Supreme Court rules insurers must pay small businesses for lockdown losses

The court has ruled that insurers must pay out to hundreds of thousands of companies forced to close during the UK’s first coronavirus lockdown, ruling in favour of the Financial Conduct Authority (FCA), over policyholders with business interruption cover.

The result of the landmark judgment has implications for hundreds of thousands of businesses that were forced to close during the coronavirus pandemic, including thousands of nurseries.

The FCA said that ‘tens of thousands of small firms’ and ‘potentially hundreds of thousands of jobs’ were affected, and that insurers should move quickly to make payouts on claims that the judgment said should be paid.

Most nurseries forced to close as a result of the pandemic that found they were unable to claim on their insurance.

While some nurseries stayed open for key worker and vulnerable children during the first lockdown, others were unable to do so, and sought claims for financial losses under their business insurance.

Many policyholders whose businesses were affected by the Covid-19 pandemic suffered significant losses, resulting in large numbers of claims under business interruption (BI) policies.

The test case was brought by the Financial Conduct Authority (FCA) in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market. 

They argued that disease or denial of access clauses within interruption policies should trigger payouts in the event of coronavirus-linked disruption.

As we reported last year, most nurseries forced to close as a result of the pandemic were among thousands of small businesses left fighting claims with their insurers despite having business interruption cover included in their policies, which they believed would protect them during unforeseen events, such as the pandemic.

Many insurers refused to pay out, which led to the FCA bringing the business interruption insurance test case

In September, the High Court ruled that the disease clauses in some insurance policies should have meant they are covered.

The High Court found in favour of the arguments advanced for policyholders by the FCA on the majority of the key issues. 

However, six of the eight insurers – Arch Insurance, Argenta, Hiscox, MS Amlin, QBE and RSA – appealed. The FCA also deced to appeal against some parts of the ruling.

Nursery World reported in May that international law firm Fieldfisher was considering taking on a class action on behalf of more than 90 day nurseries against the insurer Ecclesiastical and/or broker Pound Gates.

The nurseries’ claims for business interruption as a result of the coronavirus lockdown had been rejected.

Commenting, a Fieldfisher spokesperson, said, ‘The Supreme Court's decision is encouraging news and certainly helpful for nurseries, many of which are continuing to feel the acute financial strain of the pandemic.

‘We will be speaking to all our nursery claimants about this judgment as a priority and hope to be able to reach a decision regarding their claims in due course.’

The spokesperson added that if businesses have closed as a result of the policy not paying out, policyholders may also be able to claim for damages. Some nurseries may also be able to claim for damages, for example if they have had to pay rent on a building they were unable to open during the lockdown.

Sheldon Mills, executive director, Consumers and Competition at the FCA, said, 'Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. This test case involved complex legal issues. Our aim throughout this test case has been to get clarity for as wide a range of parties as possible, as quickly as possible, and today’s judgment decisively removes many of the roadblocks to claims by policyholders.

'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.’

One of the judges, Lord Briggs, said that the fact the cover apparently provided for interruption caused by the effects of a notifiable disease causing a national pandemic 'was in reality illusory, just when it might have been supposed to have been most needed by policyholders'.

He added, 'This was not, of course, a disease which anyone could have had specifically in mind when the policies in issue were written and marketed. But it is clear from the use of the definition of a "notifiable disease" in most of the relevant clauses, and equivalent wording in the remainder, that Covid-19 [when it appeared] fell squarely within the types of disease for which all the relevant disease and hybrid clauses provided cover.'

The Federation of Small Businesses' (FSB) national Chair Mike Cherry said, ‘Today’s judgement is a big victory. It cements the high court’s decision to grant businesses left on the brink the insurance pay-outs they are rightfully owed. For many, it has been a long and difficult road to get to this stage so this will bring clarity and hope to the thousands of firms which have been left in financial limbo for almost a year.

‘While this is good news, and while the law has to follow procedure, it’s disappointing that so many small businesses have had to wait to get the money they desperately need under policies they believed were there to protect them, policies they bought in good faith.

‘Businesses deserve to be protected in a timely way, but instead they have been failed by their insurers and are now trying to make up for lost time. ‘Providers must now pay out quickly, and consider the steps they can take to progress these claims in a swift and seamless manner. Any paperwork required of claimants shouldn’t be onerous or time-consuming.'

• More information on the Supreme Court judgment in the COVID-19 Business Interruption insurance test case is available here