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Business insurers that won’t pay up for coronavirus losses now face legal action – but paradoxically the move could destroy some small firms for good.
The Financial Conduct Authority (FCA) is to pursue a legal case over the wording of insurers’ business interruption (BI) cover.
HuffPost revealed in April that conflicts between SMEs (small and medium enterprises) and insurance companies had arisen over the wording in these policies, meaning business owners were not getting the cover they had been paying for and desperately needed to see them through coronavirus and the ensuing nationwide lockdown.
Major insurers have avoided paying out on business interruption claims citing what appeared to be technicalities, telling policy holders that the wording of their documents meant they weren’t covered for their losses as a result of Covid-19.
The reasons given to business owners ranged from assertions that the global pandemic “wasn’t an incident” as defined in the policy, the fact there wasn’t an outbreak specifically on the business premises, and interpretations of the word “plague” to refer only to the now largely extinct bubonic plague.
Hundreds of businesses have raised their concerns about the conduct of insurers, and on May 1 the FCA set out their intention to pursue a court declaration on the uncertainty when it comes to BI cover.
But with the timeline for this legal case unclear, many SME owners fear that the judgment will come too late – with business owners forced to fold without payment.
As the owner of the Lazy Claire Patisserie in Belfast – which has been refused a business interruption payment by Hiscox – and an organiser of the Hiscox Action Group, which now has more than 450 businesses on its books, Daniel Duckett has seen firsthand how SME owners have been impacted by the failure of their insurers to pay out during the Covid-19 crisis.
Despite a need for clarity on the wording of policies, he believes the FCA’s decision to follow a legal route has left businesses in an even worse position.
He said: “It leaves everybody in limbo. It gives nobody any quick or decisive action, and it leaves us actually a bit worse off than if the FCA were to take action immediately.
“Personally speaking, I’m really having to start considering taking out the bounce back loan [a scheme specifically set up for businesses who are losing revenue as a result of Covid-19], but I’m really unwilling to as I already have a business loan and equipment lease for a coffee machine which were due to be paid off next April.
“They’ve been deferred for three months, so that’s another three months of repayments I hadn’t really wanted to deal with, but if I do take out the bounce back loan then you’re looking at perhaps another five years of repayments.”
Duckett explained that while he was facing difficult decisions, small, seasonal businesses such as bridal boutiques faced an even greater threat.
“This would be their busy season, but there’s no cash coming in,” he explained. “Eventually they’ll have to close, they’ll have to fold, and that’s the reality of it.
“They really cannot wait. As a cafe we could probably reopen when we can and get a bit of business, but for some of these small businesses there will be nothing. They will have to face up to that hard decision to wind up their business.”
A spokesperson for the FCA said: “Our legal action is designed to avoid the protracted legal processes which might be involved in pursuing individual cases.
“It is the quickest route to clarity and by covering multiple policies and insurers, it will also be of most use across the market.
“In no way does it prevent parties from taking their own separate action, nor does it prevent insurers reaching settlements sooner.”
While HuffPost UK has spoken to business owners who hold policies with a number of different policies, the FCA has not yet made public the names of the insurers involved in the legal process.
In a statement on its website the regulator said it was “intending to take this action in the public interest to advance our consumer protection and market integrity objectives”, with the current uncertainty “resolved as quickly as possible.”
In a letter published in April entitled “Dear CEO” and addressed to business owners, FCA interim chief executive Christopher Woolard wrote that when “it is clear that the firm has an obligation to pay out... it is important that claims are assessed and settled quickly.”
In Duckett’s view, the FCA’s decision to pursue legal clarification does the opposite.
He said: “I told the FCA: ‘What good are you if you cannot make decisions on your own?’
“They are the regulatory body for the insurance industry. If they’re wringing their hands and have to go to the courts, then what good do they do?
“We may as well just take every dispute to the court in a very lengthy process and do away with the FCA altogether.”
Many companies had decided to take up their complaints against insurers with the Financial Ombudsman Service (FOS), instead of pursuing their own complicated and potentially expensive legal challenge.
But, as Duckett explained, the FCA’s decision to pursue a court ruling means that the majority of cases pursued by the FOS could be put on hold indefinitely until the decision from a judge on the wording comes in.
For many SMEs – faced with high running costs, low income, and the burden of additional loans waiting months for a judgement – isn’t an option.
In a letter to the Hiscox Action Group, the FOS told campaigners that without further details on the legal case being brought forward by the FCA, they were unable to say exactly how ongoing cases could be impacted.
Duckett said: “The FOS sent us a letter basically saying they would have to hear more detail from the FDA about the legal action that they’re not yet able to say how that might affect the progression of cases.
“Effectively, there’s no complaints process at the moment. During conversation we had with the FCA they agreed that it was ambitious for their timeline, but they would really like a trial by July.
“That’s another month-and-a-half away. It might be some 16 weeks since the start of lockdown, and that’s just the start of the trial – who knows how long it will last?
“And then, the FCA did absolutely agree that there could be an appeal process, and there’s no guarantee that would be expedited up to the Supreme Court. So we’re looking at maybe August or September before there’s any decision.
“Many of our members just simply do not have time to wait.”
With little clarity, many businesses across the UK – some of whom have been paying for cover to protect them in an event just like Covid-19 – face an anxious wait and impossible decisions about whether or not to fold in order to avoid ever-mounting costs and loan repayments as lockdown restrictions continue.
Duckett also said that that some small businesses feared the FCA’s move had indirectly benefited insurers because SMEs would be forced to fold before they could push their claims further.
He explained: “The only recourse that we will eventually have is to pursue the legal route.
“As weird as it seems, you know, this is what the insurers want. They want a very lengthy process. They want something that will reduce the amount of claimants there are because they will have gone out of business.”
The FOS told HuffPost UK: “We do understand the concerns of small businesses. We are in contact with those who have brought a complaint to our service, and are engaging with business representative groups.
“When looking at complaints we take into account relevant law, regulation, codes of conduct and good industry practice. In light of FCA’s announcement that it intends to obtain a court declaration in relation to the meaning of some business interruption insurance policy wordings, we will need to consider what this means for cases at our service.
“For cases we are able to progress, we will do all we can to reach fair and reasonable decisions in the quickest and most efficient way. If small businesses feel they haven’t been treated fairly by their insurer, they should get in contact with the FOS and we’ll see if we can help.”