‘We had to take a business interruption loan,” says KC Suri, director of Reel Cinemas, an independent chain. “With government help we managed to keep all of our staff but it is looking very, very tough.”
The loss of income from all of its cinemas between March and July and the impact of ongoing restrictions has had a devastating effect. Suri had hoped Reel Cinema’s insurer Axa would pay out and help keep it going through the pandemic. Instead his hopes are pinned on the High Court.
Axa has been resisting paying out until the outcome of the legal case is known. The High Court has ruled on 21 sample business interruption contracts but Suri feels no closer to knowing if his insurer will pay. Axa wrote to Reel Cinemas on Sep 16, the day after the judgment, saying that it will not decide whether to pay until after any appeals are resolved.
It is a delay Suri could do without. “Once you close a cinema it’s closed forever,” he says. “You lose good managers, you have the projectors. To start it back up is going to cost more money than keeping it open.”
An insurance payout would not be “an open cheque book” but would cover some of the losses until business eventually picks up as restrictions are eased again, he adds.
Across the country, businesses desperate for insurance payouts to help keep them afloat through the pandemic are reaching breaking point.
The Financial Conduct Authority (FCA), which is representing policyholders in the landmark case, hailed the court’s 162-page ruling this month as a victory for policyholders.
That boast will be put to the test this week as the appeal deadline passes for the FCA and the eight defendant insurers: Arch; Argenta; Ecclesiastical; Hiscox; MS Amlin; QBE; RSA and Zurich.
If the insurers fold their tent then some more money may finally start to flow to small businesses as insurers begin to process up to 370,000 claims that are affected one way or the other by the outcome.
Both the watchdog and the insurers are tight-lipped on whether they will seek to overturn parts of the judgment.
By digging their heels in and appealing, the insurers would alienate customers still further. That is the price of fighting to shape the principles that could bind them for decades.
Insurers have already convinced judges that they may not be required to pay claims under “denial of access” clauses where firms chose to close due to the pandemic but were not legally forced to shut, for example. It was enough to buoy the share prices of Hiscox and RSA after the decision.
Despite the heavy reputational damage, one insurance boss says it was the right decision not to pay out all claims simply to avoid controversy.
“[The judgment] provides clarity, which is always good, but it also provides a validation of the need to go through the sort of process and not just say ‘well, this was covered’,” he says.
The executive’s response suggests insurers may seek to challenge at least some of the judgment’s findings.
Lloyd’s of London estimates that its members will lose £5bn due to Covid-related claims, with business interruption forming a significant chunk. Saving money in the short term is not the only motivation to appeal as judges’ rulings in this case are likely to dictate how the entire industry writes its contracts in future.
“I think it’s perfectly reasonable to expect that at least some of these points will get appealed from either side, because [the outcome] is going to determine how contracts are written and interpreted for some years to come,” says another senior insurance source.
The decision may not be entirely their own. Most insurers sell on some of the risks they cover to reinsurers, who will demand a say in the litigation if they are ultimately on the hook for any losses.
“I think the reinsurers will have something to say to the front-line names,” says Ashwin Mistry, chairman of BHIB, a Leicester-based broker. “They’re not just going to say ‘great, go out and just pay all these claims’.”
Even if there are no appeals, insured businesses will have to substantiate their losses and show what actions they took to minimise them.
“I think there’s a very strong danger that people might just assume that the cheques are going to drop through the letterbox,” warns Mistry.
While businesses have been howling for insurers to pay out, Mistry says any claims paid this year will lead to an increase in premiums for all customers further down the line.
If the High Court does grant permission to appeal at a hearing on Friday, the case is expected to “leapfrog” the Court of Appeal and head straight to the Supreme Court, which could hear the arguments before Christmas.
The fear is that by then thousands of firms could be forced to close before the case is resolved.
The FCA is pressing insurers to cough up, instructing them in a Dear CEO letter to begin paying as soon as possible where the test case has provided clarity.
“If one or several insurers decide to appeal, it is likely to be hard for the FCA to insist that they make interim payments to businesses,” says Ravi Nayer, a partner at law firm Brown Rudnick. “If the FCA lose on appeal, it will be very hard for insurers to claw the money back from thousands of individual businesses.”
In the meantime, small and medium sized businesses are facing a winter of tough measures to limit the spread of Covid.
Further local or national lockdowns could leave many relying on their interruption insurance once again just as financial support from the Treasury is dialled down.
Their chances of successfully claiming this time around may be even lower. Most policies include a cap on payouts in a single period or for a single event.
“If a second wave takes place, is that another event [meaning that businesses that have already managed to make a claim could hit their payout cap] or is that part of the same event?” asks Mistry at BHIB. “Nobody’s got off the fence on that.”
Some insurers failed in their argument that the World Trade Centre attacks, where two planes were flown into two buildings at different times, were a single event.
But Mistry thinks that this time around they could succeed in arguing that a second lockdown is part of the same global event that caused the shutdown from March to July, leaving businesses disappointed if they seek payouts following any further lockdown.
Any business that renewed its cover after late March is likely to find its policy excludes pandemic-related losses after insurers raced to limit their exposure to Covid-19 once the risks became clear.
For businesses like Reel Cinemas, that is another battle for another day.
Suri says the insurers “are playing the long game” which leaves smaller firms in “a lot of pain”. “So many small businesses will just throw the keys through the landlord’s letterbox.”