The Supreme Court has recently delivered a landmark victory for small businesses in a judgment that will have profound ramifications for the insurance sector but provides a lifeline for many small businesses that are at risk of going under during the Covid-19 pandemic.

The judgment follows a test case brought by the Financial Conduct Authority (FCA), which represented the interests of policyholders against six insurance companies.

The case concerns the validity of insurance claims made by many small businesses for business interruption losses, including loss of earnings incurred during the first national lockdown due to being forced to close in compliance with the government’s coronavirus restrictions in place at the time.

Business Interruption

Business interruption insurance is a key part of commercial insurance policies and usually provides insurance cover if a business cannot trade as usual owing to an unexpected event.

In this case, the insurers refused to pay out on these policies, arguing that the policies were not designed to cover the unprecedented government-imposed lockdown.

The Supreme Court largely focused on the wording of a few selected policies and the impact of the lockdown measures on certain clauses in these policies, such as disease clauses.

The Supreme Court rejected many of the arguments put forward by insurers and found in favour of the policyholders by ruling that they were entitled to receive payments from insurers out of their business interruption policies.

Future Claims

There is some useful guidance provided on the validity of disease clauses, the impact of businesses being denied access to their properties and the timing of lost earnings, which will be helpful in determining the parameters for what could be considered valid insurance claims in the future.

For instance, the Supreme Court clarified that COVID-19 fell squarely within the types of notifiable disease for which the relevant disease clauses in these policies provided cover.

Whilst this represents an important victory for small businesses, it remains to be seen how quickly insurers will now process and payout on the claims that are affected.

Any policyholder who is due to receive a payout following this ruling would be well advised to seek an interim payment from their insurers wherever possible in order to mitigate the risk of any further delays being incurred whilst insurers process final payments.

An inevitable consequence of the ruling is that premiums for policyholders renewing or taking out new business interruption insurance policies are likely to increase significantly as a result.

The ruling is also likely to have a major ripple effect on other types of insurance claims from small businesses, such as claims for loss of rent cover.

It could pave the way for other consumers to bring claims against insurers who have refused to pay out during the coronavirus crisis.

If you are a small business and have been affected by non-payment of an insurance policy, please do not hesitate to contact us to discuss your options.

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