Hiscox Insurance Company Limited · DRN-5877836

The complaint Two linked limited companies, that I will refer to in this decision as R, have complained about the settlement offered by Hiscox Insurance Company Limited following a claim for business interruption losses under a business insurance policy. Both limited companies ae covered by the same policy. Mrs G, as a director of both limited companies, has brought the complaint on their behalf. Mrs G is also represented in this complaint, but for ease I will refer to Mrs G or R throughout this decision. What happened R is an aesthetics clinic. R made a claim for business interruption losses under its policy with Hiscox, as it had been required to close under the Government restrictions imposed in response to the Covid-19 pandemic. Hiscox initially rejected the claim but agreed to review that decision following further information in late 2021. Having reviewed the claim, Hiscox accepted that R had been required to close for three different periods (24 March to 13 July 2020, 5 November to 2 December 2020 and 31 December 2020 to 12 April 2021) as a result of the Government restrictions imposed, and that this triggered cover under the “public authority” section of the policy. Hiscox therefore proceeded to assess the losses claimed for these periods. Having done so, Hiscox said that R had been underinsured, as the sum insured for loss of income was less than it should have been. Hiscox therefore applied a proportionate reduction in the settlement due for each indemnity period to reflect this. In mid-2023, Hiscox made a total settlement offer of almost £25,000 (which included interest) for the losses suffered during the three periods of lockdown, having adjusted for the underinsurance. It also paid £500 compensation for any inconvenience caused during the handling of the claim. R was unhappy with this settlement and complained. R says that Hiscox incorrectly deducted the amounts received from the Government under the furlough scheme from the settlement; and says Hiscox has not shown that the adjustments it applied for underinsurance was fair. R also said that it had continued to be impacted by the restrictions imposed by the Government between the periods it had to be shut and Hiscox should also provide cover for those losses, for the full indemnity period which she says should be from March 2020 to July 2021. Hiscox did not change its position and as R remained unhappy, it referred its complaint to us. R has made a number of points in support of its complaint. I have considered everything it has said and have summarised its main points below: • In interpreting any contract, it is the reasonable objective intentions of the contracting

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parties at the time that matter. It is fair and reasonable for R to expect the policy to cover these losses. • The relevant policy clause relied on in this case was specifically referenced during the Financial Conduct Authority (“FCA”) test case and the Supreme Court interpreted the word “interruption” more widely than just being the complete closure of the premises. • The Supreme Court also held that an “inability to use” would be established under the Hiscox policy wording if the insured “is unable to use the premises for a discrete part of its business activities or is unable to use a discrete part of its premises for its business activities.” • The Supreme Court set out examples to illustrate its judgment on this point: - a department store which had to close all parts of the store except its pharmacy; - a golf course that was allowed to remain open but which had to close its clubhouse so that there is an “inability to use” a discrete part of the golf club for a discrete part of its business; and - a bookshop which was required to close for walk-in customers, but could continue to use the premises for telephone orders. These examples were not intended to be exhaustive. • The Supreme Court’s analysis should apply to R’s business, as it suffered an “inability to use” a discrete part of its business or was unable to use discrete parts of its premises due to the restrictions imposed by the Government at the time. • This is because to comply with all the restrictions at the time, such as social distancing measures and guidance of its professional body, R was forced to change the way it operated, which reduced the capacity of its business and restricted certain business activities; it was also unable to use its premises for offering a discrete part of its business during periods of reopening, for instance, it had to stop all training courses. • R’s circumstances are analogous to the examples given above because there were discrete areas of the premises that customers were not permitted to access. • The impact of such restrictions on the conduct of the business, and the service it offered, were so significant that they must be considered more than a “mere hindrance”. • The possibility that an interruption to business may be partial is inherent in the policy wording; the policy contains a number of heads of cover for perils causing “interruption to your activities” which are plainly intended to apply in circumstances where there is only limited interruption and not a complete cessation of activities. • The Supreme Court also said that the indemnity period would begin on the date the restriction is imposed, and would last for the period that income is affected as a result of such a restriction. Government restrictions were imposed on R consistently over the period of 20 March 2020 until July 2021, so this is the appropriate indemnity period. • Hiscox has not proven that it is entitled to reduce the settlement by the amount it has due to the underinsurance. There is no evidence that it would have charged a higher premium, if the higher sum insured had been declared by the amount it has said or at all. • It has been advised by expert insurance brokers that it is unlikely that the insurance premium would have increased in line with the increase in turnover. Because the change to the amount insured does not impact the entire policy over, it makes no sense that the whole premium would be increased proportionately based solely on the amount insured for Business Interruption increasing. • In addition, insurers such as Hiscox will have a minimum premium set for insurance policies for small businesses such as R. It is therefore submitted that there is a distinct possibility that increasing the amount insured from £130,000 to £236,287 would not have increased the premium that would have been charged whatsoever. • Hiscox has sought to contract out of the Insurance Act 2015 and imposed the under

