SMEs backed in Covid Business Insurance dispute

Insurance companies that rejected thousands of business interruption insurance claims could soon be forced to honour payouts totalling more than £1 billion.

 A number of insurers who turned down claims on the basis that the coronavirus pandemic was not covered in their business interruption policies were taken to the High Court as part of a test case brought forward by the Financial Conduct Authority (FCA). 

The Supreme Court has ruled in favour of the FCA's case and dismissed the appeals of insurers. If you've had a business interruption claim relating to coronavirus rejected, here's what the ruling could mean for your business.

What’s the story?

The coronavirus pandemic caused chaos for businesses across the UK, which suddenly had to shut their doors to contain the spread of Covid-19. 

Although some companies had taken out business insurance to protect against such an eventuality, hundreds of thousands found their claims rejected by insurers, many of which did so on the basis that policies demanded there needed to be confirmed local cases in an outbreak situation.

This meant that although business owners were forced to shut up shop as part of national or local lockdown rules, they weren’t covered by their policy unless there was an outbreak on their premises. 

One business owner, speaking to BBC 5Live, outlined how their claim was rejected by their insurer, even though their business interruption insurance had a ‘hybrid clause’ that refers to ‘closure of a business by any public authority, in the event of an occurrence of a notifiable disease’. 

The government classified Covid-19 as a ‘notifiable disease’, which indicates that this clause should have covered the business for any loss of trading during lockdown.

On the other hand, insurers argue that standard business interruption insurance was never designed to cover the effects of a global pandemic, citing that standalone cover is available for pandemics such as this one.

Even so, insurers faced a legal challenge from the Financial Conduct Authority (FCA), which launched a test case that was taken to the High Court. The outcome ruled in favour of business owners who had seen their claims rejected by insurers who stated that their cover didn’t include coronavirus. 

An appeal of this decision was then fast-tracked to the highest court in England and Wales, where a four-day hearing on the issue was completed back in November. The final ruling from the Supreme Court looks set to force insurers into paying out on the disputed claims. But the situation is still far from being fully resolved.

What’s the problem?

Although the Supreme Court ruling looks like good news for any business owners who feel they’ve had legitimate business interruption claims turned down, it doesn’t offer a clear resolution for all.

This is because the test case brought by the FCA only included a sample of 17 insurance policy wordings, which it felt captured most of the key areas of dispute between insurers and policyholders. This means there are still a number of issues that haven’t been tested, not least the dispute about whether the disruption caused by the pandemic should be treated as one or multiple events.

What happens next?

The expectation following the Supreme Court decision on the FCA test case is that insurers will act to pay claims for business interruption cover for those customers affected as soon as practically possible. 

While the initial test case and the appeal focussed on a few policies from a handful of insurers, it is expected that even where an Insurer was not involved they should now be assessing their claims based on this new ruling. Therefore:

• If you think you have a claim and haven’t yet registered it with your insurer you should do so as soon as possible. 
• If you have already registered a claim or you have had a claim declined by your insurer you should contact their claims team to understand if the position will change. 
• If you have had a claim paid out, in some specific scenarios, it might be that the amount paid out could increase. You should contact your insurer to check
• Claims numbers and email addresses are stated in your policy wording; we understand insurers are receiving a large number of calls and there will be lots of claims to work through, so if your insurer provides an email address specifically for receiving claims, this may be a better bet.

David Woodfield, Insurance Director at Bionic, said: “After a remarkably difficult 2020, the FCA Test Case ruling is a welcome result for those of the UK’s SMEs who had business interruption insurance.  In my view, it presents a strong position from the courts that, broadly speaking, backs SME customers’ views that they should be paid out, and largely rejects the insurers’ views that they should not.  For some SMEs, this will translate into a significant and potentially business-saving insurance claim.”

Unfortunately, some businesses will have ceased trading when they found out their initial claim was rejected. If the ruling now deems that these claims should have been honoured, any payouts will be made to the insolvent estate and used to pay back creditors. Scant consolation for business owners who have lost their livelihood.

The long-term effects of the ruling could be a hike in premium prices, as insurers look to claw back some of the money they have lost, along with adjusted policy wording. It’s likely the policy wording for business interruption insurance will be tightened, especially where pandemics and diseases are concerned.

In the short term though, the ruling has to be seen as a win for SMEs.

What's Bionic's point of view?

This landmark case has major implications for the businesses involved and the wider insurance industry. Here's what our Insurance Director, David Woodfield, had to say on behalf of Bionic:

After a remarkably difficult 2020, the FCA Test Case ruling is a welcome result for those of the UK’s SMEs who had business interruption insurance.  In my view it presents a strong position from the courts that, broadly speaking, backs SME customers’ views that they should be paid out, and largely rejects the insurers’ views that they should not.  For some SMEs this will translate into a significant and potentially business-saving insurance claim. 

At a basic level, leaving legal principles to one side, we also view this as an important ruling since it sides with a customer’s expectation when they bought the policy.  Insurance carries a difficult reputational challenge in that its products need to be complex and specific to generate underwriting profit, but need to be simple to meet customers’ expectation.  

The more complex they are, the more difficult the purchase becomes and the more disappointment the products create so our hope is that this will also lay the ground for a simpler future.  That the legal cases have taken getting on for a year since the outbreak to conclude is another indication of the complexity which in the meantime has meant UK SMEs have gone bust where their claim may have otherwise saved them.

Beyond this lesson in simplicity, we have some sympathy for insurers whose underwriters would never have envisaged this exact scenario.  And in all likelihood, before the event, they may have been dismissed, deprioritised or accused of fanaticism if they had presented it for serious consideration.  

After the event, the individuals within insurers would have been desperate to pay out but their forecasts won’t have been prepared for this shock and their obligation to shareholders remains an imperative.  Having fought and lost, they now face the unenviable task of recovering these losses through higher pricing at a time when customer trust in them will be at an all-time low.

Whilst we all hope there is no future pandemic or similar scenario, I hope that two lessons are learned for the future:

1. Consider the insurer who reviewed their wordings and off their own bat decided to pay out these claims immediately.  They will have been brave, albeit likely taking that decision on a calculation.   That calculation will have been that the brand benefit and trust generated with customers is well worth the losses it brings.  I dare say that in hindsight that is now proving to be a wise course of action.
2. Consider the government’s role in this process.  Thinking back to the start of the pandemic, UK SMEs were desperate for cash to tide them over.  THE government-backed lenders and attempted to get CBILS loans into markets as rapidly as possible.  This required the creation of new products, it required lenders to change their rules and brokers to help customers through a new journey.  Approval rates were very low; it took time to get right.  Again all the while UK SMEs were shutting up shop as their cash ran out.  A smart solution, in part, would have been for the UK Government to underwrite these BI cases.  The insurers were primed and ready with all the processes, controls and products already in the hands of customers that allowed money to reach them.  Essentially an asset that allowed funds to flow from the government to (some, insured) UK SMEs with a minimum of change.  A missed opportunity and one that would have doubtless saved many businesses and left insurance with the ‘there when you need it’ reputation it strives for.