The decision will result in payouts for many hospitality businesses and is based on a four-day hearing that saw insurers Argenta, Arch Insurance, Hiscox, MS Amlin, RSA, QBE UK and policyholder action groups Hiscox Action Group and Hospitality Insurance Group Action join the FCA in seeking clarity on whether specific policy wordings cover business interruption caused by the first Covid-19 lockdown.
When the pandemic hit, thousands of businesses made claims on their business interruption insurance but many leading insurers argued that their policies did not provide cover and refused to payout.
This resulted in watchdog FCA bringing a test case in a bid to provide clarity for both policyholders and insurers.
Today’s decision impacts 700 types of policies, 60 insurers, and 370,000 policyholders and over £1b in claims.
It will also have a bearing on disputes in Scotland and Northern Ireland, with The Financial Ombudsman Service and courts expected to base their decisions on the Supreme Court’s ruling.
The Supreme Court was asked to rule on the specific wording of polices, including clauses relating to disease and prevention of access (further details can be found here).
Paul Smethurst, partner and forensic investigation specialist at accountancy firm Menzies LLP, says the ruling means that businesses finally know where they stand with respect to their business interruption insurance.
“Most of those that have been waiting for a resolution of their existing claims will now receive the compensation they are due," he says. "However, many will still need to study the small print of their policies to check what the Court’s decision means for them."
Only sample wordings were considered and underwriters may seek to distinguish their particular policy terms. That said, a clear message has been sent to the insurance community regarding liability for claims.
“While both the appeal hearing and the original case have been expedited, it is still possible that some businesses will have failed before finding out that their claim will be paid," Smethurst continues. "In these circumstances any claim and the money resulting from a payout will be for the benefit of the insolvent estate and used to pay back creditors.
Manoj Vaghela, partner at Charles Russell Speechlys, which specialises in insurance disputes, also welcomed the ruling, describing it as the "the light at the end of the tunnel".
“Although insurers argued that you could not simply rewrite the insurance contract to expand the scope of indemnity, it is a relief to see that the Supreme Court has shown a willingness to develop a new line of law on this occasion to support businesses.”
“The challenge the courts will now face is managing external expectations that this legal rewriting will be followed in every case where public opinion thinks the law is unjust. Going forward, it is important that the freedom to contract remains sacrosanct.”
The ruling will likely see premiums increase as insurers seek to recoup some of their losses and policy wording is likely to be tightened, particularly in clauses related to the circumstances of business interruption claims.