The Supreme Court rules that insurers must pay many small businesses for Covid lockdown losses
On 15th January 2021, the Supreme Court substantially allowed an appeal by the Financial Conduct Authority (FCA) brought on behalf of predominantly small and medium sized enterprises who have business interruption insurance and have suffered financial losses as a result of the national lockdowns imposed by the UK Government during the COVID-19 pandemic.
In March 2020, the UK Government declared the first national lockdown in the UK due to the COVID-19 pandemic. At the time of writing in February 2021, the UK is facing its third national lockdown. Many businesses who have been forced to close have tried to make a claim on their business interruption insurance policies to indemnify them for the consequential financial losses. However, insurers have rejected many of these claims, arguing that their policies do not cover the economic impact of the pandemic in line with strict interpretations of the policy terms. Around 400 companies submitted complaints to the Financial Ombudsman that they had been wrongfully denied payment from their insurers for the loss they suffered due to the first lockdown. The FCA, as the UK’s insurance regulator, brought proceedings under the Financial Markets Test Case Scheme on behalf of business interruption insurance policyholders.
The High Court considered 21 sample wordings from policies of 8 different insurers to determine the correct interpretation of the policy terms and whether the policies covered the losses caused by the pandemic. In September 2020, the High Court largely ruled in favour of the FCA. It was held that some, but not all, of the policies would cover the business interruption losses, the outcome largely depending on the construction of the policy term, and the specific effect the business in question had suffered.
The decision was appealed, and the case was fast-tracked to the Supreme Court.
The Supreme Court case - The Financial Conduct Authority v Arch Insurance (UK) Ltd & others,  UKSC 1
The Supreme Court considered a number of issues including the interpretation of ‘disease clauses’ (which cover business interruption losses resulting from an occurrence of a notifiable disease within a specified distance of the business’ premises), and ‘prevention of access’ clauses (which cover business interruption losses resulting from public authority intervention preventing access to, or use of, business premises). It was held that disease clauses would cover business interruption losses caused by COVID-19, which was recognised as a notifiable disease in March 2020, within the specified geographical area. Each case of COVID-19 was confirmed to be a separate ‘occurrence’ for these purposes. It was held that prevention of access clauses apply to restrictions imposed by a public authority that have the force of law as well as restrictions that are mandatory but not necessarily enforceable by law. The Court indicated that mandatory instructions from the Prime Minister to lockdown would fall into this category, even if those instructions were not legally enforceable.
Overall, the Supreme Court found largely in favour of business interruption insurance policyholders receiving payments for the financial losses they suffered during the pandemic. It was held that from the sample of 21 policies that were considered, 14 may provide cover.
The Supreme Court decision means that more policyholders, including thousands of small businesses, who have suffered financially due to the national lockdown will be able to make a successful claim under their business interruption insurance. For many businesses, a successful insurance claim could provide them with the financial means to continue.
Insurers are now amending their policies to expressly state whether cover is provided for losses due to the pandemic and resulting lockdowns. However, in cases where the position is left ambiguous, the Supreme Court’s decision will provide guidance to the insurance sector, FCA, and Financial Ombudsman as to whether a claim regarding these types of business losses should be successful.