UK small companies win victory in Covid insurance test case

Hundreds of thousands of small companies will receive payouts on insurance claims after being forced to close during the Covid-19 pandemic, following a high court judgment in the test case brought by the City regulator.

About 370,000 firms are affected by the judgment and should hear from their insurer within the next week, according to the Financial Conduct Authority (FCA). It had previously estimated the value of policies affected by the test case at about £1.2bn.

Many insurers had declined to pay out, arguing that the business interruption policies were not designed to cover a government-imposed lockdown. This prompted the Financial Conduct Authority to launch a test case in the courts to provide clarity on business interruption policy clauses, based on a sample of 21 policies from eight insurers: Arch Insurance; Argenta; Ecclesiastical Insurance Office; Hiscox; MS Amlin; QBE; Royal & Sun Alliance; and Zurich.

In the most significant insurance court case in years, the high court found in favour of the arguments advanced for policyholders by the FCA on the majority of the key issues, the watchdog said, although it cautioned that not all policies will pay out.

The judgment was welcomed by the Hiscox Action Group, representing clients of insurer Hiscox, and the Night Time Industries Association ( NTIA), representing firms in the hospitality industry, which have been particularly hard hit by enforced closures. Both groups had joined the FCA as claimants.

Michael Kill, the chief executive of NTIA, said: “This verdict is just what we’ve been waiting for. The night-time economy has been one of the hardest hit by lockdown measures during the pandemic, and many businesses are grassroots, family-owned venues … This verdict gives some reassurance that these businesses will get the payments they deserve to help them survive this period.”

Richard Leedham, from Mishcon de Reya, which represents the Hiscox Action Group, said the judgment was “one of the most significant in recent years and will provide a lifeline for small businesses across the country”.

He added: “I would hope insurers think long and hard about an appeal.”

The FCA cautioned that although the judgment was welcome news for many policyholders, it did not say that insurers are liable across all of the 21 different types of policy wording in the representative sample considered by the court.

“Each policy needs to be considered against the detailed judgment to work out what it means for that policy. Policyholders with affected claims can expect to hear from their insurer within the next seven days.”

Any appeal by the insurance firms does not stop policyholders seeking to settle their claims with their insurer before the outcome of any appeal is known, the regulator said. It added that the judgment removes the need for firms to bring individual cases, at a time when many are struggling for survival.

Christopher Woolard, the interim chief executive of the 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.

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“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.”

It is unclear whether any insurance firms will appeal. Hiscox said it had not decided yet whether to appeal, adding that the ruling on any appeal would likely come in October. It estimates it will pay out on fewer than one third of its 34,000 UK business interruption policies, which will cost less than £100m after reinsurance recoveries. RSA has estimated the impact of the judgment at £85m.

Huw Evans, the director general of the Association of British Insurers, said: “The judgment divides evenly between insurers and policyholders on the main issues. The national lockdown was an unprecedented situation that posed understandable questions of interpretation for some business insurance contracts.”

It is the first action of its kind by the FCA since it was established in 2013, as well as the first time the financial markets test case scheme has been used.

Some insurers did pay out under business interruption policies after previously arguing that the pandemic was not covered.