) < https://www.engage.hoganlovells.com/knowledgeservices/news/changes-to-insurance-policy-coverage-in-light-of-covid-19-mid-term-adjustments-renewals-and-product-suspensions > Accessed on 3rd February 2021

[11] Alicja Grzadkowska, ’Massive business interruption ruling and its reverberations in the global insurance industry’ (2nd February 2021) < https://www.insurancebusinessmag.com/uk/news/columns/massive-business-interruption-ruling-and-its-reverberations-in-the-global-insurance-industry-245335.aspx> Accessed on 7th February 2021

Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.