Hundreds of thousands of small businesses forced to close during the Covid-19 pandemic can expect to receive payouts on insurance claims worth more than £1bn.
After what was descibed as a ‘historic victory’ at the supreme court last week, the Financial Conduct Authority (FCA), which brought the test case, said it would now be working with insurers to ensure they ‘move quickly’ to process payouts to businesses, some of which have struggled to stay afloat.
Judges threw out the appeals from six insurance companies and on the whole supported the arguments made by the FCA and the policyholder action group. This prompted the law firm Reed Smith to declare it ‘a catastrophic outcome’ for insurers.
The FCA originally estimated the value of claims concerned at around £1.2bn and had previously said that 370,000 policyholders may be affected by the outcome of the test case. But some analysts have said the payouts could amount to several billion pounds.
The Hiscox Action Group (HAG), representing policyholders, said insurers should be ‘in no doubt that they should immediately start doing the right thing and settle these claims’. Richard Leedham, partner at the law firm Mishcon de Reya who represented the action group, said the outcome is ‘one of the most significant for businesses in modern times’.
Judge rules Covid-19 ‘notifiable disease’
The complex case centres on business interruption insurance, a critical part of commercial policies which is intended to pay out if a company cannot trade as usual due to an unexpected event.
Multiple small businesses, from guest houses and hairdressers to bars and restaurants, argued they should have received payouts from their insurers once the coronavirus lockdowns had left them unable to trade. As a result, some have accused insurers of relying on technical legal arguments to avoid their responsibilities.
The fact that many insurers had declined to pay out, on the basis that business interruption policies were not intended to cover a government-imposed lockdown, prompted the FCA to launch a test case to provide transparency.
Lord Briggs, one of the judges, said although the cover appeared to provide for interruption caused by the effects of a notifiable disease resulting in a national pandemic, it was in fact misleading at a time when it might have been most needed by policyholders. The action group claimed the statement was ‘a damning indictment’ of the insurers’ words.
The judge commented that the outcome seemed to him to be ‘clearly contrary to the spirit and intent of the relevant provisions of the policies at issue’. He went on to say that, of course, the coronavirus was not a disease anyone could have had specifically in mind when the relevant policies were written and marketed.
But he felt it clear from the definition of a ‘notifiable disease’ in most of the clauses that when Covid-19 appeared, it fell squarely into the category of diseases for which the clauses provided cover.
Hopes of prompt payouts dashed initially
Hiscox said its total estimate for Covid-19 business interruption increased by $48m (£35m) net of reinsurance, as a result of the judgment and further government restrictions announced during 2020.
The FCA brought the case following receipt of a large number of complaints from small businesses, MPs and others concerning claims being refused during the weeks after the first national lockdown, which began on 23 March.
The organisation said there had been ‘widespread concern about the lack of clarity and certainty for some customers making these claims, and the basis on which some firms are making decisions’.
The high court had found in favour of policyholders on the majority of the key issues in September 2020. But hopes of prompt payouts were dashed when six of the eight insurers appealed.
In its defence, the Association of British Insurers (ABI) has said business interruption policies ‘are not generally designed, priced or sold to cover unspecified global pandemics’.