City watchdog squares up to the insurance big guns in payout fight

Up to 370,000 businesses could be affected by the groundbreaking test case

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Some 30 barristers - instructed by seven firms of solicitors - will be involved in the High Court test case Credit: Chris Helgren/REUTERS

A groundbreaking legal action kicks off today to test insurers’ claims that they are not liable for payouts demanded by businesses during the pandemic.

The Financial Conduct Authority will face off against eight insurers, including Hiscox, QBE, RSA and Zurich to clarify whether business interruption cover sold by the firms should compensate them for losses suffered due to Covid-19 and the national lockdown.

The outcome of the test case could affect more than 50 insurers and 370,000 businesses with policies similar to those being considered by the court.

Judges will review a sample of the most controversial insurance contracts, but many customers believe insurers should have already paid out.

“Hiscox are on the hook for all of it,” says one insurance boss. “These are just black and white. There’s no wriggle room. That cover is very much in place and what surprises me is that this is a business that spent the last 10 years spending a huge amount of money on marketing and getting a brand that is all about [saying] ‘we pay all claims’.”

Hiscox and other insurers are supportive of the FCA’s test case and say they are paying out on valid claims as quickly as possible. However, the FCA accepts insurers’ view that most business interruption policies clearly exclude cover for losses caused by pandemics.

Most policies were never intended to cover a pandemic, and if they did the increase in cost would make them unaffordable for most businesses, insurers argue.

The eight-day court hearing will focus on policies where there is ambiguity or dispute over whether losses caused by the pandemic should be covered or not.

“My overall hope is that it provides contractual clarity as quickly as possible,” says Huw Evans, director general of the Association of British Insurers.

“We haven’t been dragged there. The FCA couldn’t actually have run this process if insurers didn’t agree to it,” he says. The court’s decision can’t come quickly enough for businesses waiting for payouts they believe should have arrived months ago.

Arros QD, a Spanish restaurant in the West End boasting Michelin-starred chef Quique Dacosta, is one of the businesses whose fate may hang on the outcome of the legal claim.

The restaurant has been battling RSA to pay out after receiving assurances that losses caused by Covid-19 would be covered when it bought cover through a broker in February.

“We’ve made sure that we are insured for this and now they don’t care,” says Sarah Winter, Arros QD’s finance director.

Without a payout, the restaurant is reliant on landlords not demanding full rental payments when the moratorium on enforcing commercial rents expires at the end of September.

Despite the unusually speedy legal process agreed by the FCA, insurers and the courts, Winter is one of many who feel the impending litigation has been used by insurers to delay paying out. “It’s now harder to get answers from RSA because they’re waiting to see what the High Court rules before discussing it further with us,” she says. RSA declined to comment on Arros QD’s claim.

If the judges rule in favour of policyholders, the speedy payment of claims will be critical for struggling businesses, which fear further wrangling over the size of any payments will mean the money arrives too late to save them.

“I don’t really want [a payout] being wrapped up in an administration,” says Winter. Sources on both sides of the case agree that the High Court’s ruling could arrive as soon as August or September but it is likely to be subject to an appeal.

The FCA and insurers have agreed to try and leapfrog the Court of Appeal and go straight to the Supreme Court to prevent the case dragging on for even longer, but lawyers involved say this could still take until Christmas.

A swifter resolution would be a feather in the cap of the FCA’s interim boss Chris Woolard who has found himself in the regulatory hot seat for a tumultuous few months after Andrew Bailey’s move to the Bank of England.

Christopher Woolard, the FCA’s head of Strategy and Competition Credit: Anna Gordon/eyevine

The real winners, however, may be the lawyers. About 30 barristers, instructed by seven firms of solicitors, will appear in the court case.

Asked at a preliminary hearing whether he would like an introduction to the full cast, Lord Justice Flaux declined wearily. “I think it would be completely exhausting for all of us,” he said.