Pressure is now on insurers to pay out to policyholders with business interruption (BI) insurance following Friday’s Supreme Court ruling, although there are still issues to be sorted out.
The Supreme Court substantially allowed the Financial Conduct Authority’s (FCA) leapfrogged appeal on behalf of policyholders against September’s High Court ruling in the BI test cases.
Some 370,000 policyholders are thought to hold 700 types of policies issued by 60 insurers that may be affected by the outcome of the case.
The case centred on ‘disease’ and ‘prevention of access’ clauses in the representative sample of 21 policy types and whether they provided cover in the circumstances of Covid-19, and that the trigger for cover caused policyholders’ losses.
The FCA, six of the eight insurers and the Hiscox Action Group as intervener all appealed the High Court ruling.
Herbert Smith Freehills, the City firm that acted for the FCA, said the Supreme Court took a narrower approach than the High Court to identifying the insured peril or trigger in disease clauses, focusing on individual occurrences, “but because it found that such individual occurrences could as a matter of law satisfy the test of causation (along with all other such occurrences) the conclusion that there was cover under the disease clauses was confirmed”.
It also held that prevention of access/hybrid clauses would be triggered more readily than the High Court did – there was no requirement for an actual legislative step ordering closure, and equally losing access for the purposes of a part of a business or access to a part of premises may suffice.
On causation, the ‘source’ event (ie the Covid-19 pandemic) would not be a competing cause when assessing if the insured has established causation and hence insurers’ arguments as to the competing causes of loss were rejected.
The principle underlying the above conclusions was that ‘but for’ causation was neither always necessary nor always sufficient. Here it was not necessary.
On payouts, the court said that trends clauses were intended to address losses wholly outside the insured peril; matters inextricably linked to it or the source were not trends and did not fall to be taken into account. This applied as well to pre-trigger downturn in revenue.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “We will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible.
“Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.”
The FCA stressed that the test case was not intended to encompass all possible disputes, but “to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers”.
It went on: “Each policy needs to be considered against the detailed judgment to work out what it means for that policy.”
The judgment will now be distilled into a set of declarations, with the FCA and defendant insurers “working as quickly as possible with the Supreme Court to enable the court” to issue it.
The FCA will publish a set of Q&As for policyholders to assist them and their advisers in understanding the test case, as well as a list of BI policy types that potentially respond to the pandemic.
Paul Lewis, partner and global head of insurance disputes at Herbert Smith Freehills, said the ruling improves policyholders’ position “significantly beyond that which was already established by the High Court judgment”.
But Rebecca Carrera, a legal director at Pinsent Masons, said: “While the judgment will allow insurers and policyholders to now focus on quantum and claims settlement, a number of issues such as aggregation of losses and the application of one or multiple sub-limits sat outside the remit of the test case and so will still need to be worked through in the normal way.
“Each policy will also still need to be considered on its own terms against the detailed judgment and the facts of each case.
“The wider impact of this decision on loss of rent cover for landlords and tenants, delay in start-up insurance for construction projects and on reinsurers is yet to be seen. However, it is clear that the ripple effects of the judgment are likely to be significant.”
Richard Leedham, the partner at Mishcon de Reya who represented the Hiscox Action Group, said: “The judgment should be a massive boost to all businesses reeling from a third lockdown who can now demand their claims are paid.
“The hope and expectation of our clients is that the claim adjustment process starts immediately and that insurers will not continue to cause further distress by further unnecessary delay.”
Hiscox said the claims settlement process has now begun following the ruling and said fewer than one-third of its 34,000 BI policies may respond as a result.
Dene Rowe, partner and innovation director at insurance law firm Keoghs, said: “With insurers now facing a potential avalanche of claims from policyholders, it is likely that insurers will require a technology focused approach to ensure the prompt settlement of claims.
“Failure to respond in an accelerated way will likely risk a major reputational risk to commercial insurance brands.”
Huw Evans, director general of the Association of British Insurers, said: “All valid claims will be settled as soon as possible and in many cases the process of settling claims has begun. Some payments have already been made where valid business interruption claims have not been impacted by the test case ruling.”
Stephen Netherway, partner and head of the insurance practice at national law firm Devonshires, added: “The knock-on effect of this landmark judgement could see thousands of jobs and livelihoods being saved. Had the insurers won it would have spelled further, fatal, economic misery for those just surviving businesses.”