A test case, brought about by the Financial Conduct Authority (FCA) on behalf of UK based SMEs, has clarified the interpretation of insurance clauses relating to losses incurred as a result of the COVID-19 pandemic, ruling in the favour of policyholders on the majority of issues raised.

The test case presented arguments on key issues associated with Business Interruption (BI) policies, many of which were in relation to the interpretation of certain Disease Clauses, Prevention of Access and Hybrid Clauses in connection with the disruption caused to their business by the pandemic and the Government’s  restrictions to combat the spread of the virus.

Whilst some insurers accepted liability under these policies, many disputed cover, leading to widespread anger, confusion and uncertainty.

The judgement, although complex, will remove a large number of roadblocks to successful claims, and is a promising move for policyholders, particularly those who previously had their claims rejected by insurers. It essentially means that many policyholders’ claims for compensation have now been vindicated – and that they should now see their claims dealt with and swiftly paid out – as the FCA and the court have asked.

Moving forward, the ruling will be used as guidance for disputed BI cases and is expected to impact around 370,000 SMEs.

What does this mean for policyholders throughout the UK?

John Farnsworth, Head of Corporate Finance at Smith Cooper comments “COVID-19 has caused substantial losses for many businesses, putting them under immense financial strain. Some, but by no means all, insurance policies appeared to cover some of these losses but ambiguity in the precise terms of the cover enabled many insurers to refuse to honour such claims.”

“The Business Interruption Test Case appeal judgement by the FCA is of huge significance and provides some SMEs with much needed, long-awaited clarity, and hopefully money in the near term. For the hundreds of thousands of small businesses eligible to receive insurance pay-outs covering losses from the first national lockdown, this may well prove to be a vital lifeline that prevents them from going under as the third lockdown places them under still greater pressure.”

“Although this ruling is welcome,  it is important to note that each policy’s wording will need to be considered against the detailed judgment to work out what it means for each specific case.”

Does the new FCA ruling affect me, and if so, do I need to act?

Insurers are being encouraged to communicate swiftly with policyholders who have previously made unsuccessful claims, explaining the next steps. Policyholders with relevant claims can expect to hear from their insurer within the next 7 days.

We recommend business owners check their policies and, where appropriate,  seek legal advice from their broker or solicitor to find out what the judgement means for them, and what they may now be entitled to as a result.

If you require any additional advice or support in regards to your business, please do not hesitate to get in touch with a member of our dedicated team – we are here to help and can work alongside you to deliver practical, commercially-viable advice with positivity, and tenacity. Furthermore, our Coronavirus hub provides detailed information about the support available for you and your business.