Insurers must pay small firms for Covid lockdown losses

The Supreme Court found largely in favour of small firms receiving payments from business interruption insurance policies.

For some businesses it could provide a lifeline, allowing them to trade beyond the coronavirus crisis.

The ruling could cost the insurance sector hundreds of millions of pounds.

The City watchdog, the Financial Conduct Authority (FCA), brought the test case, with eight insurers agreeing to take part in proceedings.

One of the insurers set to make significant payouts is Hiscox, which was challenged by thousands of its policyholders as part of the case.

Richard Leedham, who represented the Hiscox Action Group – on behalf of small businesses, said: “This is a landmark victory for a small group of businesses who took on a huge insurance player and have been fully vindicated.

“What is important now is that Hiscox accepts the Supreme Court’s verdict and starts paying out to its policy holders, many of whom are in danger of going under”.

Other insurers involved in the test case are Arch, Argenta, MS Amlin, QBE and RSA – but as many as 60 insurers sold similar products. They will now pay out on many, but not all, policies.

Huw Evans, director general of the Association of British Insurers, said: “All valid claims will be settled as soon as possible and in many cases the process of settling claims has begun.

“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.”

In the lockdown of last spring, many small businesses made claims through business interruption insurance policies for loss of earnings when they had to close.

But many insurers refused to pay, arguing only the most specialist policies had cover for such unprecedented restrictions.

It was agreed that a selection of policy wordings should be tested in court, setting the parameters for what would be considered a valid claim.

The ruling provides guidance for a wider pool of 700 policies, potentially affecting 370,000 small businesses.

Giving the court’s ruling, Lord Hamblen said the court accepted the arguments from representatives of policyholders and dismissed appeals from insurers against an earlier judgement finding in policyholders’ favour.

The complex ruling covered issues such as disease clauses, whether business were denied access to the properties, and the timing of lost earnings.

James Ollerenshaw’s hair salon was one of those businesses unable to operate during the first national lockdown.

The business – The Drawing Room in London’s Spitalfields – paid an annual premium of £1,200 for business interruption insurance, and disease cover came as part of it.

Mr Ollerenshaw said the Supreme Court’s decision would not directly affect his policy, but would decide the principles on claims such as his – and were vital for the business.

“A payout would cover the major costs, which is the rent. We have debt sitting there,” he said.

He said he was delighted with the Supreme Court’s ruling.

“The insurance industry needs to face up to the fact that it failed customers at their greatest moment of need, destroying companies, livelihoods and jobs,” he said.

He formed a Covid Claims Group, joining other small business owners in calling for a quick resolution and payouts.

“Time matters,” he said, pointing out that some small businesses have been forced to close down while waiting for the decision.

Sheldon Mills, from the FCA, which brought the case on behalf of policyholders, said: “Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. Today’s judgment decisively removes many of the roadblocks to claims by policyholders.

“We will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible.”

The test case was fast-tracked to the highest court in England and Wales – the Supreme Court, which heard four days of legal representations in November. The final ruling provides authoritative guidance for these policies, and potentially of similar ones not part of the case.

The FCA, the insurance sector, and the Financial Ombudsman will all use the judgement to guide their decisions in other cases.

The Financial Ombudsman Service and courts in Scotland and Northern Ireland are expected to use the judgment to rule on other, similar cases.

Insurance policies would have been amended for new and renewing customers since this issue emerged, so losses from the latest lockdown measures in different parts of the UK would be clearly stated as part of the cover – or not – in new business interruption insurance policies.