Today the Supreme Court has handed down judgment on the appeal in the Financial Conduct Authority’s test case on business interruption insurance clauses (FCA v Arch Insurance (UK) Ltd and Others). The ruling is good news for those businesses that hold appropriate cover at this challenging time.

The majority of business interruption insurance clauses are linked to property damage.  So for example, if a factory were to catch fire and burn down, the insured could seek to rely on a business interruption clause in their insurance policy which would cover them for their business interruption losses for the period when the factory could not operate.  However, there are business interruption clauses that are not linked to property damage.  It is believed that there are approximately 370,000 policyholders that may be affected by this case.

With the outbreak of Covid-19, and the massive business interruption that this caused, these clauses suddenly came into vogue. In a number of instances, insurers sought to challenge the insured’s right to claim. Common themes in these clauses were whether the clause covered Covid-19 (disease clauses), whether there had to be prevention of access and public authority closures or restrictions for the clause to operate (prevention of access clauses) and causation (whether the business interruption was caused by Covid-19 in their area, or whether it was a more widespread downturn caused by the Government’s lockdown measures). For the record, some clauses were hybrids of the above clauses, combining aspects of each (hybrid clause).

The Financial Conduct Authority brought a test case against eight insurers in relation to 21 policy types.

In September last year, the High Court ruled that most of the disease clauses and certain prevention of access clauses (12 policy types from the sample of 21) provided cover and that the pandemic and the Government and public response caused the business interruption losses.  The insurers appealed those conclusions for 11 of the 12 policy types and the Financial Conduct Authority also appealed.  The Appeal moved forward to the Supreme Court.

It had been hoped that the judgment would be handed down before Christmas, but it was finally given today.

The Supreme Court has dismissed the appeals brought by the six insurers.  On the Financial Conduct Authority’s appeal, the Supreme Court has ruled that cover may be available for partial closure of premises (as well as full closure) and for the mandatory closure orders that were not legally binding; that valid claims should not be reduced because the loss would have resulted in any event from the pandemic; and that two additional policy types from insurer QBE provide cover.  This is likely to increase the number of policyholders that will have valid claims and potentially payouts could be higher.

The judgment is very long and complex and specific to the different types of policy wording.  It is anticipated that the Financial Conduct Authority will finalise their guidance to those affected shortly.  Given that claims of this type are always scrutinised closely in any event, it is likely that insurers will continue to do this, especially in relation to the claims covered here.

If you would like to discuss your insurance policy and if this decision affects you, or if you are having issues in relation to an insurer paying out on your claim, please do not hesitate to contact Graham Mead, a partner in the firm’s Commercial Dispute Resolution team on 01473 232121.

Graham Mead