The results from the FCA’s test case could come too late to save struggling SMEs that are facing daily financial hardship as a result of the Covid-19 pandemic. Insurance Times hears from Stamford House Bed and Breakfast about its claims experience and fears for the future

Alison Spencer, the owner of Stamford House Bed and Breakfast, situated near Peterborough, is facing a desperate “timebomb of debt” since insurer AXA refused to pay out on her business interruption (BI) claim after she was forced to close her establishment due to the Covid-19 pandemic.

Spencer, who turns 60 in December, set up the B&B three years ago. She has been living at the property alone since she bought her ex-partner out of the business last year – she occupies a downstairs living space, while letting out four upstairs rooms with en suite bathrooms to guests.

The B&B, for which she pays a commercial mortgage with NatWest, is Spencer’s only source of income.

For Spencer, her financial troubles started back in March, when the coronavirus outbreak first escalated prior to the nationwide lockdown.

Initially, she experienced booking cancellations as prospective guests became fearful of travelling, however once prime minister Boris Johnson formally announced the lockdown regime, she received a letter from her local council instructing her to close the business, which she did.

At this point, she turned to her commercial combined insurance policy, which includes a business interruption extension.

The policy, provided by insurer AXA with coverholder Gresham Underwriting, cost Spencer £1,413.12 at her last renewal in January this year.

Under the extensions section of her policy documentation, her insurance states that she is covered for “an outbreak of a notifiable human infectious or contagious disease (excluding AIDS) occurring within 25 miles of the premises”.

A claim triggered by these policy wordings should have entitled her to a £500,000 pay out over 24 months.

As Spencer’s nearest hospital is only 14 miles from her premises, she believed her insurance would respond to bolster her swiftly dwindling finances.

She was initially told that her policy did cover her current situation and she was allocated a loss adjuster from Crawford and Company.

Despite providing the required information and having a positive experience with Crawford and Company, Spencer’s loss adjuster soon informed her that they were getting radio silence from AXA and were therefore unable to progress her claim.

“I started to get really worried. I just felt like I was sinking, I was drowning in the bills,” she added.

After a seven week wait, on 28 April Spencer received her official letter from AXA refusing cover for her BI claim.

The insurer explained that her policy provided cover for a specific occurrence of Covid-19, either at the insured premises or within a 25-mile radius of the property.

However, AXA determined that her business losses were not caused by a localised incident of the virus, but could instead be attributed to the wider coronavirus pandemic and associated lockdown – this cites the ‘but for’ methodology that is now acting as one of the lines of defence for insurers participating in the FCA’s test case.

The letter read: “In the present case, the business interruption losses would have been suffered in any event owing to the wider coronavirus pandemic/the lockdown, meaning that there will be no covered business interruption loss.”

Stamford House

Stamford House Bed and Breakfast

On receipt of this letter, Spencer immediately contacted her broker, Insync Insurance Solutions. Her contact there sent an email to AXA on her behalf. It read:

“I do believe that our client has a valid claim under the disease extension in Gresham’s policy wording.

”At no point in this extension does it make reference to the fact that claims will only be covered under this extension if they are able to be directly linked to a specific occurrence.

“The extension wording simply states cover is extended to cover loss resulting from interruption or interference with the business due to a consequence of an outbreak of a notifiable human infectious or contagious disease (excluding AIDS) occurring within 25 miles of the premises.

“Whilst I appreciate that in your letter to Mrs Spencer, you draw attention to the fact that the policy is intended to only cover losses caused by a particular occurrence of the disease, there is no mention of particular or specific occurrences within the Gresham policy wording, and I feel that on this technicality, there is indeed cover in place for our client as there has been an outbreak of a notifiable human infectious or contagious disease occurring within 25 miles of the insured premises.

“On this basis, I ask that you please take a look at our client’s claim again, as I feel that this proves valid cover under the client’s disease extension.”

Despite this broker support, Spencer heard nothing regarding a change in status for her claim for two weeks.

She then took it upon herself to phone AXA for answers – when she spoke to the insurer, she asked for her broker’s letter to be considered as a formal complaint and that she did not accept her claim’s rejection.

Although AXA acknowledged this in mid-May, Spencer still had not heard from the insurer by the end of that month.

“They’ve taken [money] off me and it says a [notifiable] disease 25 miles from the property and that’s what they should be paying.

”The government made it a [notifiable] disease on the 5 March for insurance purposes. And they actually used those words. We are making it a [notifiable] disease for insurance purposes,” she argued.

Spencer even resorted to contacting the Financial Ombudsman Service (FOS), however she was told that AXA had eight weeks to provide her with a final response following her compliant, so the FOS was unable to take any action at that point.

Without the financial buoyancy of her BI claim pay out, Spencer has fallen on hard times.

