Insurers Must Pay Businesses for Pandemic Claims, British Court Rules

LONDON — One day last March, as the coronavirus pandemic was beginning to sweep across Northern Ireland and the rest of Britain, Daniel Duckett was forced to shut the doors of his Belfast bakery and cafe, the Lazy Claire Patisserie. Britain’s prime minister would order all dining establishments closed as the scale of the pandemic became clear.

The Lazy Claire Patisserie, a couple of months shy of its two-year anniversary, wouldn’t reopen its doors for more than three months. “We followed the advice; we believed that was the right thing to do and that was what was mandated,” Mr. Duckett said.

There was one consolation: Mr. Duckett had purchased business interruption insurance, which covers lost earnings when unexpected events beyond the shop’s control force it to close. The day they locked the doors, he filed a claim to to Hiscox, a major insurance provider in Britain.

“It’s been a battle ever since,” he said.

Several weeks and countless phone calls later, his claim, which would have covered up to £100,000 (or $136,000) in losses, was denied. Mr. Duckett said that Hiscox told him that the pandemic wasn’t something the company had envisioned being covered by their policies.

He soon discovered he wasn’t alone and became one of the founding members of Hiscox Action Group, which has rallied as many as 750 businesses together to take action against the insurance company.

On Friday, Mr. Duckett got some good news after the delay in getting an insurance payout forced him to take on new debt a few months away from paying off his loans: The country’s highest court unanimously rejected insurers’ appeals, clearing the way for him and hundreds of thousands of other small-business owners in Britain to receive insurance payouts for business interruption claims from the pandemic.

The Financial Conduct Authority, Britain’s financial services regulator, brought the legal test case on behalf of policyholders to the country’s highest courts to try to quickly resolve the issue.

The Supreme Court ruling, which is legally binding for eight insurers involved in the case, is expected to affect 370,000 businesses holding 700 types of policies issued by 60 insurers.

The decision has sweeping implications for small businesses that have been forced to repeatedly close or shut down huge parts of their operations under government orders to contain the virus. The pandemic has imperiled small businesses and their employees, with a quarter of the businesses saying they cut staff in the last few months of 2020.

At issue in the case were two terms that appeared in many of the policies: “disease clauses,” which cover losses from any occurrence of a disease that must be reported to authorities, and “prevention of access clauses,” which cover losses when public authorities block access to the business premises. Insurance companies argued that the pandemic did not meet the terms of either of those clauses. But court appeals found that the pandemic, and the instructions from the government to stay home and shutter businesses, were covered by the insurance policy terms.

“Today’s judgment is a big victory,” said Mike Cherry, the chair of the Federation of Small Businesses. “It has been a long and difficult road to get to this stage, so this will bring clarity and hope to the thousands of firms which have been left in financial limbo for almost a year.”

Hiscox said that because of the ruling and additional government lockdowns in Britain, it expected to pay $48 million more in business interruption claims in 2020.

The Supreme Court also ruled that companies could make claims for the partial closure of their business, and for orders to close that were not legally binding — in many cases, for example, the government has repeatedly asked businesses to close days before putting the policy into law. The Financial Conduct Authority said that this meant more businesses would have valid claims and some payouts would be higher.

Sheldon Mills, the executive director of consumers and competition at the financial services regulator, said the regulator was working with insurers to get payments made as quickly as possible and have interim payouts wherever possible.

“As we have recognized from the start of this case, tens of thousands of small firms and potentially hundreds of thousands of jobs are relying on this,” Mr. Mills said.

The Supreme Court ruling is also expected to have broader implications for the insurance industry. The judges said a 2010 business interruption case decided in a British court, over claims filed by the owner of a New Orleans hotel that was damaged by a hurricane, was wrongly decided in the insurer’s favor, the U.K. branch of an Italian company. The case, which has been widely cited in the past, should be overruled, the judges said. Insurers could now face more successful claims being made for other types of damage, such as floods or storms.

The work of the Hiscox Action Group is not over yet, Mr. Duckett said, as there are some policies not covered by in the ruling on Friday, and some companies are still going through their own arbitration processes with the insurance companies.

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