The test case resulted from many business interruption (BI) policyholders whose businesses were affected by the Coronavirus pandemic finding that their claims were denied.
Most SME policies are focused on property damage and only have basic cover for BI as a consequence of property damage. Some policies also cover for BI from other causes, in particular infectious or notifiable diseases and non-damage denial of access and public authority closures or restrictions. In some cases, insurers accepted liability under these policies. In other cases, insurers disputed liability while policyholders considered that it existed, leading to widespread concern about the lack of clarity and certainty.
The test case was bought by the FCA to provide businesses and insurers with clarity. The regulator named the eight insurers who agreed to take part in a test case in June.
As the results from the test case came in, the Chartered Insurance Institute urged insurance professionals and the government to act now to reduce the need for similar legal proceedings in the future.
The professional body urged the insurance profession to focus on product governance processes (including gaining greater clarity on product wordings), improved advice processes to help clients understand the full range of risks they face, and to establish an approach to pandemics and other systemic risks that clearly sets out the scope of government intervention.
Sian Fisher, CEO of the Chartered Insurance Institute, said: “As the professional body for insurance, our key concern is to build trust in the profession. For this reason, we welcomed the test case when it was launched, as it will create greater certainly around the legal basis of business interruption contracts.
“Although the High Court decision will bring greater certainty to the situation, we must bear in mind that this decision may be subject to appeal.
“Business interruption insurance is a crucial product for many SMEs. It provides for a wide range of risks that could threaten the survival of a business, including fire and flood.
“Looking to the future, insurers, brokers and government must act now to reduce the need for court cases such as this one in future.”
Christopher Woolard, interim chief executive of the FCA, said: “We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market. We are pleased that the Court has substantially found in favour of the arguments we presented on the majority of the key issues. Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders. We are grateful to the court for delivering the judgment quickly and the speed with which it was reached reflects well on all parties.
“Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful.”