Britain’s Supreme Court Ruling Could Help Businesses That Have Suffered COVID-19 Interruption

Insurers around the world have universally declined the COVID-19 business interruption claims their clients have filed over the past year. In some cases they site a lack of direct damage or invoke exclusions related to bacteria and infectious disease but the industry has been in unison all year to say such claims are simply not covered.  Here at Morris & Reynolds we’ve filed countless such COVID-19 claims over the past year with a who’s who of insurers and in each case the loss has been declined. And when we appeal those initial decisions, as we do in each case, the answer has time and time again been the same as insurers remain firm in their belief that their contracts exclude such losses.

So as a new year begins the news of the United Kingdom’s Supreme Court having ruled in favor of ‘tens of thousands’ of businesses just might, perhaps, have far reaching repercussions. Time will tell if that’s the case or if it has any application here (the wording of most policies written in the US differs from those in the UK) but it’s worth following (and I thought worth sharing) for sure.  

The case that was the subject of the ruling was called a ‘test case’ and in concert with eight insurers the British Financial Conduct Authority sought clarity on their policy wording. As you are about to read, the ruling is estimated to impact nearly 400,000 UK businesses, 60 insurers and the wording within some 700 different policies those insurers apparently used to cover those businesses. The impacted insurers include Arch, Argenta, Hiscox, MS Amlin, QBE, Royal & Sun Alliance while the contracts offered by the other two, Zurich and Ecclesiastical, were found to provide no coverage.

We will continue to monitor this news and any possible developments here in the United States but for now want to share the news in an article from the Insurance Journal’s January 18th edition:   

UK Supreme Court rules for policyholders in COVID BI litigation

Key case in insurers’ argument ‘wrongly decided,’ court found

By Erin Ayers, Front Page News

The United Kingdom’s Supreme Court ruled in favor of “tens of thousands” of policyholders in the closely watched battle over COVID-19-related business interruption coverage, unanimously dismissing the appeals of several insurers.

The decision upholds a lower court’s ruling on a test case brought by the UK Financial Conduct Authority (FCA) last May to provide clarity on economic fallout from the COVID-19 pandemic. Eight insurers agreed to participate in the litigation, which examined whether select policy wordings should provide coverage for non-damage business interruption losses caused by a notifiable disease within a specific radius.

The London High Court ruled in favor of policyholders in most cases in September but found that the policies used by Zurich and Ecclesiastical Insurance did not provide cover. The remaining insurers – Arch, Argenta, Hiscox, MS Amlin, QBE, Royal & Sun Alliance – appealed the case directly to the Supreme Court.

FCA identified approximately 370,000 policyholders, 700 types of policies, and 60 insurers that could be affected by the litigation. Most BI policies focus on losses from actual physical damage, but the policies examined by the UK courts in this case contain provisions for infectious disease, prevention of access, and “hybrid” clauses that relate to both disease and access.

The Supreme Court not only upheld the High Court’s ruling, it expanded upon it. While the lower court had limited coverage for losses to mandatory public shutdowns, the Supreme Court found this interpretation too narrow and ruled that “instructions” from public authorities can constitute prevention of access.

It also determined that policyholders can claim losses for the impact of reduced service and interpreted the disease clauses to provide coverage for any COVID-19 cases occurring within a 25-mile radius. Insurers had argued that losses must be caused by the localized impact of the disease, rather than a more general impact.

One of the insurers’ key defenses against paying the pandemic BI claims was the 2010 case of Orient-Express Hotels Ltd. v. Assicurazioni Generali SpA, in which a New Orleans-based hotel sued its insurer for business interruption damages after 2005’s Hurricane Katrina. The Supreme Court opined that Orient Express was “wrongly decided” by the London High Court, according to a review of the test case by Herbert Smith Freehills, the FCA’s legal counsel.

The Court’s determination on Orient that could have “far-reaching ramifications” for the insurance industry going forward, according to an analysis by Fitch Ratings.

“Insurers have relied on this decision for the past 10 years to reduce payouts for BI claims. In the FCA test case, insurers argued that businesses forced to close during the pandemic would have suffered reduced earnings even had they been allowed to stay open, due to other restrictions and changing public behavior. They believed that compensation should be reduced to reflect the lower trading activity rather than being based on pre-pandemic business levels,” Fitch said. The ratings firms added that while UK insurers could see a significant increase in BI claims cost – including those not relating to the pandemic.

The FCA praised the Supreme Court’s ruling and said it would be working with insurers to ensure claims are paid.

“Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. This test case involved complex legal issues,” said Sheldon Mills, FCA executive director for consumers and competition. “Our aim throughout this test 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.”

Huw Evans, director-general of the Association of British Insurers (ABI), said, “The insurance industry expects to pay out over £1.8bn in Covid-19 related claims across a range of products, including business interruption policies. Customers who have made claims that are affected by the test case will be contacted by their insurer to discuss what the judgment means for their claim. All valid claims will be settled as soon as possible and in many cases the process of settling claims has begun. Some payments have already been made where valid business interruption claims have not been impacted by the test case ruling.”

Hiscox said in a statement that fewer than one-third of its 34,000 UK business interruption policies would be affected. The Court found that Hiscox’s policies only provide coverage for complete inability to use the premises, rather than partial inability.

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