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Supreme Court backs small business COVID insurance claims

18 January 2021: Tens of thousands of small businesses forced to close during the first lockdown could receive insurance payments following a Supreme Court ruling, in a move which could cost insurers more than £1bn.

In a test case brought by the Financial Conduct Authority, the Supreme Court has ruled in favour of small businesses initially denied payouts on their business interruption insurance policies following the first wave of coronavirus restrictions.

The City watchdog brought the case after several insurers refused to pay small business claims on the basis that only specialist policies covered such unprecedented restrictions.

However, said the court accepted the policyholders’ arguments and dismissed appeals from six insurers against an earlier High Court judgment which found in policyholders' favour.

During the first national lockdown, hundreds of thousands of businesses were forced to close, resulting in significant losses to their income. However, when they claimed on their business interruption insurance a number of leading insurers disputed the claims, arguing their policies did not cover the restrictions. This prompted the watchdog to bring a test case on behalf of policyholders seeking legal clarity on the issue.

In July last year, 400 SMEs complained to the FCA that many insurers had not backed their claims, leading the city watchdog to bring a High Court case to gain clarity on what to do regarding payouts and future coverage. 

In September, High Court judges ruled in favour of the arguments advanced for policyholders by the FCA on the majority of the issues. However, because a comprehensive agreement was not reached, insurers and the FCA made 'leapfrog' appeals to the Supreme Court without going to the Court of Appeal first, resulting in the final verdict in favour of policyholders.

Commenting after the verdict Sheldon Mills, Executive Director, Consumers and Competition at the FCA, said the organisation’s aim throughout the case has been to get clarity “for as wide a range of parties as possible, as quickly as possible”, and the 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,” continued Mills. “Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.

“As we have recognised from the start of this case, tens of thousands of small firms and potentially hundreds of thousands of jobs are relying on this. We are grateful to the Supreme Court for delivering the judgment quickly. The speed with which it was reached reflects well on all parties.”

Lack of clarity

While the majority of small business commercial insurance policies focus on property damage and contain only basic business interruption cover, some also cover interruption from other causes, in particular infectious or ‘notifiable’ diseases and public authority closures or restrictions.

While a number of insurers accepted liability under such policies others disputed liability, leading to a lack of clarity and the FCA’s test case.

Since this development, commercial insurance policies have been amended for new and renewing customers, with lockdown losses clearly stated as part of the cover.

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