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insurance term in the policy but this was not sufficiently drawn to R’s attention and is not clear. The approach to the underinsurance to be used for the purposes of this claim should be derived from the Act, as opposed to the policy. • Hiscox, when considering the extent of underinsurance, have also failed to take into account that the Complainant is VAT registered. Given that Hiscox would not insure VAT in such circumstances, it is submitted that the turnover figure used for their underinsurance calculation is inflated as Hiscox would not have insured the VAT element of the turnover. This further reduces any alleged underinsurance under the calculation method set out in the policy (notwithstanding that we maintain the correct methodology to be used is that derived from the Act). • Hiscox deducted from the settlement the amounts that R received as furlough grants, which is unfair. While Hiscox has acted in line with the current legal position regarding the treatment of furlough payments, it asked that this point is considered further and a declaration be provided that Hiscox be compelled to reconsider this, if a higher court determines that they should not be deducted. One of our Investigators looked into the matter. He did not recommend the complaint be upheld, as he was not persuaded that there was cover for the impact on R by any Government restrictions during the periods that it was allowed to reopen its premises. Instead, the Investigator thought the impact was due to a reduction in capacity, which would amount to a hindrance rather than an inability to use the premises, which is what was required under the policy. The Investigator also said that Hiscox was entitled to take account of the furlough payments in the way it had and that Hiscox had provided evidence to support that it had applied the underinsurance deduction fairly. R does not accept the Investigator’s assessment. R says it should be provided with a redacted copy of the evidence provided by Hiscox about the underinsurance. R also says it was not just required to reduce the number of people that could access the premises but there were specific delineated parts of the premises that could not be accessed. The cumulative impact of the restrictions on it are analogous to the department store example, provided by the Supreme Court test case, and set out above, where the Supreme Court said that an “inability to use” would be found. As the Investigator was unable to resolve the complaint, it has been passed to me. What I’ve decided – and why I’ve considered all the available evidence and arguments to decide what’s fair and reasonable in the circumstances of this complaint. I can see that the Covid-19 pandemic has had a significant financial impact on R. However, I don’t intend to uphold its complaint. I’ll explain why. Business insurance policies provide protection for some of the common things which might happen to a business. No policy will cover every eventuality however and each policy may provide different cover. R’s policy provided cover for losses arising from interruption to its business. That interruption has to be the result of one of the events specified in the policy. In this case the section of the policy that both parties agree is relevant is the “public authority” section. This section of the policy says there will be cover for loss as a result of business interruption caused by: “Public Authority

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Your inability to use the business premises due to restrictions imposed by a public authority during the period of insurance following… b) an occurrence of a notifiable human disease...” It is accepted that there were restrictions imposed on R by a public authority following an occurrence of a notifiable human disease. Hiscox accepted that R was mandated to close as a result of these restrictions from 24 March to 13 July 2020, 5 November to 2 December 2020 and 31 December to 12 April 2021. So, there was cover for the losses arising from those closures. Hiscox has settled the claim for these periods. I will address the issue of the underinsurance and furlough deductions later in this decision. The question for me to consider now, is whether there were restrictions imposed on R, over and above those that required it to shut its premises, that meant R suffered an inability to use its business premises outside the indemnity periods identified by Hiscox. I accept that the policy might cover partial closure or a partial interruption to business activities. But in this instance the relevant section of cover requires an inability to use the premises. So, an interruption to normal business activities is not enough on its own to trigger cover. As R has stated, the above policy term was considered by the Supreme Court as part of the FCA test case. The Supreme Court’s judgment said, at paragraph 129: “The public authority clauses in Hiscox 1-4 (set out at para 111 above) do not cover all business interruption due to “restrictions imposed” by a public authority following an occurrence of a notifiable disease. They apply only where the interruption is caused by the policyholder’s “inability to use” the business premises due to such restrictions.” The court went on to say, at paragraph 136: “… an inability of use has to be established; not an impairment or hindrance in use.” The court also made it clear that it may be possible for a business to claim for losses that arose because it was “unable to use the premises for a discrete part of its business activities or is unable to use a discrete part of its premises for its business activities”. As such, I agree that this policy term would provide cover to a business that had been caused an inability to use their insured premises, for all, or for a discrete part, of its business. The Supreme Court judgement included examples of situations it considered would mean that a business was unable to use the premises for a discrete part of its business activities or unable to use a discrete part of its premises. I agree that the examples given are not exhaustive. There could be many possible scenarios and each case would be considered on its own particular facts. But the examples given provide important guidance. They all involved a complete closure of a part of the business premises or complete cessation of a discrete part of the insured’s business activities. None of the examples given involved a situation where there was a reduced capacity within the premises. I have considered everything R has said about this carefully, R has said that it could not use discrete parts of its premises, and could not use its premises for a discrete part of its business activities, during the periods it was allowed to reopen, because of the restrictions imposed by the Government and by its professional regulatory bodies. In particular, R has said: • it had to implement hygiene procedures and wear protective equipment, including

