What does the Supreme Court’s Business Interruption Ruling Mean for Insurance Brokers?

Background

The Covid-19 pandemic and the unprecedented national ‘lockdown’ had a devastating effect on businesses throughout the UK. Many beleaguered business owners, hoping to recover their losses, subsequently made claims under their Business Interruption (BI) policies.

Most BI policies, principally aimed at small and medium enterprises (SMEs), focus on property damage and provide basic cover for business interruption following such damage. However, some BI policies respond to ‘non-damage’ business interruption, including interruption caused by infectious or notifiable diseases, and non-damage denial of access, or public authority closure or restrictions.

What became apparent was the widespread concern about the lack of clarity and certainty for policyholders making BI claims because of Covid-19, and the basis on which some insurers were making decisions in relation to claims. The issues were complex, and it was recognised that they had the potential to create ongoing uncertainty for both policyholders and broker firms.

The FCA’s test case, aimed at resolving the contractual uncertainty around the validity of many BI claims, allowed it to advance arguments on behalf of policyholders in the public interest.

On 15 January 2021, the Supreme Court, the highest court in the land, handed down its judgment, substantially allowing the FCA’s appeals and dismissing the insurers’ appeals.

The ruling means more claims will now be payable.

Whilst this is good news for some policyholders, it should be remembered that the test case was about Non-Physical Damage Business Interruption clauses covering areas such as Disease, Denial of Access or a hybrid of the two. Most SME Business Interruption policies do not have this cover, which the FCA has always acknowledged.

FCA Policy Checker

As many of you will be aware the FCA recently published their policy checker: (https://www.fca.org.uk/firms/business-interruption-insurance-policy-checker/general-faqs-policyholders). There is a lot of information for broker firms to consider, including focus on the claims process itself and importantly, the ‘proving’ of coronavirus (Covid-19).

Objective

The principal aim of this article is to help raise awareness more generally within broker firms concerning key messages contained in published guidance in December 2020, distilling certain parts into practical steps that firms can consider now that we are more informed and more aware of our obligations to both reach out and deal fairly with policyholders (potential claimants).

Practical Steps to Take

The initial steps broker firms might wish to undertake (if not already taken) can be broken down into two components.

The first would be to identify the number of affected policyholders both by client and policy type to establish a tranche of potentially affected policyholders. This should be achievable through the reporting function of most broking platforms.

The second is to filter the policy types by insurer. Although the test case was based on a representative sample of policy wordings, it is clear the outcome of the judgment was legally binding on the following insurers:

  • Arch Insurance (UK) Ltd
  • Argenta Syndicate Management Ltd
  • Ecclesiastical Insurance Office Plc
  • MS Amlin Underwriting Ltd
  • Hiscox Insurance Company Ltd
  • QBE UK Ltd
  • Royal & Sun Alliance Insurance Plc
  • Zurich Insurance Plc

Policies with Insurers Not Listed

In undertaking these initial steps broker firms will also identify the number of policyholders (potential claimants) who have policies with other insurers, where non-damage BI cover also exists.

We suggest this tranche of policyholders be ringfenced, as dealings with potential claimants, will be more complex and require a reasonably deeper understanding of the arguments presented in the court ruling to identify what will be variety of considerations when looking at claimants’ cases with insurers not listed. We recommend broker firms design a process which works for them as it will need to be carefully researched and thought out.

The High Court judgement interpreted approximately 700 policy wordings as being affected, covering around 60 insurers. 12 out of the 21 policy types tested were found to have the potential to provide cover in response to the pandemic; 9 were not.

Broker firms will need to think carefully about what steps they take. We would strongly encourage all firms to consider the underlying basis on which the court ruling was reached, and considerations given within published guidance in building support for potential claimants. We fully appreciate this will not be straight-forward.

Policies with Insurers listed

Significant (in the context of the insurers listed above) is the table published on 22 January 2021, and we urge all broker firms to familiarise themselves with this as it includes, of particular importance, the final judgment on whether the policy would potentially provide cover, as well as the type of clause that may be relied upon.

The table incorporates embedded links to wider interrelating material including relevant declarations of the High Court and can be accessed here:

(https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-table-high-court-supreme-court-outcomes.pdf)

Presence of disease

What we know, and worthy of emphasising, is whether or not policyholders will need to prove the presence of at least one case of Covid-19 in a particular zone relative to the policyholder’s premises will depend on the policy wording.

We therefore encourage firms to at least familiarise themselves with how to access the reported NHS data which can be found here https://www.england.nhs.uk/statistics/statistical-workareas/covid-19-daily-deaths/. Data for the wider UK can be found on the UK government’s Coronavirus Data website (https://coronavirus.data.gov.uk/).

Vicinity Clauses

Policies requiring the presence of disease within a given area (vicinity), where events that occur within such area would be reasonably expected to have an impact on a policyholder, will not need to prove the presence of Covid-19, as was confirmed by the High Court in the test case RSA4, which looked at the policy type underwritten by Royal and Sun Alliance and various other insurers.

The FCA guidance suggests the same approach should be used where policies extend the definition of ‘vicinity’ to ‘an area surrounding or adjacent to an insured location’.

Hybrid Clauses

Policies where the ‘occurrence’ of a notifiable disease is required will not, as with those with vicinity clauses, need to prove the presence of Covid-19, as was confirmed within the Hiscox1-3 (Hybrid clauses Court declaration 3). Again, the FCA guidance suggests the same approach should be used where other policies have similar worded clauses.

Obligations on Listed Insurers and Broker Firms

In short, insurers will need to demonstrate that they have considered and assessed any evidence submitted to prove the presence of Covid-19 by claimants fairly. In instances where insurers seek to present a counter argument, broker firms should assess this to ensure it is clearly a more appealing, convincing, and pertinent argument.

Insurers have been encouraged to adopt approaches which help streamline their claims handling procedures to expedite claims, importantly insurers should seek to

  • Propose to policyholders a suitable date, where Covid-19 is deemed to have been established in an area, proven in an earlier case; and
  • Publish records of Covid-19 established areas proved by policyholders to assist other policyholders in making claims.

We would encourage broker firms, where possible, to also publish records of established areas proved by their clients on their own websites to assist their other clients.

 

Mitigating the Possibility of Disputes

Although some claimants will be happy to hear that their claims will be paid, others, especially given the difficult financial and economic conditions, may seek to raise disputes with broker firms, in particular as to why a broker firm did not provide them with a policy that would have paid out.

In these circumstances we encourage broker firms to follow their complaints procedures strictly and, in the event a resolution through that process looks unlikely, ensure professional indemnity insurers are notified.

As a knock-on effect we suggest broker firms remain vigilant regarding insurers impacted and their on-going solvency status and consider what their future placements strategy will be for these types of risks, whilst also continuing to act reasonably and prudently, and making sure client records are complete and up to date.

About the author

Ash was Managing Director at RWA from 2018. He had over 15 years’ experience in the legal and compliance field and ten years in broker sales and leadership roles in national and global insurance firms. Sadly, Ash passed away suddenly in August 2021. 

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