The High Court ruled recently that some insurers should have paid out to a number of small businesses which sustained losses as a result of lockdown. Michael Peacock – Partner and Head of Litigation and Dispute at Keebles LLP – has analysed what this ruling means going forward for SMEs across the UK.
Many have suffered significant losses on the back of the Covid-19 pandemic and the subsequent restrictions imposed by the Government.
To make matters worse, a number of these businesses, believing that their insurance policies covered them for business interruption arising in this way, have found their insurers resisting such claims.
It was against this backdrop that in June 2020 the Financial Conduct Authority commenced a test case in the High Court with a view to establishing the validity of certain types of business interruption clauses and whether or not insurers should be paying out on them. Judgment on the test case was delivered on 15 September 2020.
Clearly a test case cannot deal with every potential dispute that might arise in these circumstances, and much turns on the precise wording of the particular policy in question.
However, the court did consider a series of differently worded policies from eight different insurers and aimed in particular to address two specific areas relating to disease clauses and prevention of access/public authority clauses which between them the FCA understands account for thousands of potential claims with a combined value of more than £1billion.
Most SMEs’ business interruption policies tend to restrict cover to cases where physical damage has been suffered to their property, but some policies go further than this and include:
- disease clauses which purport to cover losses caused by infectious or notifiable diseases; and/or
- prevention of access/public authority clauses providing cover in relation to losses caused by the insured not being able to access its property as a result of Government (or other authority) restrictions
In the test case the court considered:
- whether or not the sample disease clauses and sample prevention of access clauses before it covered losses caused by the Covid-19 pandemic, and if so:
- whether or not the circumstances triggering coverage (as opposed to other circumstances), actually caused any loss to the insured. Unless such ‘causation’ is established claims may not be paid even if coverage is in place
The court’s judgment runs to 150 pages but broadly found that:
- most (but not all) of the sample disease clauses before it did provide cover for losses caused by Covid-19;
- some of the prevention of access clauses provided cover, though much would turn on the facts of each individual claim (and the court generally construed these clauses more restrictively than the disease clauses)
- the pandemic itself together with the Government’s response to it were together a single cause of the covered loss (thus making it easier for an insured to establish causation)
These findings should provide some comfort to businesses hoping to rely on disease or prevention of access clauses. However, whilst the judgment removes a number of hurdles to a successful claim, businesses cannot yet start counting their chickens. They will need to compare the specific wording of their policies with the judgment and even if they establish coverage, may still face an argument over how much is payable to them. And of course, there is every chance the insurers will appeal the decision. Whilst the court has made it clear to insurers that any appeal would need to be dealt with quickly, businesses may still face a further agonising wait before these issues can be finally resolved.