The Court ruled that the majority of businesses which held business interruption insurance and were forced to close due to the Covid-19 pandemic are entitled to be compensated by insurers.
What’s more, subject to the limits of each policy, compensation should return businesses to the position they would have been in had the pandemic never occurred.
Based on the Court's decision, thousands of hospitality businesses should now be able to receive a pay-out from their business interruption insurance policies in light of the Government-enforced 105-day closure which shuttered pubs, bars and restaurants between 20 March and 4 July.
In bringing the test case, the FCA aimed to clarify issues of contractual uncertainty for as many policyholders and insurers as possible with in the region of 370,000 policyholders believed to have insurance policies that may be affected by its outcome.
“We are pleased that the court has substantially found in favour of the arguments we presented on the majority of the key issues,” Christopher Woolard, interim chief executive of the FCA, said of the ruling. “Today’s judgement is a significant step in resolving the uncertainty being faced by policyholders.
“We are grateful to the court for delivering the judgement quickly and the speed with which it was reached reflects well on all parties.”
Woolard added that insurers should reflect on the clarity provided and, irrespective of possible appeals, consider any steps they must take to progress claims that the High Court says should now be paid.
What was the issue?
A number of insurers have refused to pay out on business interruption insurance policies that the FCA, Hospitality Insurance Group Action (HIGA) - and now the Court - believe should have been triggered when businesses were forced to close due to Covid-19.
Many policyholders whose businesses were affected by the pandemic suffered significant losses, resulting in large numbers of claims under business interruption policies.
While most small and medium-sized business policies predominantly focus on property damage, some also cover interruption caused by factors such as disease, non-damage denial of access and public authority closures or restrictions.
In some cases insurers accepted liability under these policies during the ongoing pandemic, however a number disputed liability leading to widespread concern about the lack of clarity.
Sonia Campbell, head of insurance disputes at Mishcon de Reya – who led the legal action against insurers on behalf of HIGA – argued that since the start of 2020 policyholders have seen insurance companies exploit ambiguities in business interruption policy small print.
“These insurance giants have been advancing often conflicting arguments against paying out despite many policies, clearly stating they cover enforced closure by Governmental authorities or closure caused by the outbreak of disease,” she told The Morning Advertiser (MA) prior to the High Court's decision.
Campbell believes that the outbreak of coronavirus saw insurers “pull down the shutters”.
Impact on hospitality?
It's fair to say that the hospitality sector has been devastated by the Covid-19 pandemic as the Government forced hotels, restaurants, cafés, pubs, and other venues to close.
Consequently, more than four in every five (83%) hospitality operators furloughed at least 90% of their staff during the pandemic, with 96% of sites putting more than 70% of workers on the coronavirus job retention scheme according to CGA’s Business Confidence Survey.
What's more, according to real estate advisor the Altus Group, one off cash grants for hospitality venues with a rateable value less than £51,000 have cost the Government £882m while based on the BBPA calculating that more than eight billion (8,059,495,997) pints were sold in pubs during 2019 – on average 255 per second – the UK on-trade would have poured 2,318,485,149 pints had pubs replicated 2019 trading during the 15 weeks they spent closed.
“Covid-19 has hit the hospitality sector hardest, as these businesses were forced to shut their doors completely during the lockdown following Government orders and subsequent regulations," Campbell told The MA.
She added that, for hospitality businesses that haven’t yet gone to the wall, insurance payouts are increasingly becoming a matter of survival.
“These were the first businesses that were categorically told to close on 20 March and not to reopen the next day. Their business came to a complete halt. They will be relying more heavily than most on their insurers to pay out.
“Without the payouts, it’s likely that thousands more hospitality businesses could go out of business – particularly if they cannot trade in the way that they did pre-Covid-19,” she continued. “The effect of a further lockdown doesn't bear thinking about for these businesses.
“Covid-19 isn’t going away overnight and is still going to be a problem for a good time yet - businesses aren’t going to make as much profit as they did before the pandemic so they will need all the support they can get – and we want insurers to do the right thing by paying claims."
What does the ruling mean?
Now, according to HIGA, hospitality businesses can breathe a sigh of relief as today’s judgment moves them a step closer to recovery from insurers.
Campbell described the High Court’s ruling as “fantastic news” for operators.
“I know today's result will be a relief for many hospitality companies who are relying on their insurers to pay out to continue running their business,” she said. “I would now urge other hospitality businesses to join us to ensure that they can successfully recover payments from insurers in line with the Court's decision.
“We identified at the very outset that many of these policies covered Covid-related losses, and the judgment is a vindication of our position,” Campbell continued. “For many hospitality businesses in particular, having their insurers pay out on their Business Interruption insurance policies is a matter of survival.
“Without this judgment, even more businesses would have been forced to the wall. The judgment means that many policyholders are a step closer to recovering losses from insurers.
“We do anticipate that insurers will apply for permission to appeal but we hope they will do the right thing and now start paying claims.”
Paul Newman, head of leisure and hospitality at RSM added that the ruling could prove a “huge lifeline” for many restaurant and bar operators in what continues to be a challenging trading environment.
“Managing working capital will be key over the coming months as Government support schemes begin to unwind," he said.
“The potential pay-out from valid business interruptions policies could mean the difference between survival or closure as the sector heads into the autumn and it is critical that insurers now act on this announcement to open a dialogue with policyholders on a timely basis.”
What's next?
If there is to be an appeal, the High Court's ruling only marks the end of this legal saga's first act, and there will be more uncertainty for policyholders ahead, according to Julien Luke, commercial litigation partner at UK law firm TLT.
“We’ve heard fighting talk from both sides going into this case and the battle isn’t over yet," he explained. "Given the year we’ve had, and how many thousands of businesses and livelihoods are at stake, this is clearly the biggest and most significant showdown in insurance in recent years.
"Although today’s ruling brings some clarification, it’s likely to be appealed and expedited to the Supreme Court.
“If this is indeed appealed in the coming days then the appellate court will have a delicate balancing act on its hands. The decisive judgment will impact the health of the UK economy and the fate of heavily-disrupted sectors such as leisure, hospitality and retail; companies that purchased business interruption insurance in good faith and whose future depends on the pay-out."
Luke added that an eventual Supreme Court ruling favourable to insurers could trigger a wave of law suits against insurance brokers for alleged misselling as policyholders seek redress via other routes.
“A further ruling against the insurers however could bring many businesses back from the brink and save thousands of jobs," he continued. "Policyholders would ultimately receive the money they are holding out for, and insurers could be forced to review previously rejected cases to settle those claims, because the FCA expects the judgment to be applied and re-applied to outstanding or rejected claims.