She has sold her laptop and borrowed money from friends to pay her bills, however her greatest fear is repossession, as she would lose both her home and business.

“Everyone’s asking me the same question, what are you going to do, and I wish I did know. I feel like jumping off the A1 bridge to be quite honest. I’m so distraught with it,” Spencer told Insurance Times.

“It’s so stressful; this is my home, my garden, I’ve decorated it, I’ve made it my life. I live on my own, I’m nearly 60 and I’m going to lose my home. I’m going to get repossessed. Nobody’s helping me. I’ve got nowhere to go.”

Spencer has taken advantage of NatWest’s capital payment holiday scheme, which it offers to business customers affected by coronavirus, however she still has to pay the interest on her mortgage – this amounts to around £500 a month, she said, on top of all her existing utility bills.

“It’s like a timebomb of debt building up,” she added.

A spokesperson at AXA responded: “We understand and appreciate that this is an unprecedented time for entrepreneurs and business owners.

”We have been clear and transparent that very few businesses will have BI cover that would extend to these circumstances.

“Where there are policies within the AXA portfolio that do cover claims of this type, we are paying these as quickly as we can to make sure those businesses get the financial support provided by their policy when they are in the most need.”

Huge burden

Spencer fully appreciates the importance of insurance. Considering her financial dependence on the B&B, she instructed broker Insync to find her a policy that would protect her livelihood, no matter what.

She told Insurance Times: “I said to the broker I want it to cover every eventuality - you name it, I need it because I’ve got a mortgage and this is my only income, from the bed and breakfast.”

AXA’s refusal to pay out, therefore, was a devastating blow.

Unfortunately, this series of events also coincided with the run up to the anniversary of her son’s suicide in June eight years ago.

“I can honestly say I thought I was coming to terms with it until this happened,” she said. “This loss of the business interruption has seriously made me question whether I should do something [commit suicide too] because I’ve got no income.

“I’ve not got a state pension, I’ve got no income and I’ve got a mortgage and I’ve got all the bills to pay. It’s too much to deal with and it’s so unfair to have this huge burden and they’re not paying a legitimate claim.”

Stamford House 2

Stamford House Bed and Breakfast

Branko Bjelobaba, principal at general insurance FCA compliance consultancy Branko, believes situations like Spencer’s will only be exacerbated by the FCA’s test case into BI policy wordings – although the FCA’s mission is applaudable, the process itself will take too much time and struggling SMEs may have to take drastic measures before the verdict is even issued.

Bjelobaba said: “Brokers will have many disappointed clients who are in need of this vital lifeline and I fear help, if help does come, will be far too late to save many businesses who will then have no further need for insurance. A very bitter taste will be left in the mouths of many policyholders.

“This does place brokers and their clients in a very difficult position; [more than] 25% of businesses have paused [or] ceased to trade since lockdown, [according to an] ONS survey of 6,171 businesses, [so] a pay out under the BI section, even on an interim basis, could have provided a vital lifeline.

“If these businesses do actually go under, as it will be four months since lockdown to the hearing, how can anyone have faith in the insurance sector?”

Insurer issues

On the other side of the coin, AXA has faced considerable exposure as a result of the Covid-19 pandemic.

Last month, it anticipated spending around €1.2bn in overall claims costs, post-tax and net of reinsurance, as a result of the coronavirus outbreak.

The company expected the most material impacts here to come from business interruption policies, as well as event cancellation, with smaller costs from lines such as directors’ and officers’ (D&O), liability and travel.

In May, the French-headquartered firm did a U-turn on its set stance on BI pay outs after losing a court case in Paris against French restauranteur Stephane Manigold, who was seeking to recuperate operational losses that he incurred when he was forced to close down four restaurants as a result of the lockdown.

AXA initially vowed to appeal the court decision, however the insurer then said it would meet the majority of claims, as well as provide half a billion euros in assistance to small businesses there.

Spencer had read up on the French court case, adding to her frustration at AXA’s rejection of her own claim.

“I’m at my wits end. I’ve done nothing wrong. I’ve insured myself and it’s totally unjust. It’s immoral. I put my life and soul into this place, the house has got everything,” she said.

Now, AXA Insurance UK is one of the 16 insurers whose policy wordings will be evaluated by the FCA in its upcoming test case, although the insurer is not actively participating in the High Court action.

Ben Carey-Evans, insurance analyst at GlobalData, added:In reality, there was no positive outlook for insurers in this dispute.

”Paying out will cost millions in claims as businesses around the country have been shut down or severely restricted during lockdown.

”However, not paying out would also have led to reduced consumer trust, with many business owners likely to avoid taking out any form of business interruption insurance in the future.

“GlobalData’s 2019 UK Insurance Consumer Survey found that the uptake of business interruption has been increasing over the past few years.

