If the High Court rules that insurers are liable for their policyholders’ Covid-19 business interruption losses, then agreeing quantum for specific claims amid a myriad of coronavirus-related factors will be insurers’ next hurdle

This week, the FCA launched its unprecedented test case at the High Court, seeking to determine once and for all whether insurers are liable for Covid-19-related business interruption (BI) claims by analysing a cross section of 17 relevant policy wordings from eight different insurers.

As the legal arguments rumble on, many across the industry are already considering some of the case’s potential outcomes. One area that appears to raise more questions than answers is how quantum will be decided if the court rules that insurers must pay up for BI losses – in the same way that the pandemic has tested the question of coverage, claims values will be next under the microscope.

Garon Anthony, litigation partner at law firm Squire Patton Boggs, is already seeing loss adjusters exploring whether employers furloughed their staff or not – he believes this is to lay the groundwork for potential quantum discussions following the FCA case.

He explained: “We’ve seen examples of loss adjusters being appointed by insurers, without prejudice to issues of liability, asking insureds questions over whether or not they furloughed staff and whether or not they took advantage of any government grants that might have been available to them.

“I suspect the way in which that’s playing out [is] insurers saying ‘well if you did furlough your staff, then obviously the amount of money you receive from the government in order to do that needs to be taken into account in the quantum of the claim that you may have made’. And on the flip side of that, ‘if you didn’t furlough your staff or you didn’t take advantage of these government grants, you should have done that in order to mitigate your losses’.”

Phil Tippin, insurance partner at professional services firm KPMG, added that this question around furlough and its impact on quantum is intrinsically linked to the FCA’s mission to clarify liability.

He said: “If I thought I had insurance, I might decide not to furlough and I might actually have made things worse by making that decision, thinking I had insurance and finding out that I might not. It’s those kinds of things that the FCA gets more excited about.”

Wider claims context

Another factor that may affect quantum is the now notorious ‘but for’ methodology, also known as the wide area damage test, which has been raised in many of the participating insurers’ defence documentation.

Tippin said this type of contextual consideration to individual BI claims could impact how much insurers are willing to pay out because even if businesses had been functional over the past few months, the pandemic environment would have meant that footfall was vastly reduced.

“If there hadn’t been a lockdown, would businesses have stayed as profitable as normal given that, with the coronavirus around, there would be fewer people on the streets because they would be scared, or they didn’t want to go out, or they were more reluctant to gather in large groups and does that mean that you would be able to claim as much as you’d expect?” he questioned.

“If you were a holiday let, you might say every summer I get this much, but if no one was going on holiday or there were no flights coming into the UK would you get as much?”

And since this methodology is being debated by the judges and legal professionals involved in the FCA case, Tippin added that “the court may actually make some kind of ruling on whether that will apply, which would have an impact on the size of the claims”.

There is also the timing of claims to consider when deciding quantum, although Tippin noted that this is a much smaller consideration – as many businesses have been closed for nearly four months now, the addition or subtraction of a few days may not impact claim amounts dramatically.

He said: “When would you have a claim from? Did you close on lockdown, did you close before? Was somebody actually sick on your premises and you had to close two weeks earlier? Those kinds of questions will have an impact on quantum.”

Furthermore, some non-damage BI extensions have sub limits, so regardless of contributing factors, businesses may only be able to receive a set amount from their claim.

Anthony added that these numerous considerations will all chip away at the overall claims value.

Another route

However, the issue of quantum could be eliminated completely if business owners are forced to take their complaint to the Financial Ombudsman Service (FOS), added Tippin.

Despite the quick turnaround in securing a July date for the court hearing, reaching a final verdict may still take time and rumours of a second case in September to prove any final points are also afoot – for SMEs struggling financially, this process could simply be too lengthy and an alternative solution via the FOS could be their only option for survival.

Tippin said: “The longer it takes, the bigger the risk is that they may just say ‘I can’t wait any longer, I’m going to complain’. You can complain to the [Financial] Ombudsman Service and that would take the whole question of quantum out of the court and get it ruled on by the Financial Ombudsman Service.

“That is a slightly different path that this could go down if it’s not successful in getting to a clear answer relatively quickly. That is a risk. It’s a different route to an answer. The industry and the FCA have tried to work together quite progressively on this so far, but it could get taken out of that circuit if it takes too long.”

Although the issue of quantum is closely interwoven with the FCA test case, Tippin added that it is not something the judges intend to rule on.

“It wasn’t set out to say ‘if this policy does give you cover, you should receive X pounds’. That wasn’t the intention – that needs to be considered on an individual basis,” he said.

“But, there are now a few things that have now come up in some of the legal debate that is touching on areas of ‘well if we did [find insurers liable], then how much would it be?’ So, [the test case] is drifting slightly beyond its scope potentially, but at no point is it going to answer that question directly - how much should any policyholder receive?”

Anthony, on the other hand, thinks there could be the possibility of an appeal following the court hearing because of the sheer scale of the impact the test case could have on the insurance sector.

He added: “These issues are going to the very heart of claims handling and the potential exposure is hundreds of millions of pounds across the insurance industry.”