The Supreme Court test case ruling on business interruption payouts was welcomed as a lifeline for small businesses which will unlock claims for hundreds of thousands of firms worth an estimated £1.2 billion.
But experts said the ruling was described as a “catastrophic” outcome for British insurers, and one which will have significant consequences for future policies.
Supreme Court justice Lord Hamblen announced that the FCA and campaigners had substantially won their case, and: “In addition to the particular policies chosen for the test case, some 700 types of policies across over 60 different insurers and 370,000 policyholders could potentially be affected by the outcome of this litigation.”
Small business owners and industry leaders in the pandemic’s hardest-hit sectors welcomed the decision, but warned that it applies only to specific policies and insurers - and that the detailed implications of the ruling are yet to be ironed out.
UK Hospitality chief executive, Kate Nicholls, said that “obviously, we still need to pore over the details” but that “should this result in pay-outs to policy holders – a point which is still not clear at present - this could provide an additional lifeline that many businesses desperately need”.
She said: “It could be the difference between keeping staff members on or being forced to let them go; it could mean the survival of a business that was previously staring collapse in the face."
Richard Burge, chief executive of London Chamber of Commerce and Industry, told the Standard: “While much may still depend on the small print of policies, this ruling is significant in ensuring Covid-19 business interruption pay-outs for many small businesses – who will clearly welcome this news.
“It also shows how insurance has become an essential service in a volatile and uncertain world, and its provision needs re-examination.”
Mark Pring, partner at law firm Reed Smith’s Insurance Recovery Group, said that the decision was “at least in principle” a “catastrophic outcome for insurers”.
"The finding on causation will have very significant consequences for business interruption policies and many other types of policy,” he said. “If it weren’t for remote working, we would likely have heard the collective groan of insurers as the Supreme Court issued its verdict.
"For all the excitement at the ruling, however, we must remember that for policyholders this is just the first step. The FCA has certainly made life easier by throwing its weight behind relevant policyholders but it is still incumbent on businesses to demonstrate the losses suffered were caused (broadly) by the pandemic. This is no easy task.
"Prior to Judgment today, insurers had been warned not to damage the reputation of the sector by continuing to challenge claims that are backed by some evidence of financial loss in reliance on complex technicalities. The message to insurers is now very clear, return to your offices and, where some evidence of a loss can be provided, prepare to pay out."
Daniel Lloyd-John, chief executive of Broadway Insurance Brokers, described the ruling as "a watershed moment" for the insurance industry.
He said in a statement: "This judgment presents insurance with the biggest challenge it's faced in many generations.”
The insurance sector rallied on Friday after initially seeing some firms’ share prices fall on the news.
Hiscox, one of the companies at the centre of the “denial of access” claims from policyholders, tumbled immediately after the ruling, dropping 6.3% between 9.45am and 10.20am on Friday. Once the markets had time to digest the results, however, shares quickly rebounded. The firm was up 2.6% by 2pm.
Shares in other listed insurance giants saw small falls, with Prudential down by 0.6%, RSA down 0.08%, and Aviva down 0.09%.
Matt Connell, director of policy and public affairs of the Chartered Insurance Institute, said that the judgement “will have huge ramifications for insurance beyond business interruption and it is important this is also looked at as openly as possible".
He said that the CII believes believe both trust and confidence in insurance firms “can be restored if this process remains open and transparent to the public”.
Huw Evans, director general of the Association of British Insurers (ABI), said in a statement that “insurers have supported this fast-track legal process every step of the way and we welcome the clarity that the judgment will bring to a number of complex issues”.
He said the insurance industry “expects to pay out over £1.8 billion in Covid-19 related claims across a range of products, including business interruption policies”, and stated that “customers who have made claims that are affected by the test case will be contacted by their insurer to discuss what the judgment means for their claim.
"All valid claims will be settled as soon as possible and in many cases the process of settling claims has begun.”
Martha Swift, founder and owner of cupcake specialist Primrose-hill based Primrose Bakery, is one of hundreds of thousands of business owners who will now make a claim on her insurance.
She told the Standard: “It has been hard enough to manage a small business through lockdown and this whole period of time without also having to worry that an insurance policy paid for in good faith and at some cost would not also step up when we most needed it."