Clarifying business interruption insurance policies – High Court judgment is welcome news for policyholders

Many business interruption insurance (BII) policies require physical damage to business premises to trigger cover. However, some policies provide cover when an event causes disruption to, or interference with, a business even without physical damage to property. The COVID-19 outbreak has caused loss and distress to many businesses, and it has followed that a large number of claims are being made under the terms of BII policies for losses related to the pandemic.

The Financial Conduct Authority (FCA) noted a lack of positive responses by insurers to claims made under BII policies and was concerned about the basis upon which claims were being rejected. As such, it commenced proceedings before the High Court seeking a declaration which would allow it to provide clarity and guidance to the industry. The aim has been to help resolve the uncertainty around the validity of many claims under BII policies.

The litigation started on 9 June 2020, the case was heard in July 2020 and judgment handed down on the 15 September 2020. The public importance of the issues required expedition.

The judgment is good news for policy holders as the FCA was largely successful with arguments intended to widen coverage. The principles established will clear the way for many claims but that doesn't mean that everyone insured under a BII policy will be covered. Policy wordings vary and the application of the principles established by the Court will still need to be individually applied. Policy wordings will need to be carefully considered against the detailed judgment in order to work out what the judgment means in relation to that policy and therefore whether the insurer should pay out on a claim.

It remains to be seen whether the judgment will be appealed. Any applications for permission to appeal will be heard at a "consequentials" hearing before the High Court which the FCA is seeking to have as early as possible. If there is an appeal, the parties have agreed to have it heard on an expedited basis which includes exploring the possibility of a 'leapfrog' appeal to the Supreme Court, potentially bypassing a hearing before the Court of Appeal.

Any appeal does not preclude policyholders seeking to settle their claims with their insurer before the outcome of the appeal is known.

Unless successfully appealed, the High Court judgment is legally binding on the eight defendant insurers that are parties to the test case in respect of the interpretation of the representative sample of policy wordings considered by the Court. It also provides persuasive guidance for the interpretation of similar policy wordings and claims, which can be taken into account in other court cases including in Scotland and Northern Ireland, by the Financial Ombudsman Service and by the FCA in looking at whether insurers are handling claims fairly.

Lauren Cormack from the dispute resolution team wrote an article in the Solicitors Journal in August 2020 outlining the focus of the test case and its potential impact on insurers and policy holders. She will be speaking at Wandsworth Chamber Coronavirus Business forum on 23 September 2020 considering the impact of the judgment.