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Covid-hit SMEs get business interruption insurance lifeline

Thousands of small businesses will have their claims coronavirus business interruption loss claims paid after the Supreme Court substantially allowed the FCA’s appeal on behalf of policy holders. 

15th Jan 2021
Editor AccountingWEB
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Closure sign hung in restaurant window due to Corona virus
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In today’s landmark ruling, the Supreme Court dismissed appeals from six insurers. Their ruling that insurance clauses offering cover for notifiable diseases extended to losses resulting from Covid-19 means small businesses forced to shut their doors during the first lockdown will now have their business interruption (BI) claims paid. 

“Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat,” explained Sheldon Mills from the Financial Conduct Authority (FCA), which brought the original test case to clarify policy wordings that many insurers had used to deny cover to affected businesses.

“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. Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps,” Mills added.

Background

Many small businesses in the leisure, property and hospitality industries had to close or suffered losses that prompted them to make claims under their BI policies during 2020. However, thousands of policy holders were left empty-handed as most small business policies concentrated on property damage and not on unprecedented scenarios like a global pandemic. 

In order to clarify the contractual uncertainty for policyholders and insurers, the FCA selected a representative sample of 21 types of policy issued by eight insurers. The FCA identified 370,000 policyholders that may be affected by the outcome of the test case. 

The case was not intended to encompass all disputes, but the ruling provides a basis for insurers and policy owners to determine how much is payable under individual policies.

Today’s ruling follows on from the High Court's judgement in September that resolved some issues, but neither the FCA nor the insurers could reach an agreement. 

While working with insurers to ensure claims are rapidly settled, the FCA added that each policy will need to be considered against the detailed judgment .

Claims need paid as quick as possible

MP Mel Stride and chair of the Commons Treasury select committee said the Supreme Court ruling will “provide a lifeline” for many businesses struggling through the pandemic. He backed the FCA’s undertaking to ensure that “valid claims are paid by insurers as quickly as possible”. 

Offering a similar message, BDO’s Richard Cameron-Williams recognised that the judgement gives finality to the framework for interpreting the cover afforded by the policies, but warned that the industry still faces a huge challenge in working through the vast numbers of claims.

Rafi Saville, forensic partner at accountancy firm HW Fisher, said the ruling could have a ripple effect for the entire marketplace, with its conclusions likely to extend to other affected claims. 

“Businesses who think they have a claim to make should consult their insurance documentation with a view to understanding whether their Covid related losses will be covered and start the claim process,” Saville said. 

“We understand that policies covering ‘notifiable diseases’ will be covered under the ruling, so that is what businesses should be looking out for on their documentation.”

When Bill Mew wrote about the looming Supreme Court case on AccountingWEB back in November last year, he questioned the extent to which businesses can rely on insurers to cover black swan events: “Not all black swan events are entirely unforeseen, but interpreting signals among the background noise can be almost impossible even when we are risk-aware. Unfortunately, few organisations are sufficiently risk-aware or able to spot the signals – even when clear warnings are made.”

Have any of your clients been effected? What will the Supreme Court ruling mean for their businesses?

Replies (6)

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By memyself-eye
15th Jan 2021 17:59

I've already advised 2 clients to pursue this.
Buggers up the value of my Aviva shares though....

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Replying to memyself-eye:
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By Merseyside Mike
16th Jan 2021 10:50

There has been misleading reporting on this issue - it is only certain ambiguous policy wordings that were the subject of the test case and which have been adjudged to provide cover so they now need to respond.

Since SARS back in 2002 (?) most insurers wordings have been clear that there is no blanket cover for "notifiable diseases" and that they only cover "named diseases" which are specified in the policies. Such policies are not affected and do not provide any cover.

In regard to Aviva, nearly all of their policies are on a "named disease" basis so will not respond, although they provide cover on various special schemes which are on a "notifiable disease" basis and will need to respond. This was by accident and not design, and the people who signed off the wordings perhaps weren't as diligent as they should have been.

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Glenn Martin
By Glenn Martin
17th Jan 2021 14:57

What is the definition of small business for insurance purposes ? I am interested to know why it specifically mentions small business can claim, are larger companies expected to take it on the chin.

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Replying to Glennzy:
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By Merseyside Mike
17th Jan 2021 19:23

It's actually nothing to do with small or large business. The inference however is that larger businesses will have arranged bespoke insurance that may (or more likely may not) include cover whereas small businesses will have purchased "off the shelf" policies.

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By petestar1969
18th Jan 2021 10:54

The BBC article on this mentioned that Hiscox may end up having to pay out £100 million that they did not expect to pay out.

If that's true then their customers are going to get clobbered at renewal....

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Replying to petestar1969:
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By mobilejo
21st Jan 2021 10:18

But that is simply the nature of the insurance cycle:

A bad thing happens and either (a) you are not insured for it, and it costs you money or (b) you are insured for it, receive a payout, and suffer higher premiums in the future so it costs you money.

The nuance is in balancing the value of a payout minus future renewal increases vs the cost of just eating the loss yourself. Its why so many don't claim on their car insurance after minor accidents.

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