By Martin Croucher

Law360, London (April 27, 2020, 12:08 PM BST ) Legal challenges against insurers over failure to pay out on claims for business interruption during the COVID-19 lockdown are likely to take the form of group litigation, lawyers say, as smaller companies could find high legal costs outweigh the benefits of a successful claim.

As the government-ordered restrictions stretch into a second month, small non-essential businesses forced to close are looking at their legal options after a near-blanket refusal by insurers to pay out on claims. Collective litigation is rare in Britain because of procedural constraints, but the high number of businesses facing financial collapse under the lockdown has made a case for them to band together.

In an early high-profile case, more than 200 companies have come together to pursue a group action against insurer Hiscox, it emerged last week. Lawyers believe that it is a model that could be replicated elsewhere.

"There's real interest in the case being run on a group basis," Richard Leedham, partner at Mishcon de Reya, who is acting on behalf of the members of the Hiscox Action Group, said. "If it works to group claims together against one particular insurer, typically with a standard wording, that's a route that other policyholders should consider."

Business interruption policies typically offer cover only against physical damage to a shop or other premises that prevent it from opening as normal. Because of that, most policies in force in the U.K. do not offer protection against closures by a public authority, when there has been no damage to the property.

But some contain extensions that offer protection against the inability to gain access to a property: because of a police cordon, perhaps, or because of the outbreak of an infectious disease on site or nearby.

Investment bank UBS said Friday that, outside the U.S., almost 50% of policies include some mention of infectious disease. There are far fewer in the U.S.,around 10%.

In most cases, policy wording can be tight, restricting cover to a list of defined diseases, or can exclude cover in the case of a pandemic. Cover can also be "sub-limited" – meaning a claim under the contagious disease extension is a lot less than a claim under the main physical damage part of the policy.

That can weigh on any decision over whether to bring litigation, Susan Hopcraft, a partner at Wright Hassall LLP, said.

"You need to do a cost-benefit analysis to know that the value of the damages you're claiming justify the legal spend," she said.

Hopcraft said that, if a company has a business interruption claim of around £10,000 ($12,300), then it probably wouldn't be worth pursuing legal action on its own. "There are plenty of people out there who have similar claims though, so I don't think it will be difficult for claimants to find bedfellows," she said.

Hopcraft is acting on behalf of Aquaskills, a swimming teaching company in south London, which stopped operating when the government closed pools across the country. Aquaskills has a Hiscox policy on business interruption, which has an arbitration clause.

She said she is also acting on behalf of several small businesses with the same policy wording that would now take the route of group arbitration against Hiscox, having secured legal funding to do so.

Scope and Losses

Hiscox said on Wednesday it has 10,000 customers with policies for business interruption who have been affected by the country-wide lockdown. Seven in ten of those companies have monthly revenues of less than £40,000 under typical circumstances, Hiscox said; many have revenues of less than £10,000 a month.

That took into account only lost revenues under usual circumstances, rather than if they had been allowed to remain open during the current period.

"The level of economic loss experienced is likely to be materially lower than reported revenues," Hiscox added.

That point carries echoes from an earlier contentious judgment in the English High Court case of Orient Express Hotels Ltd. v Assicurazioni Generali SPA in 2010.

In that case, Orient Express— based in New Orleans —was seeking to claim against its business interruption policy after storm damage arising from Hurricane Katrina meant its hotel was closed for two months in 2005.

The commercial court, and later the Court of Appeal, found that, because New Orleans was effectively forced to shut down after the hurricane, the hotel would have suffered losses to business even if it had been undamaged. Instead of the $2.15 million it was seeking from insurers, it was therefore allowed to claim only a limited amount on its policy, as if it had been an undamaged hotel in a damaged city.

But Hiscox said in its statement that it had "limited" exposure.

"Hiscox U.K.'s core small commercial package policies do not provide cover for business interruption as a result of the general measures taken by the U.K. government in response to a pandemic," the company said.

However lawyers say that liability will depend on what the policy states rather than what Hiscox intended it to say.

The common policy wording, as presented by the Hiscox Action Group, says claims can be made if a public authority renders the business premises unusable due to "an occurrence of any human infectious or human contagion disease."

The wording is, UBS said in its research note, "looser than some peers."

More Cases Coming

A third group of businesses is seeking to challenge the rejection of claims by Hiscox, under the umbrella of the Night Time Industries Association, which represents live music venues and nightclubs in the U.K.

The group said last week it had appointed licensing lawyer Philip Kolvin QC, of Cornerstone Barristers, to examine the legal position of more than 100 members who have Hiscox policies.

Kolvin said the association is seeking to pursue group litigation, with Hiscox's agreement. That had the benefit of reducing costs, he said.

"It appears likely that there will be several hundred claimants, currently spread across different action groups," Kolvin added.

Michael Kill, chief executive of the association, said current legal advice suggested that Hiscox policyholders have a good case.

"We want to talk urgently to any businesses within the hospitality and leisure sector which have a policy with Hiscox and would like to join the current group of over 100 claimants to progress a legal case against the company," he said.

The NTIA has also highlighted insurer NFU Mutual and underwriter Eaton Gate as two companies that have also rejected business interruption claims. The association said that policyholder members were separately weighing legal options against them as well.

Insurance solicitor Fenchurch Law said it had been contacted by customers of 10 to 15 insurers and that it was likely that claims would also be brought against them too, most probably on a collective basis.

Hopcraft said there were likely to be similar claims against other insurers too, but it depended on getting them together for group litigation, particularly where they were too small to be acting alone.

"I'm sure there are lots of other policies out there too that need to be challenged," she said. "It's just about putting the groups together and making sure we've got enough people."

Difficult Route

Lawyers believe insurers will contest these claims fiercely, fearing that admitting liability could open the sector up to widespread losses.

"Some of the figures are quite shocking," said a partner at a London law firm, who declined to be identified because he works on behalf of insurers. "A lot of these extensions are sub-limited, but if you start multiplying them across numbers of entities, [the insurers] have got a real problem."

Moreover, not all legal experts believe that collective action will always be the most successful route for claims.

The U.K. does not allow U.S.-style class action suits, in which every individual or business belonging to a defined "class" is automatically included in a suit unless it opts out.Britain does have a system of group litigation, but claimants have to opt in first and share legal costs.

Aaron Le Marquer, partner at Fenchurch Law, said that although more collective actions are likely over business interruption claims they are difficult to pursue in English courts. "They are slow and expensive, and are not suitable for determining multiple claims turning on different facts," he said.

Le Marquer said that group litigation can establish issues of fact and law that are common to a group. But it will not establish how much insurers are required to pay out.

"Even if successful on the common issues, each claimant will still be left to prove their own claim, and may find that insurers have other coverage defenses and arguments on quantum to raise," he added. "A single test case to determine specific points of policy interpretation is therefore more likely to be effective than any form of group litigation."


--Editing by Ed Harris.

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