Lessons for schools from the business interruption insurance test case

The dust has settled somewhat since the conclusion of the FCA’s business interruption insurance (BI) test case but uncertainties remain and there are important lessons to learn.

The Supreme Court’s judgment was heralded as a significant victory for policyholders (including in our summary here). It is true that the FCA won and insurers lost on most of the issues considered by the Supreme Court. Unfortunately, the FCA’s victory has not led to insurance payouts for many schools. The policies issued by the main insurers in the schools market were not found to provide cover for losses caused by the pandemic.

Is there any prospect of challenging a denial of cover?

In cases where the Supreme Court decided that a particular policy wording will not provide cover there is little scope for policyholders with identical or very similar policies to challenge their insurer’s denial of cover. However, that is not quite the end of the story.

The test case looked at a large sample of policies chosen to represent as many as possible of the most common BI policy wordings. Unsurprisingly, given the enormous scale of the test case and the truly impressive speed with which the parties and the courts dealt with it, the judgment leaves unresolved some issues that are potentially relevant to school insurance policies.

Those issues are subject to ongoing dispute, and in some cases litigation, between policyholders and insurers. It is possible that in the months and years ahead the outcome of such cases could result in a change to the current state of the law that would allow some schools to make successful insurance claims for pandemic losses. These issues include:

• Whether the pandemic amounted to a “danger or disturbance” within the vicinity of the insured premises. The current position is that it did not, so policies that are triggered by a danger or disturbance within a particular geographical area around a school’s premises are unlikely to provide cover. However, there is current litigation in the High Court in which that position is being challenged. There are a number of policies in the schools market containing similar wording which could be affected by the outcome of that case.
  
  
• Whether policies that are triggered by the presence of COVID-19 at the policyholder’s premises (rather than within a radius of 1 or 25 miles) provide cover for the broader effects of the pandemic rather than only for any direct effects of the case at the premises. The FCA has indicated that such policies are capable of providing cover but the approach being taken by insurers is that they do not. The Financial Ombudsman has also made a number of decisions that these policies will not respond. There is certainly scope for argument about whether that is right so the point may be tested in litigation. Insurers are unlikely to pay out on these policies in the absence of a High Court judgment on the issue.

We will be on the lookout for any signs that the position might change.

Broader lessons

Most schools, together with businesses and organisations across the economy, carried some form of BI cover. The pandemic and the test case revealed that there had been a fundamental disconnect between the risks that insurers believed they had covered and the protection policyholders believed they had bought.

Schools were far from alone in believing that their policies would respond to losses caused by the pandemic. The Supreme Court in the test case noted that the cover apparently provided by some BI policies was “illusory”. Even the most generous BI clauses include specific triggers and exclusions which are sometimes contained in complicated provisions in different parts of the policy. The devil is in the detail.

The most important lesson for schools is that it is vital when taking out or renewing insurance policies to have detailed discussions with your broker (and your solicitors if necessary) to ensure that the school has the cover it needs. That applies to BI policies and to all other insurance purchased by the school. The fact that the test case ended up in the Supreme Court shows how hard it can be to work out whether a policy provides cover or not. It will not be possible to achieve absolute certainty in advance about the cover available in every situation. However, a detailed discussion with the school’s broker to identify the risks that the school may face, whether those risks are covered under the school’s existing policy and whether cover for any additional risks is available (and at what cost) will help ensure that the school maximises its insurance protection.

If you require further information about anything covered in this briefing, please contact Ben Longworth, Lucy Penn or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, October 2021