Business, Interrupted: UK Supreme Court backs FCA in COVID-19 Test Case

February 10, 2021

2 min read

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What's going on here?

The highly anticipated judgment was handed down in the appeal of the Financial Conduct Authority’s (FCA) fast-tracked business interruption (BI) test case, confirming support for the FCA and policyholders.

What does this mean?

The 112 page Supreme Court judgement followed a fast-tracked ‘leapfrog’ appeal from the High Court decision in September 2020. The COVID-19 pandemic prompted large numbers of claims under BI policies. BI insurance usually operates to compensate losses due to physical damage from events such as flooding. The case focused on policies which cover for BI from other causes, such as infectious diseases and inability to access property. A representative sample of policy wordings was considered at first instance to assess if BI policies covered losses suffered due to COVID-19 and the government response to the pandemic. The judgment indicated that most of the disease clauses in the sample provided cover, silencing insurers’ claims that policies were not intended to cover pandemics. The judgment also clarified that the COVID-19 pandemic and the government response were a single cause of covered losses, a key requirement for claims to be paid. 

This case confirmed the success of the FCA at first instance and appeals brought by insurers were largely dismissed. The ruling is of particular significance to businesses whose agreements contain any of the clauses put forward for consideration which are now covered for business interruptions caused by COVID-19. The decision means that many thousands of policyholders in the UK will now be able to recover for BI losses caused by the COVID-19 pandemic, equating to a projected £1.2 billion in claims.

What's the big picture effect?

The outcome is likely to be a lifeline for businesses struggling to stay afloat, particularly those whose policies share similar wordings as considered by the test case. The FCA acknowledged that, while the decision is promising, each policy must be considered in line with the “complex judgement” to assess the effect of the judgement on an individual policy. For the Association of British Insurers’ director general Huw Evans, the conclusion of the case highlights the need for clarity in complex insurance issues. He urged insurers to “act swiftly to settle claims fairly and to clearly communicate the next steps in the process.”

 The case also marked a major win for Herbert Smith Freehills (HSF), who acted on behalf of the FCA. HSF partner and global head of insurance disputes Paul Lewis welcomed the positive outcome for policyholders, noting how “It improves their position significantly beyond that which was already established by the High Court judgment.”

The decision will likely be influential in similar BI cases in Ireland and Australia. Indeed, insurers and policyholders in Ireland await the decision of the Irish High Court in a business interruption insurance test case taken by publicans against FBD Insurance. The High Court had originally scheduled to publish its decision in mid-January but has delayed judgement until early February 2021 in order to allow submissions on the UK Supreme Court’s decision.

While insurance isn’t known for being the most exciting of industries, this decision closes an undoubtedly thrilling chapter in the sector and is likely to be influential in the way BI insurance is dealt with in future.  

Report written by Emily Cahill

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