Why fate of many small businesses rests on court fight with insurers

The fate of thousands of small UK businesses affected by coronavirus will be at stake this week when regulators take on the insurance industry at the High Court in a legal battle worth potentially billions of pounds.

Judges will be asked to make decisions on the thorny issue of how much insurers will have to pay out to companies under their business interruption policies to meet claims for Covid-related losses.

The issue has been one of the most controversial to arise from the coronavirus crisis, and the court’s ruling will have ramifications well beyond the specific policies under discussion.

Insurers say that most business interruption policies are designed to pay out for lost profits after a property has been physically damaged. Without physical damage, they suggest, the coverage provided is limited.

Their customers argue that a variety of subclauses in their contracts trigger payments, and that insurers should pay out quickly to businesses in desperate need of money.

“Most business interruption policies historically derive from Victorian concerns about factories and the link to physical damage,” said Roger Franklin, a partner at law firm Edwin Coe. “Over the years, they have extended it to issues that arise from non-physical damage.”

To decide the matter more quickly than individual disputes could, the Financial Conduct Authority has stepped in to bring a test case at the High Court. It will look at 17 policy wordings from eight different insurers including Hiscox, RSA and Zurich, and ask whether Covid-19 triggers a payout. Based on other policies that the regulator has studied, the court’s rulings are expected to apply to nearly 50 insurers, who sold cover to 370,000 customers.

According to one person briefed on the FCA’s aims, “other insurers will also be affected by the test case and its conclusions . . . they should apply the judgments in the test case to potentially affected claims”.

When the court convenes on Monday, four big questions will be central to its decisions.

What does denial of access mean?

Some policies offer cover if the businesses are unable to use their premises or are denied access to them. For example, one Hiscox policy states that customers are covered for “inability to use the insured premises due to restrictions imposed by a public authority during the period of insurance following . . . an occurrence of any human infectious or human contagious disease, an outbreak of which must be notified to the local authority”.

The court will have to decide whether, for example, the government is a “public authority”, and whether its lockdown order constitutes a denial of access.

“The FCA has taken a very broad based view on government measures and local authority measures, putting them together as a whole,” said Jumana Rahman, partner at law firm Cohen & Gresser. The defendants, she added, have tried to argue that the wording should be interpreted more narrowly to situations where the government has mandated that premises be closed.

Does Covid count as an ‘incident’ or ‘emergency’?

Some of the policies being discussed provide cover if business owners cannot get into their premises because of an emergency. For example, one of Ecclesiastical’s policies provides cover if access to premises is denied by “any action of government police or local authority due to an emergency which could endanger human life or neighbouring property”.

Was Covid on or near the premises?

Some policies offer cover if there is a notifiable disease at the business premises or within a certain radius of it. One of RSA’s policies, for example, provides cover “in the event of interruption or interference to the insured’s business as a result of . . . notifiable diseases and other incidents . . . occurring within the vicinity of an insured location”.

The court will have to decide how this cover applies to Covid-19, particularly how policyholders will be able to show that the disease was present in a certain place or geographical area.

How much should insurers pay?

This will be one of the big battlegrounds. If the court decides that the policies should pay out because of the crisis, the next question is how much should be paid.

To do that, they have to establish a counterfactual — how much would the business have earned otherwise. Much depends on the wording of so-called trends clauses in the policies, which base payments on more general business trends.

The FCA will argue that “otherwise” in this case means a world without coronavirus. The insurers will disagree, arguing that even if the businesses had been able to open they would not have made much money anyway as the whole country was in lockdown.

The outcome of this part of the case could have a big impact on how much policyholders can claim. Richard Mattick, a lawyer at law firm Covington, said: “The policyholders could have a pyrrhic victory if they won on coverage but lost on trends clauses.”

The case is due to last for two weeks. A judgment is not expected until September at the earliest. Lawyers said the outcome is likely to be nuanced, with some policies paying out and others not. “I don’t think it’s winner takes all,” said Ms Rahman.

That will leave scope for appeals. If there is an appeal, it could go straight to the Supreme Court, rather than heading to the Court of Appeal first. But an appeal could still add months to the process, delaying any payouts to cash-strapped businesses.

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