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masks and protective screens had to be installed. • Social distancing measures meant it could only allow one patient at a time. • It had to reduce the number of staff at the premises together. • Patients had to complete a health questionnaire and have a temperature check at each appointment. • Seating had to be removed. • Magazines and complementary drinks could not be offered. • There were restrictions on the retail section of the business. • It had to deep clean for each patient which meant treatments took longer. • It ceased all training courses. • It had to use a treatment room as a changing room for staff, which meant a discrete area of the premises was unable to be used for business activities. As mentioned above, the examples given by the Supreme Court involved a complete inability to use a discrete part of the premises. I do not agree that R’s situation aligns with any of the examples provided by the FCA test case. I will explain why. I have seen no reliable evidence that any part of the premises was cordoned off to prevent access entirely. From the evidence provided, all the treatments were available, and all areas of the premises were accessible, to staff and customers. R has said it had to close the customer toilet. I’ve not seen any evidence that this was a restriction imposed by the Government but, even if it was, this in itself does not meant that R could not carry out any of its business activities. I have also considered what R has said about providing a changing room for its staff. While it may have chosen to set aside a treatment room for this, I am not satisfied that this meant it could not use a discrete part of its premise for its business activities due to any restriction imposed. I say this because it seems to me this was a choice R made. As mentioned by Hiscox, the customer toilet could have been used instead. And there is no convincing evidence as to why, even if a separate changing room was needed, that this would have made the room out of bounds entirely. I do not therefore agree that there was an inability to use any part of the premises. R has also said that it could not conduct the training courses it would have normally provided. However, there is no persuasive evidence this was as a result of an inability to use the premises rather than a fall in demand, or other reason. It seems to me that any impact on how R was able to carry on its business, outside of the three lockdown periods set out above was due to the number of customers that could enter the premises at the same time and other restrictions imposed on the movement of people as opposed to being the result of a restriction that caused an inability to use the premises, or a discrete part of them. In my opinion, this would amount to a hindrance of use of the premises and not an inability of use. To refer back the Supreme Court, it said: “… an inability of use has to be established; not an impairment or hindrance in use.” As R has said an insurance contract is correctly interpreted based on the understanding a reasonable person, with the background knowledge of the parties to the contract, would have had at the time the contract was entered into. The contract should not be interpreted with hindsight. Rather the question is how the words would have been understood by the reasonable small business owner, perhaps assisted by a broker, with all the background knowledge which would have been reasonably available at the time the parties entered into

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the contract. The insurance contract was entered into before Covid-19 had been identified. I don’t think such a person would have considered, at the time R entered into its policy, that the policy would mean that reducing the number of customers it could let in, or a fall in demand for services, would amount to an inability to use its premises. Having considered everything very carefully, I am not therefore persuaded that Hiscox has acted unfairly in not considering losses outside of the three indemnity periods in line with the lockdown periods (i.e. 24 March to 13 July 2020, 5 November to 2 December 2020 and 31 December 2020 to 12 April 2021). Underinsurance As R is a commercial customer, it was required to make a declaration at the time each relevant policy was taken out that met the requirements of the duty of fair presentation under the Insurance Act 2015. In essence, in this case this meant R needed to accurately declare its income, and hence the level of cover it required for this. Where a commercial customer breaches this duty, and this means that the insurer would have charged more for the policy, the insurer is entitled to reduce a claim settlement proportionately. I’ve considered whether R made a fair presentation of the risk in May 2019 and May 2020. R’s policy was set up based on the figures it provided. As set out above, it declared both times that its income was £130,000. Hiscox has calculated that in the 12 months prior to the claim in March 2020, R’s income was £236,287. It seems to me that in May 2019 its annual income would have likely been similar and there is no reliable evidence that this was not a reasonable amount that should have been declared at renewal in May 2020 as well. I am satisfied that this would have been information that R ought to have known and there was not therefore, in my opinion, a fair representation of the risk when R applied for this policy in 2019 and 2020. Hiscox has confirmed that if R had made a fair presentation of the risk, it would have charged a higher premium for the business interruption cover. As Hiscox would have done something different, R has made what is referred to in the Act as a qualifying breach. Hiscox has accepted that R didn’t deliberately or recklessly fail to make a fair presentation of the risk. That means under the Act Hiscox would be entitled to reduce R’s claim proportionately to the amount it had underpaid on the premium. Hiscox has provided evidence of the premium it would have charged, if it had known that the sum insured for loss of income should have been £236,287. R disputes that this is credible and says the business interruption cover was only part of the cover provided, so does not accept that the premium would have increased by much, or at all. I appreciate R has asked to see evidence setting out how Hiscox would have calculated the additional premium. But the way an insurer sets its prices is commercially sensitive information. So, whilst I appreciate – and I understand – R desire to see this information, I do not think it is appropriate to share it. Having considered the evidence provided, I am satisfied that Hiscox has established it would have charged the extra premiums it has said. And I think it is clear from this evidence, and in the correspondence from Hiscox to R about this, that Hiscox has only said the premium for the business interruption part of the cover would have increased and has not suggested there would have been an increase of other elements of the premium. R has also said that the income figures used by Hiscox included VAT, so the actual figure

