When the Supreme Court handed down its judgment in January on the test case brought by the Financial Conduct Authority (FCA) about business interruption insurance policies, many business owners breathed a sigh of relief.
In a ruling that it was reported would cost the insurance sector hundreds of millions of pounds, the Court set out the parameters for what it considered a valid claim under a selection of business interruption policy wordings that were tested in court following the pandemic.
Policy wordings vary enormously in this complex area of insurance and the ruling provided guidance for a pool of 700 policies, potentially affecting 370,000 businesses, only some of whom will end up with payouts. It covered a range of issues around when businesses should be entitled to insurance coverage if they were forced to close by government lockdowns, including disease clauses, whether businesses were denied access to properties, and the timing of losses. But the ruling still leaves a lot of ambiguity for the market.
Ian Brown, a partner in the litigation practice at Trowers & Hamlins who deals with insurance disputes, says:
"Everybody's policy wording is different and judgement needs to be applied to know whether there is cover or not. This is not a one-size-fits-all ruling – the court did not say everyone is covered. It is still very much a case of checking your individual policy wording."
Since the Supreme Court ruling, the expectation has been that insurance companies will communicate with policyholders and explain whether they think a payout is required. "Although there is now more clarity, there are still disputes," says Brown. "The judgment was designed to avoid widespread litigation, but insurers are still turning down claims and, where policyholders feel that cover should exist, my advice would be to get a lawyer to look over the wording of the policy."
The FCA has created a tool on its website through which policyholders can answer a series of questions in order to achieve an indication of whether cover is valid. Still, that is not determinative.
One problem across the market is that even individual insurers will have multiple policy wordings, so it is not even possible to make a judgement about all policies underwritten by a particular insurer, for example.
And when it comes to the wordings of policies, some decisions are dependent on demonstrating the existence of Covid infections within a certain radius of the business, while others raise disputes over whether the Covid lockdown was one event or a series of events. An aggregation limit in some policy wordings creates arguments over how many events there were, a point on which the Supreme Court did not give guidance.
One additional tool in the armoury of businesses struggling to recoup losses is a provision in the Enterprise Act 2016, which sets out that insurers should pay out any sums due within a reasonable amount of time.
"What that clause provides is that a delayed payment of an insurance claim might make the insurer liable to pay compensation for that delay," says Brown. "But then you get into the classic questions of what constitutes a reasonable amount of time. Still, that is another example of further arguments that might be pursued by those seeking recompense."
A business owner who has been waiting to receive a payout since June 2020 might be able to demand payment or demand compensation. "It's not straightforward," Brown says, "but a significant delay between the handing down of the Supreme Court judgment and a payout might well lead to compensation being due."
On the other hand, those that do eventually receive money from their insurers should be mindful of the implications of those payouts for their bank lending facilities. Some bank lenders write into their loan contracts that borrowers should apply all insurance proceeds paid out for the mandatory repayment of loans unless the bank is notified that the monies are needed to cover operating losses.
Brown says: "There is a risk that a business might get a payout and put it straight into the running of the business, but in so doing invalidate a business loan that should have been paid back with that money."
It is already a common feature of bank lending facilities that businesses take out business interruption insurance, which raises questions about how the lending market might adapt going forward, given uncertainty around how the insurance market will respond to Covid and similar risks. "It is likely that, after the initial shock of Covid, the market will settle down," says Brown. "Then the insurance market will probably react and reword policies to make cover tighter. Some policies will continue to cater for pandemics but insurance premiums will increase to reflect the level of cover provided."
That will leave it for businesses to decide what level of cover they want to invest in and what level of risk they are willing to accept. In turn, banks will make their own decisions on the level of cover they expect from businesses that they lend to.
Since the Supreme Court ruling, many insurers have been in touch with their policyholders and provided much-needed clarity, but there is still some way to go.
Brown concludes: "My message would be, if the response from your insurer doesn't feel right, then don't just take it lying down. It is not true that all cases will be covered, but if you are not happy with what you are being told, it is probably worth investing in professional advice. The situation is still not black and white and there are many questions that the test case didn't answer."
He adds: "Disputes are going to exist in this area for some time to come, and businesses may need to take proceedings in order to get the appropriate remedies from their insurers. The ruling means there isn't going to be the amount of litigation that there might have been, but it is certainly not the end of the matter."
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