Many businesses adversely affected by COVID-19 may now be able to claim Business Interruption Insurance, following a legal ruling that clarifies policyholder rights related to the pandemic.
In January 2021, the Supreme Court ruled on a test case brought by the Financial Conduct Authority (FCA) to elucidate key contractual issues for both policyholders and insurers. For the affected companies, this verdict has multiple implications. For example, the estimation of the COVID-19 related quantum of losses, and the relation of insurance payouts to government support for businesses, such as furlough payments and CBILS.
Many businesses had made claims under their Business Interruption Insurance in relation to COVID-19. Insurers had argued that the nature of the pandemic did not fall under standard protection wording, save for some bespoke policies.
The FCA¹ brought a test case on behalf of policyholders against eight insurers in June 2020. Having failed to reach an agreement, the FCA and insurers leapfrogged the appeal process to take the case to the UK’s Supreme Court.
In January 2021, the Court ruled that losses arising from COVID-19 are allowed under 'disease clauses' and 'prevention of access clauses' in Business Interruption policies. Hybrid wordings, combining elements of both categories of coverage, also fell within the judgement. Although the quantification of losses due to COVID-19 will still have to be considered on a case-by-case basis, the legal process for impacted policies is now established.
The Supreme Court ruling could affect up to 370,000 policyholders, holding 700 types of policies, issued by 60 insurers. Many claims had been on hold while awaiting the decision and the ruling may prompt businesses to examine the possibility of making a claim. Policyholders should review their claims and policies and seek advice where necessary.
Assessing the Losses
In light of the judgement, firms and their advisors are trying to quantify and assess claims. For all policies considered by the test case, the indemnity received is compared to a no COVID-19, business-as-usual position. In addition, the treatment of various forms of Government assistance was not addressed by the test case. The Association of British insurers confirmed that Local Authority and Small Business grants, among others, should not be deducted from claims payments, but the question remains whether other forms of assistance, such as furlough payments and business rates relief should be deducted, and who should benefit in kind.
In considering the utilisation of any insurance payouts, there may be complex factors in play, including whether proceeds are subject to security or may impact on any lending arrangements.
Forecasts should be prepared to identify how proceeds could be utilised within the business, taking into account the current financial position and future strategy. Early discussions could be held with lenders to consider such proposals. Forecasts should also take into account any short-term liquidity gaps in the event there is a delay with the claims process. Early on account payments should be requested from insurers without delay. Legal advice should be sought in the case of exceptional income influencing guarantees and covenants.
By steering a course through the complexities of this positive development for thousands of businesses, the potential of a Business Interruption Insurance windfall can be maximised.
If you would like to discuss anything, you have read or what steps you might need to take regarding quantification of claims or other assessment options, please contact Kerry Bailey or Chris Skey. You may also be interested in referring to our interactive key event timeline to guide the decisions you take. By understanding how each of these key events may affect your business, appropriate strategies can be put in place to navigate through any challenges and opportunities that these will present.