​Insurers should see businesses' Hiscox lawsuit as just one front in Covid-19 storm

Cake makers aren't often noted for acts of aggression. But Insurer Hiscox has been invited to "bring it on" in court by a leading Northern Ireland patisserie, part of a group hoping to sue the insurance giant for failing to pay out for a coronavirus hit to business.

Daniel Duckett, director at Belfast's Lazy Claire Patisserie, told MLex he is “more than happy to go to court" with Hiscox after the insurer issued a flat rejection of the company’s claim on its business interruption insurance.

His café forms part of a growing group of more than 500 restaurants, bars and other hospitality providers that have joined forces to pursue legal action against Hiscox, claiming it isn't honoring their policy cover. They are seeking payouts for loss of revenue from having been forced to shut their doors due to government measures to quell the spread of novel coronavirus.

Their story is a familiar one, with the tussle between insurers and the insured taking center stage in the economic fallout from the Covid-19 pandemic. It is likely to be one of the test cases for when small businesses that reasonably believe they are covered can make claims against insurers that have knocked them back.

Insurers and insured will both study the dispute for pointers to how small and medium-sized enterprises hit financially by the pandemic are able to recoup lost revenue.

In the background, this spells trouble for the entire insurance industry, and perhaps even its regulator.

— Insured vs insurer —

Insurers have estimated billions in payouts due to cancelled holidays, flights, corporate events and other losses stemming from Covid-19 lockdown and social distancing measures across all major economies. Insurance and reinsurance market Lloyd’s of London said on Thursday that it alone is anticipating paying out up to $4.3 billion.

But the hospitality sector has been left wondering where this money is going, with one industry association, UKHospitality, saying it has seen just one percent of members receive successful responses from their insurance companies.

While some cover is clear — such as a consumer being unable to travel due to government advice — the issues of businesses being able to claim compensation for enforced closure of their doors has emerged as more of a grey area.

Many businesses have spent tens of thousands of pounds on buying cover for all eventualities. But they have found that this business interruption insurance doesn’t cover the crisis impact, despite the government ordering them to close their doors in a bid to slow the spread of Covid-19.

That’s right, say insurers. The Association of British Insurers has issued various statements reminding their customers that standard business interruption insurance purchased by the “vast majority of businesses” provides cover only against physical damage to premises caused by threats such as flood or fire.

The Financial Conduct Authority has generally backed up that view. In a letter to insurance chief executives on May 1, the regulator confirmed it believed that the lion’s share of SMEs' policies will contain only the basic cover described by the ABI.

Duckett, though, believes the business interruption section of his Hiscox insurance policy is unequivocal. Specifically, it says the insurer will cover the business for financial loss resulting in “the inability to use the insured premises due to restrictions imposed by a public authority, during the period of insurance following murder or suicide, an occurrence of human infectious or human contagious disease, an outbreak of which must be notified to the local authority.”

Looking at that wording, Duckett says, there’s nothing remotely “iffy” about it. “I’m extremely confident. I’m actually shocked at the fact that Hiscox have continued to come back and deny our claim,” he said.

A spokesperson for Hiscox said: “We understand these are incredibly difficult times for businesses, and we are paying claims that are covered by the policies we issue fairly and quickly."

"We do not comment on individual claims, but as the Financial Conduct Authority has said, most UK small business policies across the industry do not cover pandemics. We review every case individually, and if any customer has concerns about the application of their policy, we encourage them to get in touch with us directly.”

— Existential insurers —

But the Hiscox Action Group is pushing for the courts to decide.

The group is perhaps the highest-profile group of complainants seeking compensation. It has a wide cross-section of businesses; beside Lazy Claire, for example, is London communications agency Media Zoo and Pinnacle Climbing Centre in Northampton, both founding members of the group.

And the group clearly means business. It is being represented by Mishcon de Reya, and has been approved for litigation funding from Harbour Litigation Funding for the first phase of work, to allow the lawyers to review the claims and group the ones with clear potential into a case to take forward.

The group is waiting to hear whether the funding will stretch to a final hearing, and it isn’t yet clear whether they’re opting for group action or class action.

But there are other, smaller, groups also querying the wording of their policy cover from many other insurance companies.

In the UK alone, there are likely to be thousands of other businesses like this waiting on the sidelines to assess the outcome of this court case. This may end up being a minefield for lawyers, with many SMEs likely to go looking for representation if they too believe they have a potential business interruption claim.

Successful court cases spell trouble for insurers. Insurance company representatives display uproar at the notion of having to pay out on policies where a pandemic isn’t explicitly mentioned as cover, as they argue they would have collected higher premiums to build reserves for the potentially huge payouts.

They argue that using the sector as a scapegoat for the losses experienced by a range of other industries will just threaten the stability of insurers themselves.

But there is an existential question for the insurers here. Yes, covering losses for the biggest economic crisis in living memory could indeed threaten the sector — but what are insurers there for, if not to cover losses?

Whatever the outcome of the Hiscox Action Group court case, trust in the industry is likely to be seriously shaken, as businesses won’t want to pay hefty premiums for cover that refuses to pay out when — they argue — it’s clear that’s what the cover is for.

Anna Sweeney, the BOE’s executive director for insurance, warned on an online event last week that the pandemic will result in questions about the relevance and value of insurance products, and companies should be prepared for that. And the UK Treasury is assessing the health of the sector, given the number of claims arising.

With this in mind, there are already discussions into a joint government-industry initiative to fund losses from future pandemics. It would mirror those already in place for housing insurance for flood-prone areas or losses from terrorism-related events, in recognition of the fact that the insurance industry alone cannot shoulder the costs of such a devastating crisis.

Lloyd’s of London has funded $15 million into research efforts for how future pandemics should be covered. But for this one, it’s too late — and the legal questions still need to be answered.

— FCA case —

In parallel to private legal cases, there is work ongoing from the public authorities. Some Hiscox clients are hesitant to go down the legal route, and have instead brought complaints to the financial ombudsman.

But they might have to wait a while for a response. The ombudsman has put on hold any responses to complaints until there is an outcome to FCA legal action.

In that same CEO letter earlier this month, the FCA confirmed it would go to court over several insurance policies to obtain legal clarity on the contractual uncertainties presented. It says it is pushing for a "declamatory judgment" from High Court judges as soon as possible — which MLex understands to mean around July — but does not preclude individual private action in the meantime.

The FCA has asked insurers to give examples of their policy cover where business interruption insurance does not explicitly exclude pandemics. That might include Duckett’s cover, which is different from what the ABI describes as “standard” business interruption insurance to protect an SME against the risk of flood or fire on the premises.

Speaking to MLex this week, Duckett slammed the FCA for not doing enough to help SMEs in the UK, arguing that even an expedited court case in July isn’t soon enough for the many that will go bust waiting for an answer.

“For them to say, ‘We don’t know what we need to do, we need to have the court clarify this,' means there’s a lack of oversight or regulatory power in some way. What good is the FCA if they need to continually go to court to get clarification?” he asked.

If this saga spells trouble for the insurance industry, it’s likely to reverberate onto the regulator too. The FCA has already been embroiled in many consumer scandals and has been accused by lawmakers and consumer groups for not doing enough to prevent individuals losing money in the face of scams.

With millions of pounds and thousands of livelihoods at stake, this has the potential to be a long-running consumer scandal with fingers being pointed not just at the insurers, but at the FCA too.