A crucial High Court ruling is set to determine whether insurers will have to pay out under business interruption insurance policies, to meet claims for COVID-19-related losses.
While the Financial Conduct Authority (FCA) test case is set to provide much-needed clarity to businesses and insurers alike, paying close attention to the wording of individual policies is key to making a successful business interruption insurance claim.
So, what else do businesses need to consider in order to maximise their chances of success, and what are their options in the event that a claim is rejected?
Landmark High Court case
The issue of whether business interruption insurance policies cover pandemic-related losses is one of the most controversial legal issues resulting from the coronavirus crisis. In bringing its test case to the High Court, the FCA is aiming to provide a roadmap to businesses and insurers regarding how to interpret the wording of policies and therefore the amount that should fairly be awarded.
Worth potentially billions of pounds, the case has involved examining 17 policy wordings from eight different insurers in order to determine whether COVID-19 triggers a pay-out. However, the ruling is expected to have ripple effects for the entire marketplace, with its conclusions likely to be applied to other affected claims.
Key questions to be addressed
One of the dilemmas at the heart of this case is the intended nature of business interruption insurance policies, which are normally purchased as an “add on” product to a property damage policy. Many insurers argue that without physical damage to properties as a result of the pandemic, the coverage provided to businesses is limited, if not non-existent. However, this view is often at odds with the expectations of the policyholders, who are paying their premiums and expect to be covered regardless of the cause of business interruption.
Another key issue that the FCA case is aiming to resolve is that of the geographical coverage that policies should provide. Some insurance policies offer cover if there is a “notifiable disease” on the business premises and/or within a certain radius of it. The High Court will therefore have to determine how this cover applies to coronavirus and how to prove that the disease was present in a particular location.
The question of whether insured businesses can demonstrate a causal link between coronavirus and any losses incurred is also important. For example, retail outlets which have suffered financial losses as a result of Government-mandated store closures (rather than the virus itself) may not be covered; insurers may argue that the business could have undertaken other activities to mitigate its financial losses.
Pay attention to policy wording
As any claims for business interruption will be decided based on their particular facts, paying close attention to the wording of individual policies is essential. Expert legal advisers can provide businesses with valuable support around the effective interpretation of policies and advise whether they have a strong basis for making a claim. This in turn will inform the evidence required to support their claim. The FCA has also put together some useful guidance on this subject and the High Court’s verdict should provide further clarity around the future interpretation of policy wording.
One important element to focus on when making a business interruption claim is whether the policy classifies COVID-19 as a “notifiable disease”. If not, the business has effectively fallen at the first hurdle and any claims will almost certainly prove unsuccessful. The question of whether the virus was present on the business’ immediate premises and if not, the coverage limitations that apply under the policy should also be carefully considered.
3 steps for making a successful claim
#1 – Collate information as you go
Once it has been decided that there are grounds for a business interruption claim, it is vital to gather together the right supporting evidence. Insurance brokers and accountants can support in collating original documents, demonstrating aspects such as the lost revenues, forecasted revenues for ongoing business interruption, and any expenses incurred. There will invariably be a cap on how much an insurer will pay out under the policy.
Rather than viewing this process as a one-off, best practice should involve an accumulation of information and detailed record keeping on an ongoing basis. This means that if the business decides to make a claim six months down the line, the right documents should already be available and in the appropriate format to present to the insurance firm.
#2 – Read your insurer’s claims process
When collating documentation, it’s critical to only send the most relevant information to the insurer, rather than attempting to bolster a claim with additional information. As many insurance firms set out detailed guidance around their claims process, it’s worth reading this closely to boost the chances of a claim going smoothly.
#3 – Follow the process to the letter
Paying close attention to the correct formatting and timings provided as part of the claims process is also key – by adhering to the stated process to the letter, businesses can avoid becoming tripped up as claims move through the system.
What to do if your claim is unsuccessful
If your business interruption insurance claim is rejected, there are still a number of options which businesses can take.
- Those that have reason to believe that the wrong decision was made may wish to complain directly to the insurer. They may also have the right to make a compensation claim against the insurance company for breach of contract, due to their failure to indemnify. It’s worth noting that the FCA case is aiming to prevent large numbers of such individual actions arising by providing guidance around how insurers can most fairly address business interruption claims
- Businesses unsatisfied with an insurer’s response may make a complaint to the Financial Ombudsman Service in order to seek compensation
- As there is a possibility that some businesses may have received the wrong advice around whether the policy met their needs when purchased, they may be able to prove that the broker was negligent in the advice that they provided. In this case the business may be entitled to compensation from the broker.
‘It is essential that businesses do not bury their heads in the sand’
React quickly and seek expert advice
In order to stand the best chance of securing a satisfactory outcome, it is essential that businesses which have had their claim rejected do not bury their heads in the sand. Often, fears around the time and costs involved in litigating against a large insurance firm may discourage companies from taking the next step to secure a fair result. However, legal experts can help organisations find viable funding options, for example, by offering “no win, no fee” arrangements.
By following the outcome of the FCA test case and any associated guidance closely and getting the right expert support at an early stage, businesses will be in a good position to make successful business interruption insurance claims and mitigate the long-term financial impact of the coronavirus crisis.
Steven Skiba is a legal director and commercial disputes specialist at law firm, Shakespeare Martineau