Big UK Covid-19 BI payouts on the cards as claims head to court, say lawyers

A new wave of UK Covid-19-related business interruption (BI) claims could see big payouts for corporate policyholders and a hefty bill for their insurers, if upcoming litigation goes in favour of risk managers, legal experts have told Commercial Risk Europe.

One year on from the UK’s Covid-19 BI test case ruling, a number of large and contentious claims remain unsettled and in dispute. Several upcoming court cases are expected to clarify coverage issues unresolved by the test case, and potentially see large claims from corporates not covered by the ruling.

The Financial Conduct Authority’s (FCA) BI test case sought to clarify relevant non-damage BI wordings for Covid-19-related losses. It concluded with a Supreme Court ruling last January, which largely found in favour of policyholders. To date, insurers have paid out almost £1.3bn from more than 32,000 claims affected by the rulings, according to FCA data.

However, this figure is likely to be the “tip of the iceberg” as larger claims filter through and the courts tackle unresolved issues, according to Aaron Le Marquer of claimant legal firm Fenchurch Law.

“As a firm acting for policyholders, I can say the extent of declined and unsettled claims remains very significant both in terms of numbers and size. It will only take a handful of successful large claims to dwarf those in the FCA data,” he said.

The FCA claims data reveals “a small part of the overall picture”, because it only covers claims from smaller companies where insurers have accepted liability following the test case, Le Marquer explained. It does not show large claims from corporates, which insurers are more inclined to dispute or haggle over quantum. Neither does it cover claims based on wordings left unresolved by the test case, he said.

“The FCA data shows a relatively positive picture but it is only the tip of the iceberg. What is not reported are the claims declined for larger policyholders, and the groups of smaller companies that have had claims rejected because insurers say their wordings differ [from those in the test case] and do not respond. There are a lot of contested claims out there and a lot of unresolved issues,” said Le Marquer.

The insurance industry has worked hard to pay valid claims as quickly as possible following last year’s Supreme Court judgment, however there are some sticking points that remain unresolved, according to Naz Gauri, principal associate in the insurance and reinsurance team at Eversheds Sutherland.

“While these are in the minority, they could of course have a disproportionate effect on the final bill. Even where the test case has determined that there is coverage in principle, disputes remain over the amount of indemnity. Aggregation issues appear to be commonplace, especially in relation to businesses operating multiple premises, such as retail and hospitality chains,” he said.

Prevention-of-access wordings, disease ‘at the premises’ clauses and disputes around quantum of loss and aggregation are among the top coverage issues that remain unresolved, according to Le Marquer. But these issues could be clarified by cases in the first half of 2022.

For example, Corbin & King v AXA is the first to examine the application of prevention-of-access wordings, which were not fully resolved by the FCA. The judgment is expected as early as next month and will be relevant to large and small policyholders with similar prevention-of-access wordings, said Le Marquer.

Certain key issues surrounding the quantification of Covid-19 losses will be tested by Stonegate v MS Amlin, which is currently due to be heard in June. That case will consider the issue of aggregation, whether the pub chain suffered a single BI loss or multiple losses, and therefore will determine if the loss is subject to a single liability sub-limit of £2.5m.

“In the case of Stonegate Pub Company v MS Amlin, the court’s decision could mean the difference between insurers being liable to pay £2.5m or £845m. It is difficult to predict the eventual losses until such cases have been resolved,” said Gauri.

“Other quantum issues include determination of the number and length of indemnity periods, as well as ascertaining the extent to which losses were caused by insured perils as opposed to the wider effects of the pandemic. Often, these cases will need to be resolved on their own specific facts, which could make a quick outcome less likely,” he added.

The Stonegate case also examines whether insurers are entitled to deduct government support, namely furlough payments and business rates relief, when calculating any BI losses and/or other sums recoverable under their policy, said Le Marquer. “Most insurers have accepted that grants should not be deducted, but they have taken a line on furlough payments. Deducting government support payments can drastically reduce, or even wipe out, a claim,” he said.

Le Marquer expects Covid-19-related insurance litigation to provide some clarity on many key areas of dispute this year. This could see more large companies pursue claims against insurers for Covid-19 BI losses. “Over the course of the next year I would expect a lot of claims to reach resolution,” said Le Marquer.

“At the start of the pandemic, risk managers understood the difficulty in establishing cover under their policies and were realistic about the extent of cover. But the FCA test case has shown that there is cover in the majority of cases and this would apply across the board to companies large and small. As a result, we see many more large companies pursue claims, including some potentially large claims,” he explained.

Le Marquer also expects reinsurance and international disputes. “There will be more litigation involving large company claims, and reinsurance disputes are likely to follow once the larger claims and aggregation issues are resolved,” he said.

Another potentially contentious area will be how insurance policies written in the UK, or subject to English law, will respond to Covid-19 losses in other countries. “There will be some tricky issues to grapple with for London market and multinational policyholders, which could give rise to future litigation. The aftershock of this event could go on for many years,” said Le Marquer.

Gauri also believes that this year should shed light on many unresolved Covid-19 BI claims. “By the time 2022 is over, we should have much more clarity over these unresolved issues. The courts will certainly be conscious that there is a ‘need for speed’, given the likelihood that their judgments will affect a wider pool of market players than the litigants in front of them,” he said.

The courts could be called on in the next couple of years to resolve issues such as the extent to which the Supreme Court test case judgment on causation in disease clauses applies to claims under certain denial-of-access clauses, said Gauri. There could be action from those policyholders who had cover rejected by the High Court on the basis that their insurance covered localised incidents rather than a nationwide lockdown, he added.

This issue was addressed in the recent arbitration decision in China Taiping v Various Policyholders. While not binding or conclusive, the arbitration award was seen as providing fresh hope for policyholders with denial-of-access clauses who have had claims declined.

“In the China Taiping arbitration award, Lord Mance flagged this issue in relation to clauses triggered by occurrence of an ‘emergency’, which by definition could occur both inside and outside the small geographical area set by the policy. China Taiping was something of a test case, being a class action brought on behalf of nearly 200 policyholders, and was fully funded by insurers,” said Gauri.

“Other test cases may be based on disease clauses required to have occurred ‘at the premises’ and the extent to which policyholders must give credit for government financial assistance. Whether they will be funded by insurers, or commercially viable for litigation funders to fund, remains to be seen,” he said.

This year is also likely to see litigation in relation to loss-of-rent policies, according to Gauri.

“Currently, there is a blockage in the system because landlords and tenants have not agreed on the extent of the debts caused by the pandemic. However, the government has introduced the Commercial Rent (Coronavirus) Bill into parliament which, if passed, will establish a binding arbitration process for resolving such disputes. This will remove the impasse in related insurance claims where insurers have argued that landlords should be claiming against their tenants rather than under their policy,” he said.