Holders of business interruption insurance have won a “significant” victory in a High Court test case to determine whether the coronavirus pandemic should trigger payouts under their policies.
Lawyers acting for the Financial Conduct Authority, the UK’s financial regulator that brought the case on behalf of the policyholders, said the judges had found in favour of claimants “on the majority of the key issues”.
In particular, the court ruled that payouts were triggered under certain “non-damage” clauses that covered disease and denial of access to business premises. It also concluded that payouts should put businesses back in the position they would have been in had Covid-19 never occurred.
However, shares in insurance companies Hiscox and RSA rose following the ruling as they outlined the size of payments they expect to make, and confirmed that they had avoided some of the worst-case scenarios.
Paul Lewis, partner and global head of insurance disputes at law firm Herbert Smith Freehills, which led the FCA case, said policyholders would need to read the 160-page judgment from Lord Justice Flaux and Mr Justice Butcher very carefully to see how the principles laid down by the court applied to their particular policy wording. The judgment considered 21 wordings, and reached different conclusions for each. In the case of policies from Zurich and Ecclesiastical Insurance, it ruled in favour of the insurers, not the customers.
However, Mr Lewis added: “This is a really significant judgment. It brings guidance to how business interruption insurance wordings should operate in the context of the Covid-19 pandemic, which has had such a devastating effect on businesses across the country. The decision should bring welcome news to a significant number of policyholders.”
According to FCA estimates, the findings could affect as many as 370,000 policyholders one way or another — and each successful claim could potentially run to tens of thousands of pounds.
Gary Lovatt, who runs a bed and breakfast in Keswick in the Lake District, said that insurance payouts to cover the loss of business during the pandemic would mean “a lifeline to allow business to continue”.
“It’s life or death for small businesses,” he said, while for larger businesses “it’s the difference between keeping an extra employee . . . these are not big sums for an insurer”.
Mr Lovatt attempted to claim under his insurance policy after he was forced to close during the lockdown — for between £10,000 and £15,000 after losing about 45 per cent of his income this year. But his insurer argued that the business interruption wording did not cover coronavirus.
Shares in the affected insurance companies fell immediately after the ruling was published, but recovered soon afterwards as they quantified the impact.
Hiscox said that the additional costs arising from the case would be less than £100m. In a statement the company said that coverage “is essentially limited to those customers who were mandatorily closed by government orders, and then only in certain circumstances”. Its shares were trading up 15 per cent at midday.
RSA said that it was in line for £104m of extra payments, although that figure would be reduced by reinsurance, which insurers buy to protect themselves from big payouts. RSA also said that it would resume dividend payments following the ruling. Its shares rose 4 per cent.
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Both sides have the right to fast-track an appeal on the judgment by taking it directly to the Supreme Court.
Although the FCA said policyholders with claims could expect to hear from their insurers within the next seven days, Ravi Nayer, a partner at law firm Brown Rudnick, warned that payouts could be held up by more legal wrangling. “The FCA has said insurers need to get moving on loss adjusting, but the question is: if a significant appeal is launched, is that a reason not to pay?” he said. “My sense is the insurers won’t all do the same thing.”
Mark Killick, a member of the Hiscox Action Group, which has been demanding that the insurance group honours Covid-19 claims, urged it not to appeal. He said: “The most important thing now is that the insurers accept this ruling and start to pay out rather than embark on a fruitless appeals process that will just cause more suffering for the very policyholders they were meant to protect.”
Sonia Campbell, a lawyer at law firm Mishcon de Reya who is working with the Hospitality Insurance Group Action, representing leisure industry policyholders, said the group would now pursue a wider range of insurers for payment. “It’s a landmark victory and a monumental decision,” she added.
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