As Covid-19 continues to suspend normal life, with strict lockdown measures back in place, many small to medium businesses will have breathed a sigh of relief following a Supreme Court ruling (on Friday 15th January 2021) confirming the circumstances in which business interruption insurance policies should pay out in the event of a pandemic.
Multiple lockdowns and tiered restrictions since March 2020 have seen many businesses temporarily closing their doors to customers or making significant operational reductions for weeks or even months at a time, resulting in huge damage to their operations and loss of income.
Many companies have made timely and frustrating insurance claims but have been refused pay-outs when insurers argued the pandemic was not covered by their business interruption policy wording. Now however, thousands have been told they are covered for losses caused by the pandemic after the ruling by Britain’s Supreme Court. The Supreme Court’s judgment in the Financial Conduct Authority (Appellant) v Arch Insurance (UK) Ltd and others (Respondents) clears the way for millions of pounds to be paid for business interruption cover for losses caused by infectious diseases.
The ruling related to policies which did not explicitly outline which infectious diseases were covered and was brought by the Financial Conduct Authority as a test case, representing policyholders with 21 different policy wordings, to try and resolve the dispute over when compensation should be paid by insurers.
This included whether compensation was payable to businesses if forced to close in line with government restrictions and guidelines, rather than as a legal requirement, together with if losses could be claimed for the overall impact of a pandemic, not just restricted to cases of disease in a geographic radius of the business.
The average policy outlines that insurance claims must relate to notifiable diseases within a radius of 25 miles, making it increasingly difficult for businesses to prove that their losses had been a direct consequence from the disease in that radius, resulting in claims being refused.
One of the most important aspects of the Supreme Court’s judgement is that compensation should be related to what income a business would have generated in ‘normal circumstances’ rather than the reduced income as a result of the pandemic.
This will be very welcome news to those businesses with business interruption insurance policies and a significant turning point on an earlier ruling in the Court of Appeal, setting a precedent for future generations.
It should be noted that not all business interruption insurance policies will cover for infectious diseases and anyone who believes they have a claim will need to have it agreed with their insurers. A business will need to demonstrate the loss that has occurred and how the wording in their policy covers them as each policy tends to have its own unique wording requiring interpretations. This is not straightforward and we are bound to see future disputes with insurers on the interpretations of their policies.
According to the Association of British Insurance Brokers (ABI) pandemic insurance is not generally available anywhere in the world and most business cover is restricted to standard commercial insurance policies to cover against day-to-day risks such as fire, flood, theft and accidents involving employees.
It has been estimated by ABI that insurers in the UK will pay out £1.2 billion in claims directly connected to Covid-19, of which £900 million will qualify for business interruption.
Many businesses, even when having business interruption insurance will find that few policies cover for claims against notifiable or infectious diseases and those that do will usually seek to restrict specific diseases. Policies are usually only enforceable when the disease is present at the business premises and cause interruption to their trade by the illness, such as Legionnaires’ disease or Norovirus and where the building needs to be closed and cleaned to deal with the specific incident.