Covid-19

High Court backs business interruption insurance

The High Court has ruled in policyholders' favour in the business interruption case bought by the FCA.

It is thought that claims worth around £1.2bn could be affected by the ruling, which was likely to be appealed.

The High Court looked at 17 policy wordings from eight different insurers - Arch, Argenta, Ecclesiastical, MS Amlin, Hiscox, QBE, RSA and Zurich - to decide whether Covid-19 triggered a business interruption insurance pay out.

Based on other policies that the FCA had studied, the court’s rulings were expected to apply to nearly 50 insurers, who sold insurance to 370,000 customers – mostly small businesses.

Hiscox said that fewer than one third of its 34,000 UK business interruption policies were affected with additional claims like to be less than £100m net of reinsurance. This encompassed claims from all divisions including Hiscox Re and was a reduction of £150m from the upper end of the group's previously published risk scenario. The group’s share price was up by 13% at the time of writing.

Christopher Woolard, interim CEO, FCA, said: "Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful.

“Insurers should reflect on the clarity provided here and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgment says should be paid.  They should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.

“If any parties do appeal the judgment, we would expect that to be done in as rapid a manner as possible in line with the agreement that we made with insurers at the start of this process. As we have recognised from the start of this case, thousands of small firms and potentially hundreds of thousands of jobs are relying on this.’

The FCA said that the ruling was subject to the limits of the policy but that the compensation should return companies to the position they would have been in had the pandemic never happened.

Sonia Campbell, head of insurance disputes at Mishcon de Reya, said: “I am delighted with today’s judgment and what this means for many thousands of policyholders. We identified at the very outset that many of these policies covered Covid-related losses, and the judgment is a vindication of our position. 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 will 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 Lewis, partner at Herbert Smith Freehills, the FCA's law firm, said: "The decision should bring welcome news to a significant number of policyholders who will need to read the judgment carefully and see how the principles laid down by the court apply to their policy wording."

Rafi Saville, forensic partner at accountancy firm HW Fisher added: “This a landmark case and one of the most controversial legal issues resulting from the coronavirus crisis. Today’s decision will affect over 400,000 small and medium businesses particularly in the leisure, property and hospitality industry who were forced to close their doors back in March. The ruling is likely to considered as a partial victory and it could have a ripple effect for the entire marketplace, with its conclusions likely to be applied to other affected claims. However, the decision today could possibly add to the confusion experienced by many business owners.

“It is now crucial for these businesses to pay attention. Although the ruling may well be subject to an appeal, it becomes even more necessary for businesses to consult their insurance documentation with a view to understanding whether their Covid-related losses will be covered. At this early stage, we understand that policies covering ‘notifiable diseases’ will be covered under the ruling.”

 

Insight: Insurance is one of those things you’ll hope you never need, but that it would be good if, in the event of a deadly virus ripping around the world, kicked it to save your business.

But this ruling is not the joy that it could be, there is no blanket ruling and each small business must measure their policy against the ruling.

While it’s not over for the insurers, it’s not over for the businesses either. Campbell, who was leading the legal action against insurers on behalf of Hospitality Insurance Group Action, said that the battle would continue and called for more companies to join HIGA and continue to campaign for support.

Campbell said: “Insurers have now asked for more time to apply for permission to appeal which suggests that insurers will seek to continue to contest coverage despite the Court's clear judgment. Any business insured through the Resilience Marsh/JELF wordings or the QBE1 (25 mile) disease wordings should feel free to contact us to consider next steps.”