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FCA Covid-19 business interruption test case: Policyholders must be aware as a result of extensive implications

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The eagerly awaited judgment in the Covid-19 business interruption test case brought by the FCA was handed down by the High Court, on 15 September. The case examined the wording of a sample of 21 non-damage business interruption policies, written by 8 insurers. It brought about clarity within the insurance sector, as claims had often been declined during the pandemic. Policy provisions with respect to, disease, prevention of access or use, and hybrid wordings combining both features, were examined in the test case.

What was the verdict?

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The verdict ruled in favour of the FCA and policyholders for most of the sample wordings considered and concluded that the policy wordings selected from Zurich and Ecclesiastical Insurance policies did not provide cover for Covid-19.  However, policyholders should check the wording of their own policy as both this and the specific impact of Covid-19 upon their business will direct whether a claim can be pursued.

The case has been followed closely, both across the insurance sector and internationally such as in the US and Australia, with the speed at which the verdict was reached widely praised.

Businesses are still in uncertain times

Unfortunately, there is still uncertainty for many businesses as all policies and wording were not tested. Also, it remains to be seen whether, as the FCA hopes, insurers will apply or at least take into account the principles decided upon in the test case. 

However, further delay is anticipated as an appeal is due to be heard in the Supreme Court in mid-November so a final decision could still be some months away. It should also be borne in mind that insurers may be required to follow the appeal route by reinsurers. 

The potential claim exposure wasn’t as severe as some insurers feared, causing the price of a lot of insurance shares to rise. In addition, with the prospect of further delay and uncertainty, the potential for cash-strapped policyholders to settle early for a reduced sum, could be particularly attractive. Nevertheless, policyholders are being advised to clarify the position their insurer is taking and push for interim payments even though it is unlikely that payment will be forthcoming until the legal process has reached a conclusion. With new lockdown measures either in place or on the horizon and the accompanying potential for further claims arising from the period running up to Christmas, no one is expecting insurers to pay out before they have to.

Businesses should now:

  1. Check with their insurance broker about what the judgment means given the wording of their policy;
  2. Make or notify an insurer of any potential claim as soon as possible – failure to notify on a timely basis may invalidate a potential claim;
  3. If a claim has already been made, check what the insurer’s position is following the test case;
  4. Continue to maintain business records in a way that will enable you to identify potential claims e.g. additional expenditure incurred, periods of closure or reduced opening, details of business enquiries or opportunities that could not be dealt with.

What is the outlook for the future?

In the future, and with more local lockdowns being implemented, it is anticipated that insurance policy wording will be significantly overhauled for renewals to ensure that the financial impact of national or Government policy resulting in business interruption is either excluded or separately covered with a consequent increase in premium. In summary, it is likely that policy wordings used by most insurers will be subject to examination and revision. Accordingly, it is important that businesses are alert and consider the implications of current circumstances with respect to their own insurance coverage and business activities. The verdict has been a relief to many who felt insurance policy wordings contained tensions and inconsistencies. Furthermore, the appropriateness of coverage provided by many “off the shelf” policies purchased in the SME sector has been thrown into stark relief. 

Perhaps in addition to death and taxes, the certainties of life should include an increase in insurance premiums following a payout.

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Paul Smethurst - FCA MAE

Partner, Forensic Services

Paul Smethurst is an expert forensic accounting services Partner working in our London Central office as part of the forensic services team to deliver expert business advisory services.