Will insurers cough up over Covid?

Hundreds of thousands of small businesses should hear in September whether their insurers are legally bound to pay out on business interruption policies in light of the Covid-19 pandemic.

The High Court recently began hearing a test case brought by the Financial Conduct Authority (FCA), the City regulator, against eight insurers, which will establish the legal meaning of 17 different policy wordings in business interruption policies.

The FCA believes the ruling will apply to around 50 insurers with some 370,000 policyholders. Many insurers have argued that business interruption insurance was never meant to cover businesses damaged by a pandemic such as Covid-19.

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Instead, according to them, the insurance is meant to provide short-term help when a natural disaster, such as flooding, prevents a business from operating as normal.

However, small businesses believe their policies are framed more broadly than this, and that insurers should therefore be paying out on Covid-19-related claims.

The High Court will consider a range of issues, including the extent to which the pandemic counted as an instance of “denial of access” to business premises, whether Covid-19 is an “emergency” in insurers’ terms and whether businesses need to show they had the coronavirus on their premises or nearby.

The case also covers the question of how much insurers should pay, with some arguing that even if they are liable, policyholders might not have missed out on much income because of the closure of their business premises, given that the entire country was in lockdown. The FCA, however, is making the case that insurers should be paying out based on what businesses would have earned without Covid-19.