Long after lockdown has ended, there could well be ongoing fallout, potentially in the courts, over whether business interruption (BI) claims should have paid out.

Already, class actions are underway with angry policyholders saying policies they believed would protect against the BI losses caused by the pandemic, have proved worthless. So, what has gone wrong with these claims?

Pandemics excluded 

Most BI claims are being avoided because insurers say their policies were not designed to pay out when there is a pandemic – there are simply too many of them and if paid, could push providers to the brink of insolvency. Instead, they point out that as with terrorism and flooding, some type of government-backed scheme is needed.

In a recent ‘Dear CEO’ letter, the FCA said it accepted most BI ‘basic’ policies would not pay out, but where this was the case, then insurers should settle as quickly as possible.

Perhaps mindful that many SMEs are becoming increasingly vociferous about having their claims rejected, the regulator stated:

“Whilst this may be disappointing for the policyholder we see no reasonable grounds to intervene in such circumstances.”

Taking action

However, some policyholders are not simply walking away. One insurer in the firing line is now facing the ire of an action group with 200 members with a website inviting others to join and also, reportedly, seeking litigation funding.

SMEs include a bakery, restaurants and communications firm, Media Zoo. Unsurprisingly, Media Zoo has been quick to explain the position and claimed it purchased additional cover to protect against “human contagion disease”.

Despite this, the insurer denies liability and explains that this additional cover is intended to cover against an occurrence within the business’s premises, or in the immediate vicinity, such as norovirus, triggering a requirement on the policyholder to notify the local authority.

No safety net?

Insurers are powerful organizations with a track record in succeeding in class actions.  It is understood RSA is also facing legal action and a group of nurseries are unhappy that insurer Ecclesiastical has turned their BI claims down.

In the US, it is reported that Lloyd’s of London is also facing action. Regardless of the legal position, there is no doubt any legal threat can be damaging to an insurer’s reputation. Insurance is meant to act as a safety net and many worried business owners now feeling let down.

The UK government has to date not made many overt comments about the situation, but in Scotland, shadow chancellor and MP for Glasgow Central, Alison Thewliss, has said the FCA needs to do more, saying:

“Many businesses have taken the prudent and practical step of taking out insurance policies to protect against unforeseen events. They believed they were fully covered. In these challenging times, small companies are telling me that they feel abandoned, and that without urgent support they will not survive. Referring complaints to the Financial Ombudsman Service will only add further delay, time companies just don’t have.”

Fighting back 

The insurance industry is fighting its corner and pointed out it has to date paid out some £1.2 billion in the UK, covering a range of claims, including event cancellations such as for concerts, school trips and weddings. Further, the ABI’s director general, Huw Evans, is calling on insurers and the government to ‘pull together’ and find joint solutions to future pandemic risks.

Even so, this is some way off and for now, the war of words is continuing. According to lawyer Adam Levitt at Chicago-based DiCello Levitt Gutzler:

“Businesses nationwide have, for years, purchased expensive insurance policies to protect them from losses exactly like those they are currently enduring. For insurers to now tell them, in the most challenging of times, that the joke was on them and their policies were worthless, is unethical and abhorrent.”

Strong words from across the pond. But, at least in the UK, SMEs can turn to the Government’s ‘Bounce Back’ loan scheme, which are loans of between £2,000 and £50,000’ and are interest free for 12 months.

Businesses may argue, quite rightly, that this is not the same as having potentially far higher claims payments that do not need to be repaid, but there is also the view that COVID-19 could indeed bring the insurance industry to its knees.

So, as the months ahead unfold, it remains to be seen whether insurers have indeed met their obligations to their customers and if so, can other solutions be found that will provide the protection that is so clearly needed.