UK SMEs Win Victory In Covid Insurance Test Case

UK SMEs Win Victory In Covid Insurance Test Case
Hundreds of thousands of small firms forced to close during the Covid-19 pandemic will receive payouts on insurance claims following a high court judgment in the test case brought by the City regulator.

According to the Financial Conduct Authority (FCA), around 370,000 small companies are affected by the judgment and should hear from their insurer within the next week. The FCA had previously estimated the value of claims affected by the test case to be in the region of £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 led the FCA to bring a test case in the courts to provide clarity on business interruption policy clauses.

The test case was based on a range of 21 policies from eight insurers. They included Arch Insurance, Argenta, Ecclesiastical Insurance Office, Hiscox, MS Amlin, QBE, Royal & Sun Alliance and Zurich.

Payments will help SMEs through pandemic

The FCA said the high court, in what is the most significant court case in years, found in favour of the arguments put forward for policyholders by the watchdog on most of the key issues, although it warned that not all policies will pay out.

The Hiscox Action Group (HAG), representing clients of insurer Hiscox, firms involved in the hospitality industry which have been especially hard hit by enforced closures, welcomed the judgment. HAG and another group, the Hospitality Insurance Group Action, had joined the FCA test case as interveners.

HAG said the verdict was just what they had been waiting for. The night-time economy had been one of the worst affected by lockdown measures during the pandemic, and many of the firms are local, family-owned attractions. The judgment gives hope that these businesses will receive the payments they deserve to help them through this period.

Richard Leedham of Mishcon de Reya, representing the HAG, said the judgment would provide a lifeline for SMEs across the UK. And he hoped insurers would think carefully before appealing.

The FCA advised that, despite the judgment being welcome news for many policyholders, it did not say that insurers are liable in all the 21 different types of policy wording in the samples considered by the court. Each policy needs to be compared to the detailed judgment to determine what it means.

The regulator said any appeal by the insurers will not prevent policyholders from seeking to settle their claims with their insurer before the outcome of an appeal is known. The judgment removes the need for firms struggling financially to bring individual cases.

Unclear whether insurers will appeal

Christopher Woolard, interim CEO of the FCA, said many businesses are under great financial pressure to stay afloat during the upheaval and distress caused by the coronavirus. The FCA’s aim throughout has been to achieve clarity for as many parties as possible, as quickly as possible, and the judgment removes many of the barriers to successful claims.

Mr Woolard went on to say that should any parties appeal, the FCA expects them to do so in a timely manner in accordance with the agreement which was drawn up with insurers at the start of the test case. Thousands of small firms and possibly hundreds of thousands of jobs are banking on this.

It is as yet unclear whether any insurers will appeal. Hiscox said although it had not taken a decision, the ruling on any appeal would probably be handed down in October. The company estimated that it would pay out on fewer than one-third of its 34,000 UK business interruption policies, which would cost less than £100m following reinsurance recoveries.

Huw Evans, director general of the Association of British Insurers (ABI), said the judgment divides evenly between insurers and policyholders on the main issues. The national lockdown was an unprecedented event that created understandable questions of interpretation for some business insurance contracts.

This is the first type of action taken by the FCA since it was established in 2013, and the first time the financial markets test case scheme has been used.

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