Explained: the coronavirus business interruption insurance court case that could force insurers to pay out

The impact of COVID-19 on hundreds of thousands of UK small businesses thrust the hitherto little known topic of business interruption insurance into the spotlight like never before.

This insurance is a rather complicated topic at the best of times – with different policies covering different risks and the whole thing wrapped up in layers of insurance jargon – so it wasn’t surprising that there were disputes over which policies did and didn’t cover the financial impact of the COVID-19 lockdown.

What was more surprising was the response of the UK’s financial watchdog the FCA (Financial Conduct Authority) – it has effectively taken several insurers to court in order to get a definitive judgement on which business interruption insurance policies cover the lockdown imposed in the UK.

This piece will explain the two sides of the case, look at some of the key arguments, and address what the verdict could mean for UK small businesses.

What is the FCA business interruption insurance court case about?

The FCA explains its business interruption insurance case on its website, but, at the basic level, it’s like any other court case – there’s a prosecutor (who is trying to prove wrongdoing) and defendants (who are accused of doing the wrongdoing).

In this case, the FCA is effectively the prosecutor – it’s trying to show that some of the UK’s business interruption insurers have been refusing claims when it should have been accepting them and paying out.

Of course, the FCA is not bringing the case for itself, but to help the countless small businesses across the UK who feel they’ve been screwed by their insurer and can’t afford the costs associated with legal action. Many of these contacted the FCA for help and the FCA took on the case.

As so many small businesses are potentially affected, two larger groups have also joined the action. One is the Night Time Industries Association, a membership group that represents the interests of independent bar, nightclub and restaurant owners, as well as others involved in the UK’s nightlife industries. The other is the Hiscox Action Group, a coalition of small businesses from various sectors who feel that their Hiscox business interruption insurance policies should have covered them for COVID-19 disruption, and whose claims have been rejected by Hiscox

In the defendant corner are eight insurance companies (Arch, Argenta, Ecclesiastical, Hiscox, MS Amlin, QBE, Royal & Sun Alliance, and Zurich) who are arguing that, for various reasons, there are perfectly legitimate grounds to reject the claims and they’ll prove that in court.

The case is scheduled to run across two weeks from Monday to Thursday (20-23 July and 27-30 July).

Anyone who wishes to follow the case closely can watch a livestream, hearings begin at 10am each day.

Who is the verdict likely to apply to?

Let’s make one thing clear now.

There are two key reasons for this:

• Firstly, the majority of business interruption insurance policies do not include cover for business interruption due to infectious diseases
• Secondly, even policies that do include cover for infectious diseases usually list the diseases that they cover to avoid precisely these sorts of issues

However, there are certain policies that cover infectious diseases without specifically naming them, and some that cover interruption due to “denial of access”.

It’s these policies that are going to be the key battleground – policies that, in the view of many small businesses, should cover COVID-19 but the insurers argue don’t cover pandemics.

So this issue can be properly examined, the FCA has identified 21 policy wordings that will be examined in the court case.

Despite this seemingly narrow focus, it’s hugely important to both sides, while an FCA win could help save UK small businesses, it could be hugely costly to insurers.

And the ruling will have an impact beyond these eight insurers, with industry analysis suggesting that it could affect 60 insurers, 700 different types of policy, and 370,00 policyholders.

Talking to Channel 4 News, Mark Shepherd from the Association of British Insurers argued that pandemics are excluded from insurance policies because they affect so many customers that they threaten the central principle of insurance policies; that the “many will pay in for the few to claim”.

They also argue that they could be forced to pay out for losses they never agreed to cover.

However, the industry is not as united as that might suggest, with some insurers having already agreed to pay out after previously insisting they were not liable. This U-turn was prompted by the FCA getting involved and mounting the current court case.

The central debate of course is whether pandemics are really excluded from disputed policies.

What are some of the key issues in the case?

In total, the eight insurers have submitted over 850 pages of documents in support of their argument, so many different aspects of the specific policies and of the instructions the government gave to the UK as a whole will be gone through with a fine-tooth comb.

Rick Smith, the managing director of business rescue and insolvency specialist Forbes Burton puts it like this:

“The clash at the heart of this case is due to the insurance industry taking umbrage at the advisory nature of the Government warnings. Equating it to a cautionary advisory notice rather than an order might be stretching credibility, but many insurance companies understandably equally won’t want to be crippled by the sheer scale of payments that may need to be paid.”

Some of the key discussion points include:

Was, for example, the government telling businesses to close merely “guidance” (as some of the insurers have claimed) or an official government action?

And, if it was official, at what point in the coronavirus cycle was this official action taken?

Another key point is intention: is the fact that insurers didn’t intend to cover pandemics in their policies and wrote the guidelines accordingly enough to protect them under law? Or should (as the FCA case argues) they be punished for making the guidelines vague enough to be open to interpretation?

The two judges overseeing the case must make a decision on countless sub-points like these in order to reach an overall conclusion.

As for which way it will go, no one really knows. The simple fact is that there’s no historical precedent for a pandemic like this in the UK, and so insurance companies, the FCA, and small businesses are all in uncharted territory.

Summary

• On behalf of UK small businesses, the FCA has mounted a court case against some insurers that are refusing to pay out on some business interruption insurance policies
• The FCA acknowledges that most business interruption insurance policies do not cover COVID-19
• The verdict could affect up to 370,00 policyholders (many of which are small businesses)
• The contested policies are those that list cover for infectious diseases (without listing them) or general denial of access
• The case is expected to run until 30 July
• It’s hard to predict what will happen, as the UK has never previously been affected by a pandemic in this way