British firms are holding their breath as the courts prepare to rule on whether insurers who refused to pay out coronavirus business interruption claims were right to do so. 

Hundreds of thousands of small and medium-sized companies have faced bankruptcy since the pandemic began after being denied the financial lifeline, even though they spent years paying for insurance policies they thought covered them for pandemics.

Many of these firms are likely to have already closed their doors for good, while taxpayers have footed the bill for others as businesses denied the financial protection were forced to put staff on furlough. 

Firms have argued that specific clauses in their business interruption insurance policies should have covered them for the income they lost due to closing while lockdown was in place.

Hiscox, RSA and QBE are among the insurers whose policies are being tested by the Court

Hiscox, RSA and QBE are among the insurers whose policies are being tested by the Court

 Hiscox, RSA and QBE are among the insurers whose policies are being tested by the Court

However, insurers have argued that these firms are in fact not covered – a move which lead Britain’s financial watchdog to bring a number of test cases in front of the High Court in July.

The Court has now said it will make its final ruling on Tuesday, potentially opening the door to payouts for hundreds of thousands of struggling firms. 

Insurers who offered business interruption cover could be made to cough up an estimated £1.2billion to around 370,000 businesses, if the High Court rules in their favour today. 

The landmark case was brought about by the Financial Conduct Authority, which brought a test case earlier this year over the wording of business interruption insurance policies. However, some insurers argue policies don’t cover pandemics.

Lord Justice Flaux and Justice Butcher are expected to give their ruling this morning. 

The FCA set the legal proceedings in motion in July after it selected a representative sample of 17 policy wordings used by 16 insurers, which were considered at an eight-day.

Eight insurers agreed to assist the FCA by taking part in the test case, which the regulator has said it hopes will provide ‘clarity and certainty for everyone involved in these BI disputes, policyholder and insurer alike’. 

Matthew Brewis the FCA’s director of general insurance and conduct specialists provided a witness statement that highlighted that up to early May about 8,500 claims had policy wordings likely to be affected by the test case, with a value of approximately £1.2 billion.

Why haven’t insurers paid out?  

While the FCA says that the majority of business interruption customers are not covered for coronavirus, there remains a dispute over policies which contain certain clauses. 

Lloyd’s of London underwriter Hiscox, FTSE 100 giant RSA and Australia’s QBE are among insurers that sold business interruption policies promising to pay if companies were forced to shut because of a ‘notified human disease’.   

Insurers argue that the policy wordings were never intended to cover coronavirus – a stance that hasn’t gone down well with policyholders. 

Huw Evans, director general of the Association of British Insurers said back in June that the policies were ‘never intended’ to cover global pandemics as ‘no insurance industry in the Western world’ provides cover for pandemics as standard. 

But if insurers are declared liable by the High Court, claims for lost income are likely to spiral into the billions of pounds.  

If insurers are declared liable by the Court claims are likely to spiral into the billions of pounds

If insurers are declared liable by the Court claims are likely to spiral into the billions of pounds

 If insurers are declared liable by the Court claims are likely to spiral into the billions of pounds

Will insurers pay out if they’re found to be in the wrong? 

Even if the Court rules that insurers were wrong not to pay out on certain claims, some policies contain ‘trends clauses’ which may limit how much firms receive. 

These are one of the key features of a traditional business interruption policy and help to figure out how much the business is owed once they have claimed.

These clauses exist to set the damages at what the business would have earned had they not closed – and while the country remained in lockdown while their doors were shut, for many businesses that won’t be very much, if anything.   

This is important as it will influence the amount businesses could be entitled to receive – so how the Court rules on these clauses on Tuesday could dramatically affect how much insurers will have to pay out to policyholders.

Insurers could also appeal to the Supreme Court if they are found to be in the wrong, which could drag out the case further and delay any payments owed to policyholders. 

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What about the firms that have gone bust waiting for a payout? 

Many firms denied a payout would have had to close their doors permanently as the country plunged into recession. 

For some, a successful claim could have meant the difference between their company surviving or folding. 

So what if the Court finds on Tuesday that these firms should have been paid?  

A piece of legislation called the Enterprise Act gives policyholders a right to claim damages in the event of late payment of claims. 

If a company were to go bust while waiting for a pay out, they could claim for much more than they were originally insured for.

However in this case it would have to be proven that the insurer delayed the pay-out ‘beyond a reasonable time’. 

At the moment, insurers could potentially argue they were waiting for the result of the FCA’s court case before paying out.

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