Small businesses win Covid insurance payouts after UK supreme court victory

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Hundreds of thousands of small businesses that were forced to close during the Covid-19 pandemic are expected to receive payouts on insurance claims worth more than £1bn after what was described as a “historic victory” at the supreme court.

The Financial Conduct Authority, which brought the test case, said it would now be working with insurers to ensure they “move quickly” to pay claims to businesses, some of which have been struggling to stay afloat.

Judges threw out the appeals from six insurance companies and largely supported the arguments made by the FCA and a policyholder action group – prompting the law firm Reed Smith to declare that this was “a catastrophic outcome” for insurers.

The FCA has previously said that 370,000 policyholders may be affected by the outcome of the test case, and originally estimated the value of claims affected at about £1.2bn. However, some analysts have said several billion pounds could be at stake.

The Hiscox Action Group, which represents policyholders, said insurers should be “in no doubt that they should immediately start doing the right thing and settle these claims”. Richard Leedham, a partner at the law firm Mishcon de Reya who represented the action group, said: “Today’s outcome is one of the most significant for business in modern times.”

The complex case involves business interruption insurance, a key part of commercial policies which is meant to pay out if a firm cannot trade as usual owing to an unexpected event.

Many small businesses, from restaurants and bars to hairdressers and guesthouses, claimed they should have received payouts from their insurers after the coronavirus lockdowns left them unable to trade. Insurers have been accused by some of relying on technical legal arguments to wriggle out of their responsibilities.

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Many insurers had declined to pay out, arguing that business interruption policies were not designed to cover a government-imposed lockdown. This prompted the FCA to launch a test case to provide clarity.

One of the judges, Lord Briggs, delivered what the action group claimed was “a damning indictment” on the insurers’ words when he said the cover apparently provided for interruption caused by the effects of a notifiable disease causing a national pandemic “was in reality illusory, just when it might have been supposed to have been most needed by policyholders”.

Briggs said that outcome seemed to him to be “clearly contrary to the spirit and intent of the relevant provisions of the policies in issue”.

He added: “This was not, of course, a disease which anyone could have had specifically in mind when the policies in issue were written and marketed. But it is clear from the use of the definition of a ‘notifiable disease’ in most of the relevant clauses, and equivalent wording in the remainder, that Covid-19 [when it appeared] fell squarely within the types of disease for which all the relevant disease and hybrid clauses provided cover.”

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Hiscox said that as a result of the judgment, as well as further government restrictions announced during 2020, its total estimate for Covid-19 business interruption increased by $48m (£35m) net of reinsurance.

The test case, which was heard by the supreme court in November, was brought by the FCA against eight insurers.

The high court found in favour of policyholders on the majority of the key issues in September 2020. However, hopes of rapid payouts were quickly dashed when six of the eight insurers – Arch Insurance, Argenta, Hiscox, MS Amlin, QBE and RSA – appealed. The FCA also decided to appeal against some elements of the ruling.

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The FCA brought the case after receiving a large number of complaints from small businesses, MPs and others about claims being refused during the weeks after the first national lockdown, which began on 23 March. It 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”.

With many business interruption policies, the cover relates to physical damage to premises, which would not be eligible for payouts linked to the pandemic. However, in some cases the wording refers to an outbreak of a “disease” within the vicinity, or a “denial of access” to premises following public authority action taken due to an emergency.

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The high court originally looked at 21 policy types, 13 of which ended up being considered by the supreme court.

In November, the former footballer Gary Neville, who co-owns two hotels with his former Manchester United teammate Ryan Giggs, tweeted: “We have paid BI [business interruption] insurance for years and they won’t pay out! Due to ‘technicalities’. So many in the same boat. @RishiSunak made a speech in parliament stating insurers needed to pay. It’s not happening.”

The head of the Association of British Insurers said the industry body welcomed the clarity the judgment would bring to several complex issues.

“All valid claims will be settled as soon as possible and in many cases the process of settling claims has begun,” Huw Evans said.

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“We recognise this has been a particularly difficult time for many small businesses and naturally regret the Covid-19 restrictions have led to disputes with some customers. We will continue to work together as an industry to ensure customers have the clarity they need when it comes to what they can expect from their business insurance policies.”

This article was updated on 18 January 2021 to include a statement from the Association of British Insurers in response to the ruling.