High Court insurance ruling ‘welcome news’ for small firms

A High Court ruling on business insurance claims over coronavirus disruption will be “welcome news” for many firms, according to a UK watchdog.

Around 370,000 firms could be affected by the judgement, which is part of a test case looking at key issues around firms’ entitlements to payouts over the impact of the government-imposed lockdown.

The Financial Conduct Authority (FCA), Britain’s financial watchdog, brought a case on behalf of many firms which have been unable to succeed making claims so far.

A 162-page judgement was published on Tuesday in the complex case, resolving disputes over the terms used in many common business interruption policies.

“We are pleased that the court has substantially found in favour of the arguments we presented on the majority of the key issues,” said Christopher Woolard, interim chief executive of the FCA.

“Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat.”

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But the court did not back the regulator’s case on every issue, and the number of policyholders likely to succeed making claims or miss out as a result is not yet clear.

Hiscox (HSX.L), one insurance firm involved, saw its stocks slip 3.3{a25bda0f8ab6dac90e68079d6f038584ef6ac53f1f4621de3ad526e35cd6c0d6} immediately after the FCA’s announcement but then quickly skyrocket 16.3{a25bda0f8ab6dac90e68079d6f038584ef6ac53f1f4621de3ad526e35cd6c0d6}. It suggests shareholders may have initially taken fright, before deciding the judgement could in fact be less damaging for insurers than previously expected.

Hiscox said in a statement the ruling meant it now estimated additional claims at £100m, lower than the £150m upper end of previous risk estimates.

“The judgment clarifies that fewer than one third of Hiscox’s 34,000 UK business interruption policies may respond. Coverage under these policies is essentially limited to those customers who were mandatorily closed by government orders, and then only in certain circumstances,” it said.

The FCA had argued policies which cover firms for business interruption from infectious or so-called ‘notifiable’ diseases should have cover for COVID-19 disruption. It argued firms with clauses on “denial of access” or “public authority closures or restrictions” should likewise receive payouts.

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Some insurers have paid out on such clauses, according to the FCA, but some have denied liability, prompting the FCA to bring the case to achieve clarity.

It said the judgement had found “most, but not all” of the policies with disease clauses provide cover, while “certain” policies on limited access and authority restrictions similarly provide cover.

The FCA noted the judgement did not show eight defendant insurers were liable across all 21 types of policy wording it had brought before the court. It also does not determine how much is payable under individual policies. Insurance firms could also appeal the ruling.

“Each policy needs to be considered against the detailed judgment to work out what it means for that policy.  Policyholders with affected claims can expect to hear from their insurer within the next 7 days,” it said.