Hiscox and QBE have been ordered by the High Court to pay out on their disputed business interruption policies after a test case brought by the Financial Conduct Authority (FCA) was won.

Many policyholders whose businesses, including hospitality businesses and venues, were affected by COVID-19 suffered significant losses, resulting in large numbers of claims under business interruption (BI) policies.

Most SME policies are focused on property damage and only have basic cover for BI as a consequence of property damage. But some policies also cover for BI from other causes, in particular infectious or notifiable diseases (disease clauses). In some instances, insurers have accepted liability under these policies. But in order cases, insurers have disputed liability while policyholders considered that it existed, leading to widespread concern about the lack of clarity and certainty.

The FCA’s aim in bringing the test case was to clarify key issues of contractual uncertainty for as many policyholders and insurers as possible. The FCA did this by selecting a representative sample of policy wordings issued by eight insurers. The FCA’s role was to put forward policyholders’ arguments to their best advantage in the public interest. In total, 370,000 policyholders were identified as holding policies that may be affected by the outcome of the test case.

The court found in favour of the arguments advanced for policyholders by the FCA on the majority of the key issues, bringing welcome news for a significant number of the thousands of policyholders impacted by COVID-related business interruption losses.

Christopher Woolard, interim chief executive of the FCA, commented: “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. The judgment is a significant step in resolving the uncertainty being faced by policyholders.

“Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and the judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful.

“Insurers should reflect on the clarity provided here and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgment says should be paid. They should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.”

The High Court judgment runs to more than 150 pages and deals with many issues. The FCA’s legal team at Herbert Smith Freehills has published a summary here, which may be referred to for further detail.

The Night Time Industries Association (NTIA) and NDML, the insurance broker, have released a statement on the ruling, and the impact it has on venues across the UK.

Both organisations are thrilled with the positive result for 370,000 policyholders and the difference it will make to the survival of their businesses.

Michael Kill, CEO of NTIA, said: “This verdict is just what we’ve been waiting for. The night-time economy has been one of the hardest hit by lockdown measures during the pandemic, and many businesses are grassroots, family owned venues, that are cultural cornerstones of towns and cities across the UK. The enforced lockdown since March has created unthinkable financial turmoil and stress for many business owners. This verdict gives some reassurance that these businesses will get the payments they deserve to help them survive this period.”

With next steps still being finalised, it’s not yet clear exactly when businesses will see their claims paid, but this result means businesses can progress to the next stage and start planning for the future more secure in the knowledge that they’ll have the resources to survive.

Whilst this is good news, there is likely to be an appeal brought by insurers where the High Court has sided with the FCA, so businesses should be aware that there are still challenges ahead, but they will not be facing them alone.

Jane Longhurst, chief executive of the Meetings Industry Association, said of the ruling: “We know from our recent industry survey that 92 per cent of respondents stated that their financial losses to date have not been covered by their insurance policy, so this test case is promising news for the many who have suffered immeasurable losses due to the ramifications of the pandemic.

“In light of the landmark ruling that examined 21 policy wordings, we are advising the sector to revisit their existing, as well as any previously outstanding policies, where the policyholder may deem themselves eligible to make a claim under pandemic or notifiable disease clauses.

“As highlighted by Christopher Woolard, interim chief executive of the Financial Conduct Authority (FCA), insurers must now reflect on previous clarity provided irrespective of any possible appeals, while also communicating the next steps on how they can progress claims.

“While the FCA is expecting this activity to be conducted in a rapid manner, we are advising the sector to directly contact their insurer as soon as possible to seek further explanation and investigation into any potential claims.”