Joy for SMEs after landmark Covid insurance test case victory

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Hundreds of thousands of SME businesses could now receive payouts from their insurers after the High Court ruled in policyholders’ favour.

About 370,000 small and medium-sized firms found their insurers trying to wiggle out of paying them when the coronavirus pandemic struck and they could not open their businesses.

But the Financial Conduct Authority (FCA) brought a test case over the wording of business interruption insurance policies and now the High Court ruling has removed “the lack of clarity and certainty” for businesses seeking to cover substantial losses incurred by the Covid-19 pandemic and subsequent national lockdown.

According to the regulator, the value of policies likely to be affected by the test case is approximately £1.2billion.

In a 150-page judgment, which was delivered remotely on Tuesday, September 15, Lord Justice Flaux and Mr Justice Butcher considered 21 “lead” insurance policies issued by eight separate insurers.

In a statement after the ruling, the FCA said the court determined that the “disease clauses” in most – but not all – of the policies in the test case provide cover to policyholders.

But the regulator also said: “Although the judgment will bring welcome news for many policyholders, the judgment did not say that the eight defendant 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 judgement to work out what it means for that policy.”

The FCA’s interim chief executive Christopher Woolard said: “We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market.

“We are pleased that the court has substantially found in favour of the arguments we presented on the majority of the key issues. Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders.”

He added: “Insurers should reflect on the clarity provided here and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgement says should be paid.

“They should also communicate directly and quickly with policyholders who have made claims affected by the judgement to explain next steps.

“If any parties do appeal the judgement, 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.”

The Hiscox Action Group, which has more than 400 members and intervened in the High Court case, also welcomed the ruling. The group’s solicitor, Richard Leedham from Mishcon de Reya, said: “Today’s judgement by the High Court is one of the most significant in recent years and will provide a lifeline for small businesses across the country.

“We joined the court case as we believed it was vital for businesses to have a voice in the proceedings and we are delighted they have finally been heard.”

Mark Killick, a Hiscox Action Group steering committee member, said: “Today’s judgement represents a huge victory for the Hiscox Action Group.”

He added: “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.”

Huw Evans, director general of the Association of British Insurers, said: “Insurers have supported this fast-track court process led by the FCA to help bring clarity for customers and we welcome the speed with which the court has delivered a ruling.

“The judgement 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.

“Insurers always regret any contract dispute with their customers and will continue to reflect on feedback from recent events.

“We recognise this continues to be a difficult time for many businesses, small and large, and for society as a whole.

“That is why insurers have made a range of commitments to help both businesses and individual customers through the crisis and why the industry expects to pay out over £1.7bn in Covid-19 claims.”

He added that it was “a complex judgement” and said “it will take a little time for those involved in the court case to understand what it means and consider any appeals”.

At an eight-day hearing in July, the FCA’s barrister Colin Edelman QC said about 370,000 policyholders “could potentially be affected by this litigation”.

He suggested this “ballpark figure” pointed to the importance of the case for businesses “confronting the financial impact of the coronavirus epidemic”.

The FCA said the Government’s coronavirus public health controls had caused “substantial loss and distress to businesses”, particularly small and medium enterprises.

It argued that, while some insurers had provided payouts to customers, many businesses had had claims “rejected” under “blanket denials of cover”.

A witness statement by the FCA’s director of general insurance and conduct specialists Matthew Brewis said that, up to early May, about 8,500 claims had policy wordings likely to be affected by the test case, with a value of approximately £1.2billion.

Business Live’s South West Business Reporter is William Telford.

He is based in Plymouth but covers the entire region.

To contact William:

Email: william.telford@reachplc.com

Phone: 01752 293116

Mob: 07584 594052

Twitter: @WTelfordHerald

LinkedIn: www.linkedin.com

Facebook: www.facebook.com/william.telford.5473

William has more than a decade’s experience reporting on the business scene in Plymouth and the South West.

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Paul Smethurst, partner and forensic investigation specialist at accountancy firm, Menzies LLP, said: “This is the news that many businesses have been waiting for. The Government will also be relieved that insurers are being forced to contribute to losses suffered by businesses as this could mitigate demand for business support funded by the taxpayer going forward.

“Policyholders can now go full steam ahead, preparing their claims in accordance with the clarity provided by this judgement, although some care and attention regarding the specific wording of their policies is still required.

“Businesses should take advice when quantifying the losses caused by any coronavirus-related business interruption. This may not be as straightforward as it sounds. As well as considering any obvious loss of profits based on a comparison with normal trading activity, they should consider any contracts that were lost, or failed to convert, due to the lockdown restrictions. Businesses may have received inquiries that they were unable to fulfill, or respond to within the required time-frame, and these projected losses should also be taken into account.

“Some businesses in the hospitality and leisure industry, such as pubs and restaurants, could lose out on quantity discounts that they might have expected to earn under normal circumstances. This could result in increased costs and reduced profitability going forward. While it’s easy to overlook such projected losses when pulling schedules together, they should be considered properly.

“With the prospect of more local lockdowns in the months ahead, businesses must continue to keep detailed records of their commercial dealings in a format that could assist them in bringing further claims in a timely way in the future.”




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