Insurance judgment gives SMEs hope over COVID business interruption

Running any business involves a plethora of risks that can threaten its profitability, liquidity or very survival.  Wise SME owners take steps to mitigate those risks by putting in place appropriate insurance cover. Such policies, some compulsory and others optional, may include employers’ and public liability, key person, professional indemnity and business interruption.

BI cover varies widely

Business interruption insurance provides for payment of claims arising from any of a variety of adverse events specified in the policy terms and conditions. These T&Cs may vary between providers and between various standards of cover, but may typically include loss of income when trading activity is paused due to physical damage from a fire or other catastrophic event.

Many, but by no means all, business interruption policies exclude the consequences of a pandemic. Even some policies described as ‘all risks’ may still have exclusions, which need to be made very clear from the start. The complexities and uncertainties of some insurers’ products brought serious disappointment to many SMEs after COVID-19 reached our shores earlier this year when they approached their brokers to make claims.

False sense of security

Peace of mind turned to false sense of security for some businesses that had good reason to believe that an interruption due to a pandemic would justify a valid claim.  Even where insurers conceded that cover for infectious diseases was included, they argued that this was not intended to mean a global pandemic. The stand-off between businesses and insurers needed to be resolved.

The route to a solution was for the Financial Conduct Authority to bring a test case involving eight insurers, heard in the High Court, which handed down its judgment on Tuesday 15 September. The FCA said it hoped its test case would resolve the contractual uncertainty surrounding many of the disputed claims. The Court considered a representative sample of business interruption policy wording from the eight insurers.

The gist of the judgment

As summarised by the FCA, the lengthy judgment indicates: “Most, but not all, of the disease clauses in the sample provide cover. It also says that certain denial of access clauses in the sample provide cover, but this depends on the detailed wording of the clause and how the business was affected by the Government response to the pandemic, including for example whether the business was subject to a mandatory closure order and whether the business was ordered to close completely.

“Although the judgment will bring welcome news for many policyholders, the judgment did not say that the eight defendant insurers are liable across all of the 21 different types of policy wording in the representative sample considered by the High Court.  Each policy needs to be considered against the detailed judgment to work out what it means for that policy. Policyholders with affected claims can expect to hear from their insurer within the next 7 days.” 

Here to advise

The judgment may be appealed, but the finding that at least a proportion of business interruption policies do purport to cover coronavirus seems unlikely to change. Woodfines has been closely following this important issue and has the expertise to advise SME clients on interpretation of their specific policy wording to assist with appropriate claims.

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