What will it take to stem the tide of UK BI litigation?

Insurers and their reinsurers will be eagerly awaiting rulings from London’s High Court on coverage for Covid-19 business interruption (BI) losses in the second half of 2022, but sources have warned of yet another wave of claims hitting the courts as “unscrupulous” claims farmers target policyholders.

The UK’s Financial Conduct Authority (FCA) ran a test case in July 2020 with a group of eight sample insurers – Arch, Argenta, Ecclesiastical, Hiscox, MS Amlin, QBE, RSA and Zurich – in a bid to resolve the most common pandemic-related BI claims disputes between policyholders (typically SMEs) and insurers.

The Supreme Court later upheld the findings of the High Court, ruling largely in favour of policyholders in January 2021. Since then, UK insurers have paid out more than £1.35bn ($1.66bn) in interim and final settlements to more than 40,000 policyholders, according to the last publicly available data published by the FCA.

While the test case was successful in clarifying various issues common to many Covid-19 BI claims, there remain a number of areas of uncertainty created by the variety of policy wordings used and also the lack of legal clarity around their application, as demonstrated by the queue of high-profile disputes under scrutiny by the courts.

A spike in ‘smaller’ BI claims

The Insurer is aware of more than 16 live BI cases currently making their way through the UK court system.

However, several senior legal sources have told this publication that while some of the cases will “certainly provide answers” to untested areas of BI insurance, others are the product of “unscrupulous” lawyers and “dubious” law firms that have offered to represent smaller claimants in a manner that is more akin to the personal injury or payment protection insurance (PPI) market.

“It is important to note that all of these claims have legal merit but it is certainly true to say that some have only been filed as the result of certain solicitors acting in a somewhat dubious manner and farming claims,” a senior legal source said.

“The current landscape of BI litigation in the UK is reminiscent of what you’d expect in the personal injury arena or a claim against mis-sold PPI.”

A second source noted that there has been a “notable spike” in claims filed in recent weeks following restaurant chain Corbin & King’s high-profile victory in its legal battle with Axa UK in February.

The High Court ruled that Corbin & King, the owner of upmarket London restaurants The Wolseley and The Delaunay, was entitled to receive a payout for losses incurred at each of its premises following government-mandated closures in March, September and November 2020.

The judgment was significant as it provided clarity on the proper application of non-damage denial of access wordings and policy limits in cases where there are multiple insureds and numerous premises affected by lockdown regulations.

“It’s fair to say that the judgment has given certain policyholders, especially those in hospitality, renewed hope that their policies will pay out whether there is legal merit to their claim or not,” one source said.

“While the outcome for Corbin & King gave policyholders cause for optimism, it was never going to be a silver bullet and this has given rise to the sudden surge in claims we’re seeing materialise.”

More recently, UK restaurant chain PizzaExpress has filed a suit against Liberty Mutual and Axa, while The Insurer reported in July that Liberty Mutual also faces a suit brought by a group of six hotels – including branches of the popular Hilton and Crowne Plaza chains. There are further suits brought by hospitality companies against QIC Europe and the UK arm of HDI Global.

UK grouped cases remain the bellwether for BI litigation

So great is the continuing volume of litigation that the UK’s Commercial Court has grouped together a series of live disputes which it deems as noteworthy under a sub-list directed by Justice Butcher, with support from his colleague Justice Cockerill.

Corbin & King v Axa was one of these grouped cases. Three further cases, each arising out of the Marsh Resilience wording, raise at least some of the same issues, and while not being consolidated or heard together, are being managed in a coordinated way by the courts.

The Marsh Resilience wording – a policy aimed at restaurant owners which came under the spotlight during the FCA test case – has been recently scrutinised by the Commercial Court in pub giant Stonegate’s £1.1bn action against MS Amlin, Liberty Mutual and Zurich, baker Greggs’ £150mn suit against Zurich and Various Eateries’ case against Allianz – all of which were subject to so-called stage 1 trials between 13 June 2022 and 29 July 2022.

The smaller case of Altrincham Association Football Club v Axa is also included under the grouped cases and sees the semi-professional football club seek £250,000 plus interest after it was forced to close from March 2020 to June 2021. Directions have been given for a trial to commence sometime after 27 February 2023.

The disruption the lockdowns caused to football in the UK has also spawned a UK legal action from a coalition of some of England’s biggest football clubs against six insurers – Allianz, Aviva, CNA, Liberty Mutual, MS Amlin and Zurich. While this is not currently included under the grouped cases, sources have estimated the action could ultimately cost the industry hundreds of millions of pounds if its defence proves leaky.

However, it is Stonegate’s legal claim that remains front of mind within the insurance sector. With judgment anticipated later this year, the main issue is around aggregation and whether the losses claimed constituted a single business loss or more.

The pub group is arguing each of its circa 760 UK locations suffered a covered loss, equating to a £2.5mn payout per location. Its insurers do not dispute that the policies should have paid out, but contend their liability is limited to £17.5mn, of which £14.5mn has already been paid.

The case has been described by lawyers on both sides of the bench as one of the “most significant” BI cases to be examined following the test case judgment as it tackles four key issues of principle: aggregation, causation of post-policy period losses, increased operating costs and the impact of government support.

“A victory in Stonegate’s favour would not only show a clear trend resulting from the court cases which look to be extending the scope of coverage, but would also clarify four of the more significant issues remaining in BI litigation,” a source said.

“Whatever the verdict, policyholders and insurers should be thinking carefully about the need and reasons for pursuing cases all the way to court. Whilst there are further significant Covid business interruption cases listed for trial in July, we are already benefiting from a number of decisions which provide valuable guidance.”