High Court backs FCA business insurance claim case

16 September: Judges say insurers should cover SME business interruption insurance claims made during the pandemic, writes Financial Services Faculty commissioning editor Brian Cantwell.

Small and medium-sized enterprises (SMEs) now have more clarity on business interruption insurance claims after the High Court backed financial regulator FCA’s test case.

In July this year, 400 SMEs complained to the FCA that many insurers had not backed their business interruption insurance claims made during the pandemic lockdown. The FCA then brought a High Court case to gain clarity on what to do regarding pay-outs and future coverage.

Ruling

Judges ruled in favour of the arguments advanced for policyholders by the FCA on the majority of the issues. 

According to the Financial Times, 21 wordings of different insurers were considered and in 19 of the wordings, the judges found in favour of the claimants, with Zurich and Ecclesiastical Insurance the exceptions.

Commenting on the outcome of the case Christopher Woolard, Interim Chief Executive of the FCA, said: “Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful.”

Woolard added: “Insurers should reflect on the clarity provided here and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgment says should be paid. They should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.

“If any parties do appeal the judgment, we would expect that to be done in as rapid a manner as possible in line with the agreement that we made with insurers at the start of this process. As we have recognised from the start of this case, thousands of small firms and potentially hundreds of thousands of jobs are relying on this.”

While the pay-outs will aide struggling SMEs in the short term, there are fears that it could cause premiums to rise in the future.

Financial impact

Two insurers, Hiscox and RSA, have said the decision will cost them £200m to cover the claims. 

Hiscox said in a statement "As a result of the judgment, the group estimates additional COVID-19 claims arising from business interruption to be less than £100m net of reinsurance."

However, many insurers have seen their stock prices rise in the day after the ruling, as the market backs the product and the company in the future, leading to a more complex financial situation than a win or lose for insurers. Some will point to the clarity giving confidence in the product for SMEs, and while future contracts will be carefully worded, there is now perhaps more confidence in the product than there was before, which could also benefit SMEs.

Outcomes

In August, the Financial Services Faculty looked at some of the impacts the case could have on the market. ICAEW spoke to Simon Sloane, at the time head of the international arbitration group at lawyers Fieldfisher, who argued business interruption (BI) cover will emerge from COVID-19 and may even become more affordable for businesses.

Sloane did not predict BI cover would become any more expensive, even if the FCA lost the case, as insurers will have had a windfall. However, if demand does fall, there could well be a 'race to the bottom' on premium by insurers to secure market dominance.

“SMEs will still require BI insurance cover, so I anticipate it will increase the use of cell captives and FinTech insurance products such as Lemonade, which work like a mutual, whereby all in the small group share premium and risk,” said Sloane.

He also predicted “greater scrutiny of cover” in future by SMEs and their directors, and increased risk on their brokers “to ensure they inform and/or advise fully [about] the scope of the BI cover provided”. 

As for the SMEs involved in the case, money will not be directly forthcoming until the prospect of an appeal is ruled out, or if they are customers of Zurich or Ecclesiastical Insurance. The FCA said it will maintain contact with SMEs about the progress of any appeals through its website.

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