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should have been lower. I have seen nothing to support that. I have therefore considered the remedy that Hiscox is entitled to as a result of the fact R did not make a fair presentation of risk. R has said Hiscox has applied a proportionate remedy set out in the policy that is disadvantageous to it and because it did not make this sufficiently clear to R, Hiscox should instead apply the remedy available under the Insurance Act 2015. Under the Act, where an insurer has shown that it would have charged a higher premium if the correct information had been provided, it allows the insurer to settle the claim on a proportionate basis based on the proportion of premiums that were paid, compared to those that should have been paid. R’s policy also provides that in the event of underinsurance Hiscox will apply the following adjustment: “If the annualised amount insured is less than 85% of your actual income, or your actual gross profit if applicable, during the 12 months immediately preceding the date of the insured damage, insured failure or restriction, the amount we pay will be reduced in the same proportion as the under insurance.” Hiscox applied the policy term above to each period of indemnity, which meant it applied the following deductions for underinsurance: Lockdown 1 (24 March to 13 July 2020) it applied a 45% deduction based on income in the preceding 12 months being £236,287; Lockdown 2 (5 November to 2 December 2020) it applied a 38.5% deduction based on income in the preceding 12 months (which included the first lockdown period) being £211,359; and Lockdown 3 (31 December 2020 to 12 April 2021) it applied a 40.6% deduction based on income in the preceding 12 months (which also included lockdown periods) being £218,936. As mentioned above, I think it is likely that R’s annual income would have been around £236,287 when applying for the policy in May 2019. Comparing the premium that would have been charged if Hiscox had been aware that this was the sum insured compared to what was paid provides the same deduction of 45% as it has applied here for Lockdown 1. So, I think what Hiscox has done in respect of Lockdown 1 is fair. With regard to the policy taken in May 2020, I do not have the exact annual income figure that should have been disclosed then, but it seems to me likely it should also have been around £236,287 based on income for a normal trading year. This would also mean a deduction for underinsurance of around 45% for Lockdowns 2 and 3. In the event, because of the Covid-19 pandemic, R’s actual income was less in the period leading up to Lockdown 2 and 3. Hiscox has used these lower figures when calculating the deduction for underinsurance in accordance with the underinsurance term in the policy. It seems to me therefore that the way Hiscox has calculated the underinsurance deductions for Lockdown periods 2 and 3 is likely more favourable to R than if it had applied the remedy under the Insurance Act 2015. I have not seen anything to support that this is not the case. I therefore consider Hiscox has acted fairly and reasonably. Furlough During the COVID-19 pandemic, the UK Government introduced a number of grant schemes to support businesses. These included furlough payments. R has accepted that the current legal position (as set out in the judgment of Stonegate Pub Company v MS Amlin and Others

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[2022] EWHC 2548 (Comm) ("Stonegate")) is that insurers are entitled to take account of furlough payments in the way Hiscox has here. It has, however, asked that Hiscox be required to reconsider this if case law changes. I cannot make any direction about what Hiscox should do, if at any point the courts determine that furlough payments should not be taken into account in the way that Hiscox has done. I can only determine complaints about things that have happened and make awards, if appropriate, to put right things that have gone wrong. I cannot therefore make a conditional award in the way R has asked. And, for the avoidance of doubt. as Hiscox has deducted furlough payments, in line with the current law, I do not think it has done anything wrong. My final decision I do not uphold this complaint. Under the rules of the Financial Ombudsman Service, I’m required to ask R to accept or reject my decision before 21 April 2026. Harriet McCarthy Ombudsman

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