Hundreds of thousands of UK businesses can claim insurance payouts for their Covid-19-related losses, after the country’s top court ruled that “business interruption” policies provided cover against the pandemic and government lockdown measures.
In a ruling handed down on Friday, judges at the Supreme Court unanimously dismissed insurers’ appeals against a High Court ruling that they should honour most claims. The original case was brought by the UK’s Financial Conduct Authority on behalf of 370,000 affected policyholders.
Sheldon Mills, the executive director responsible for consumers and competition at the regulator, said: “Our aim throughout this test case has been to get clarity for as wide a range of parties as possible, as quickly as possible, and today’s judgment decisively removes many of the roadblocks to claims by policyholders.”
Lawyer Paul Lewis from Herbert Smith Freehills, who led the case for the FCA, described the result as “very positive”.
Up to 700 types of insurance policy issued by 60 different insurers are affected by the ruling, and the FCA said thousands of businesses that had been waiting months for a decision should now have their claims paid.
Nicholas Hamblen, the Supreme Court justice who handed down the landmark decision, said: “The FCA’s appeal is substantially allowed and the insurers’ appeals are dismissed.”
As a result of the judgment, policyholders will be able to claim for losses caused by the presence of coronavirus in their local area and government guidance to close their premises — even though this was not a legal requirement at first. In addition, the fact that customers’ health worries might have reduced revenues even without lockdown will not affect payouts.
When it first brought the case, the FCA estimated that each successful claim could run to tens of thousands of pounds. Figures from the Association of British Insurers during the first lockdown in 2020 put the total cost of UK business interruption claims at £900m.
In the High Court case, judges said many claims were valid under clauses covering the presence of a “notifiable disease” and “denial of access” to business premises. They also concluded that payouts should put businesses back in the position they would have been in had Covid-19 never occurred at all, rather than in a situation where lockdown did not happen but the virus had still curtailed their trading.
However, in a four-day hearing in November, lawyers for six insurers argued that payouts should be denied or greatly reduced because of strict policy definitions. They said the pandemic and the government’s lockdown measures were different “perils” and could not be treated as a single and “indivisible cause” of loss, as the FCA and policyholders had believed.
In its judgment, the Supreme Court justices largely rejected these arguments. Lord Michael Briggs said that geographic limits and other policy definitions did exclude cover for a national pandemic.
Shares in Hiscox, one of the insurance companies exposed to denial of access claims, fell 5 per cent on the news, and the action group formed by its customers called the verdict a “humiliation” for the company. Their lawyer, Richard Leedham of Mishcon de Reya, said: “This is a landmark victory for a small group of businesses who took on a huge insurance player and have been fully vindicated.”
However, Hiscox shares rebounded to a 3 per cent gain after the company said that fewer than one-third of its policies would have to pay out, and the extra cost was only $48m.
Shares in RSA, another of the insurers appealing against the judgment, were unchanged.
Huw Evans, director-general of the ABI, said: “Customers who have made claims that are affected by the test case will be contacted by their insurer to discuss what the judgment means for their claim. All valid claims will be settled as soon as possible and in many cases the process of settling claims has begun.”
But David Berkley QC, a barrister at 3PB chambers which is advising 500 businesses on claims, predicted more litigation over the cause of losses and amounts owed.
Insurance companies also face the prospect of higher liabilities in the future, after the Supreme Court overturned a key legal precedent. A past ruling on hurricane losses at the Orient Express Hotel in New Orleans had concluded that related economic impacts should not be counted. That has now changed.
“The Supreme Court’s ruling that the Orient Express case was wrongly decided removes one of the most significant precedents relating to business interruption,” said Rob Benson, head of insurance at accountancy firm Grant Thornton. “All insurers will therefore need to review a huge volume of policy wordings in order to assess the resulting impact on their potential liabilities.”
The new nationwide lockdown rules in England
The main restriction is a firm stay-at-home message
People are only allowed to leave their home to go to work if they cannot reasonably do so from home, to shop for essential food, medicines and other necessities and to exercise with their household or one other person — once a day and locally
The most clinically vulnerable will be asked to shield
All colleges and primary and secondary schools will be closed until a review at half-term in mid-February. Vulnerable children and children of critical workers will still be able to attend while nursery provision will remain available
University students will have to study from home until at least mid-February
Hospitality and non-essential retail will be closed. Takeaway services will be available but not for the sale of alcohol
Entertainment venues and animal attractions such as zoos will close. Playgrounds can remain open
Places of worship can also stay open but one may attend only with one’s household
Indoor and outdoor sports facilities, including courts, gyms, golf courses, swimming pools and riding arenas, will close. Elite sport including the English Premier League will be able to continue
Overseas travel will be allowed for “essential” business only
Full details are available on the government’s official website.
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