”It has risen from a penetration rate among small and medium-sized enterprises of 11.1% in 2015 to 17.3% in 2019. This means that a significant number of existing policies will be up for renewal in 2020.

”The recent trend shows that it is a growing product and businesses are likely to be even more interested in it if it does cover pandemics going forward.

“The scale of disruption caused by Covid-19 will make pricing business interruption premiums with pandemic cover included extremely difficult. However, those insurers who are committed to paying out will surely see large increases in its penetration rate in the coming years.”

Although Stamford House Bed and Breakfast planned to reopen for business on 4 July, in line with government advice, Spencer confirmed to Insurance Times on 7 July that she has had to close the B&B and sell the property as a private house. She accepted an offer for the house last Friday. She has also resorted to selling furniture, such as beds and fridges, and has engaged a ‘no win, no fee’ solicitor to further look in to her case.

”Business interruption [insurance] has caused this,” she said. ”Business interruption is the biggest downfall. Totally unfair. It’s going to be too late for me.”

Risk mitigation

For Luigi Maggio, managing director at Kennett Insurance Brokers, SMEs within the B&B market will struggle with incoming risk mitigation measures arising from the Covid-19 pandemic, which could then have a knock-on impact on potential claims.

He said: “Unfortunately, the B&B sector will be affected more than most due to issues beyond the general insurance cover for Covid-19.

”The timing of both the pandemic and lockdown could not have been any worse as spring and summer are their busiest seasonal peaks for income and guests.

“The specific issue they face is that when the government chooses to relax the measures so that the public can make overnight stays, SMEs in the sector then have the challenge of risk mitigation - not only to comply with government rules, but also that of insurers.

“Should B&B owners not take all relevant precautions, inevitably it will lead to guests possibly trying to submit claims and, regardless of policy cover, it will have a detrimental effect on brand reputation.

”A number of insurers are issuing guidance on how to manage risk and it is our job as the clients’ brokers to assist them in navigating these challenges.”

These insurer-imposed risk mitigation measures are not designed to trip SMEs up however. Maggio commented that overall, insurers have responded well to assist policyholders.

“In the main, insurers have tried to be pragmatic and genuinely tried to assist where possible, which wasn’t helped by the government’s initial handling of the insurance sector, with little dialogue [between] the FCA and other relevant trade bodies,” he said.

“Whilst Covid-19 has caused financial and operational strain on businesses, insurers have tried to react with meaningful assistance, which is something businesses will require beyond 2020 to ensure we stabilise and economically recover as quickly as possible.”

The role of the broker is “crucial” in this recovery, Maggio added.

He continued: “Despite not being able to give positive news in the vast majority of cases regarding financial cover, it is our role to first empathise on a business level, but also ensure that we as a broker are there to provide support on managing the day-to-day risks, advise on staff, such as the importance of mental wellbeing when working remotely for long periods, offering solutions to issues of reopening, social distancing and safety.

“In many cases we have a weekly call with clients to act as a ‘sounding board’, helping to provide comfort on what they may face.”

How to put together a business interruption claim

Michael Yachnik, partner at global advisory firm StoneTurn, explains how policyholders can best support brokers and compile the information needed for a business interruption claim.

Developing an action plan

“Identify a team of both internal and external resources to manage the process from claim preparation to final resolution; this team will also develop and execute the action plan.

“Given that the claim is likely to be complex relative to Covid-19, consider engaging insurance coverage counsel to clarify potential coverage issues and positioning, as well as appointing accountants experienced in business interruption claims to help simplify claim preparation - claim preparation fees are commonly covered by insurance.

“After coverage is determined, ensure the proper notification requirements are met and plan to work with the broker and stay in regular contact with the insurance adjuster throughout the claim process.”

Measuring business income losses and correlating them to pandemic restrictions

“To maximise recovery, the business income loss calculation needs to be objective, supportable and technically sound. It should reflect the revenue loss minus the expenses that would have been incurred to generate such revenue. Prepare for challenges around commonly scrutinised areas including:

  • Correlation of the income loss to the loss event.
  • Ordinary course of business forecasts.
  • Trending historical results and achievement of prior budgets.
  • Make-up sales and other potential offsets.
  • The indemnity period - linked to when normal business operations might resume based federal, state and local Covid-19 restrictions.”

Methods to collect supporting evidence of loss to accelerate the claims process

“Use any downtime or Covid-19-related lull in business to assemble supporting evidence in advance to help expedite your claim, including:

  • Two years of historical financial statements/budgets/projections.
  • Current budgets/business plans, projections of business operations and income covering the interruption period.
  • General ledgers, financial statements, customer sales registers.
  • Invoices supporting extra and expediting expenses.
  • Logs and other evidence of the company’s indemnity period and its efforts to resume business operations.”

Coronavirus: Rejected business interruption claim case studies