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Supreme Court orders insurers to pay out for small business lockdown losses

The purpose of business interruption insurance (“BII”) as a risk management tool is to reduce the exposure of one’s business to the effects of particular risks. But how could the risk of disruption to small businesses of such an unprecedented magnitude as the coronavirus pandemic have been foreseen?

It goes without saying that the lockdown in March of last year changed everything. Many small businesses were forced to submit claims under their BII policies for earnings lost as a result of enforced closure. To their horror, many found that their insurers refused to pay on the basis that only a select number of specialised policies provided cover in the circumstances. Many were told although they were covered in the event of pandemics, given Covid-19 was a new disease it was not covered by their existing list.

The fallout from the payment refusals understandably led to much litigation and the intervention of the Financial Conduct Authority (“FCA”). That litigation has today come to an end with the UK Supreme Court unanimously allowing a series of connected appeals in favour of businesses.

As a result of the Supreme Court judgments, it is anticipated that tens of thousands of small businesses will now stand to receive pay-outs from their insurers. This will provide a much-needed lifeline for many. The Director General of the Association of British Insurers has already commented that: “All valid claims will be settled as soon as possible and in many cases the process of settling claims has begun.”

The cases were concerned with individual policies but the implications of the decision are likely to be far-reaching. The FCA now has authoritative guidance to require insurers to amend their policies and principles with which to guide their decisions in existing cases. It is anticipated that the decision could affect as many as over 350,000 small businesses.

Balfour+Manson can offer advice on insurance issues, including business interruption claims. If you need any input, please contact Scott Clair or Gordon Deane.