Boost for small businesses after coronavirus insurance test case ruling – could it affect other insurance too?

Many businesses across the UK had to close because of the lockdown imposed by the Government in March, and when many looked to their insurers for cover they were told the policies were never meant to cover such unprecedented restrictions.

The Financial Conduct Authority (FCA) brought a test case – which could affect about 370,000 businesses – over the wording of business interruption insurance policies.

In a 150-page judgment, which was delivered remotely on Tuesday, Lord Justice Flaux and Mr Justice Butcher considered 21 lead insurance policies issued by eight separate insurers.

Different conclusions were reached on the many policies, but the court found in favour of the FCA on many of the key issues, finding that most of the disease clauses in the sample provided cover.

Policyholders with affected claims can expect to hear from their insurer within the next seven days – and the ruling could mean more businesses receive a payout.

For information about the help available to small business owners and other self-employed people during the pandemic, see our Self-Employed & Small Limited Company Help guide.

Martin: 'A win for small business – could it have wider implications?'

Martin Lewis, founder of MoneySavingExpert.com, said "This is far from a simple ruling – with 150 pages just to announce it – but overall it's a win for small businesses and the FCA. It means some insurers who weren't paying out will have to.

"A key question in the consumer arena is whether it could have wider implications for other types of insurance too. Many who have wedding insurance, for example, have faced very similar issues, with some insurers trying to work their way out of paying for pandemic claims.

"The judgment itself was based on specific wording relating to business interruption insurance, so doesn't on its own set a wider precedent – but similar wording may have been used on wedding insurance policies for the same issue.

"Of course, as that's a consumer policy there is less need to push it to the courts. Instead, if you believe your claim has wrongly been turned down, you can take it to the Financial Ombudsman. And instinctively this case is likely to strengthen the case of consumers pushing for a payout on similar issues. Yet of course, with a judgment of such complexity, no read across will be rock solid."

What does the ruling mean?

Although today's judgment on business interruption insurance will bring welcome news for many policyholders, it did not state that the eight defendant insurers were liable across all of the 21 different types of policy wording in the representative sample considered by the court. So in other words, it DOESN'T mean insurers will need to pay out in every case.

Each policy needs to be considered against the detailed judgment to work out what it means for that policy.  Policyholders with affected claims can expect to hear from their insurer within the next seven days about what their next steps are.

It is possible that the judgment will be appealed, but this doesn't mean that policyholders can't seek to settle their claims with their insurer before the outcome of any appeal is known.

What does the FCA say?

The FCA's interim chief executive Christopher Woolard 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."

What do insurers say?

Huw Evans, director general of the Association of British Insurers, said: "Insurers have supported this fast-track court process led by the FCA to help bring clarity for customers, and we welcome the speed with which the court has delivered a ruling.

"The judgment divides evenly between insurers and policyholders on the main issues. The national lockdown was an unprecedented situation that posed understandable questions of interpretation for some business insurance contracts.

"Insurers always regret any contract dispute with their customers and will continue to reflect on feedback from recent events. We recognise this continues to be a difficult time for many businesses, small and large, and for society as a whole."