Hiscox defeated in Supreme Court

Hiscox (HSX) is set to face thousands of legitimate claims from business interruption insurance policyholders, after the Lloyd’s of London member’s refusal to pay out was today rejected by the UK’s Supreme Court.

As the Covid-19 pandemic sparked an avalanche of insurance claims from businesses forced to close or halt their activity last spring, the general insurance industry denied cover to thousands of claimants, arguing that the nature of the pandemic did not fall under standard protection wording, save for some bespoke policies.

Within the sector, Hiscox was one of the most emphatic in its rejection, telling investors last April that its “core policy wordings do not provide cover for business interruption”.

That view has now been definitively rejected in a unanimous decision by all five Law Lords, which denied appeals made by insurers to lower courts, and castigated the insurers for failing to honour the “spirit and intent” of the business interruption policies.

The judgement also reiterated previous rulings that the pandemic and the government and public response were a single cause of the covered loss, and that disease and denial of access clauses in many sample industry policies were enough to trigger pay-outs.

Commenting on the insurers' argument, Lord Briggs wrote: “The cover apparently provided for business interruption caused by the effects of a national pandemic type of notifiable disease was in reality illusory, just when it might have been supposed to have been most needed by policyholders.

“That outcome seemed to me to be clearly contrary to the spirit and intent of the relevant provisions of the policies in issue.”

The court instead found in favour of policyholders, led by the Hiscox Action Group, a 400-strong consortium of small businesses with a collective claim of just under £50m. Following the ruling, the group said it expects thousands more policyholders to now pursue claims, as well as additional costs and special damages under the Enterprise Act.

The Financial Conduct Authority (FCA), which intervened in the case to advance the policyholders' arguments to their best advantage, believes 370,000 policyholders might be affected by the outcome of the test case, including those businesses who took out insurance with other providers.

Hiscox was one of a group of insurers and reinsurers including RSA (RSA), Zurich and QBE which last year agreed with the financial watchdog to pursue an expedited test case through the courts to determine what triggers cover under a range of policies.

The ruling closes the chapter on a protracted battle between the insurance industry and small businesses, but could lead to industry-wide claims of as much as £7.4bn according to analysis by Deutsche Bank.

“This is a landmark victory for a small group of businesses who took on a huge insurance player and have been fully vindicated,” said Richard Leedham, a partner at law firm Mishcon de Reya partner, who represented the Hiscox policyholders. “What is important now is that Hiscox accepts the Supreme Court’s verdict and starts paying out to its policy holders, many of whom are in danger of going under.”

In a statement to the market shortly after the verdict, Hiscox confirmed that this had already begun, but suggested that the ruling meant that a third of its “34,000 UK business interruption policies may respond”.

Shares in Hiscox fell as much as 6 per cent on the news, but later recovered after the group said the additional estimate for 2020 Covid-19 losses had been increased by $48m (£35m), net of reinsurance. In November, the insurer said put its total exposure to claims stemming from the pandemic at $387m, a sharp increase on the £10m to £250m estimate made at the time of its £375m rights issue last May.

Further exposure to restrictions already announced in 2021 are likely to be “less than $20m” if lockdown is extended until the end of March. Last year, the company signalled it could face “an additional $30m to $40m potential exposure relating to event cancellation” if events are unable to proceed in 2021.

As such, this still looks to be a movable feast, compounded by the complications this might bring in the coming years as Hiscox looks to win back the trust of small businesses.

“It’s disappointing that so many small businesses have had to wait to get the money they desperately need under policies they believed were there to protect them, policies they bought in good faith,” said Mike Cherry, chair of the Federation of Small Businesses (FSB).

Though many insurers have had their reputation dented by this episode, Hiscox has arguably taken the most heat – certainly relative to its size. That complicates the investment case, despite the likely hardening of rates. Hold at 987p

Last IC View: Hold, 746p, 3 Aug 2020