Plan Insurance Blog

On What Grounds Have Insurers Rejected Business Interruption Claims?

Currently, a significant number of UK insurers are taking part in preliminary stages of a High Court test case brought by the Financial Conduct Authority (FCA) to determine the validity of their decision to reject a number of business interruption claims by policyholders following the government imposed Covid-19 lockdown. The insurance industry’s reputation has taken a hammering in the press but the firms in question are standing by their decisions’.

The hearing which began on July 20th and is expected to run for eight days will feature defence from leading insurers such as Hiscox. They claim that their wordings were not designed nor intended to cover the fall out of a global pandemic despite including (amongst other sections that could be deemed relevant) a disease clause structured largely in many cases along the following lines:

“We will [also] insure you for your financial losses and any other items specified [under this section] in the schedule, resulting solely and directly from an interruption to your business caused by [the following]: … Public authority [4.] [5.] [6.] [7.] your inability to use the [office][salon][venue][business premises][insured location][hall] due to restrictions imposed by a public authority [during the period of insurance] following: a… b. an occurrence of [a][any] notifiable human disease”

Hiscox refusal is on the grounds that the policyholder would only be insured for financial losses resulting “solely and directly” from an interruption to its activities caused by an inability to use the insured premises due to restrictions imposed by a public authority, following the occurrence of a human infectious disease. The Hiscox Action Group, which is made up of the 369 businesses who are pursuing the claim argues that the insurer is using “absurd and unfair” logic with an approach that is “unworkable in the real world”. They point out that although commercial buyers are deemed more sophisticated by the FCA than ordinary consumers, policies are still meant to be comprehensible to SME firms.

Part of the insurance companies’ arguement is that the cause is so wide that it cannot be linked to the firm’s specific business. It is for judges to decide if, despite being forced to close, busiesses would still have suffered loss from the general shut-down of the economy caused by the global pandemic.

The FCA has identified and provided here a number of other wordings which are representative of the general arguments that are to be examined in detail by legal experts. Another justification from insurers such as RSA and QBE for the repudiation of claims centres on the denial of access section clause that states, “Any occurrence of a NOTIFIABLE HUMAN DISEASE within a radius of 25 miles of the PREMISES” would be included. Though as this was a national lockdown they argue the government measures were “not limited to particular areas and were not in response to any incident or occurrence in any particular area.” The wordings are designed for a “specific, small-scale, identifiable physical event of short temporal duration and limited geographical extent.”

It’s been pointed out by the claimant’s defence that using the logic outlined by insurers’ would mean that not even a business in central London, within a mile of Guy’s Hospital would have satisfied the area requirement at any relevant time. Though firms caught up by the current regional lockdown in Leicester may be eligible to claim from their policies’ as their businesses are within a specifically targeted vicinity.

The outcome of the case is awaited eagerly by both the insurers and thousands of UK companies who have been hit so hard by the crisis. Leading names including Arch, Argenta Syndicate, Ecclesiastical, Hiscox, QBE, MS Amlin, RSA and Zurich are taking part in the test case which could result in huge pay-outs should it go against them.

The Association of British Insurers (ABI) estimates insurance companies will pay out on £1.2 billion to businesses and individuals for various Covid-19 related claims. That figure will escalate greatly if the High Court rules that the policies in question do cover business interruption losses. If as is expected the losing sides appeal against the outcome, the subsequent case would be presented to the Supreme Court before the end of the year. During which time many of the firms involved may no longer be in existence.

The negative PR that has resulted from repudiating the claims could prove incredibly costly for insurers. There’s no doubt they would not have made the decision lightly, especially the likes of Hiscox. The firm has taken a large brunt of press coverage relating to the case perhaps in some part due to their brand being built around a no quibble approach to claims. They layout their logic for denying payments in this statement.

It appears to many outside observers that a key part of their reasoning for rejecting C19 related BI claims could be on a flimsy footing. They might not have anticipated a pandemic causing a UK wide lockdown but the wordings in question do not specifically exclude one from being covered. Clearly going forward the insurance industry will ensure their wordings are watertight in relation to pandemics and more than likely the cover offered will either be limited, accurately priced (rendering if unaffordable for many firms) or both. In which case, further Covid-19 related state subsidies will be needed to provide adequate protection for individual firms and in turn the wider economy in future years.

You might be interested in… Business Interruption Cover Should be Solving Landlord and Leaseholder Gridlock

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