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UPDATE 2-UK watchdog sets Wednesday deadline for agreement on business insurance claims

* Hundreds of thousands of small firms seek payouts

* Insurers argued COVID-19 not applicable

* High Court ruled they were wrong in many cases

* Regulator seeks to avoid appeals process (Adds QBE, MS Amlin, Zurich, background)

LONDON, Sept 29 (Reuters) - Britain’s financial regulator said on Tuesday it had filed for an expedited appeal in a business interruption test case against insurers, but was seeking an agreement by Wednesday to avoid the appeals process altogether.

Hundreds of thousands of mainly small British businesses are waiting to hear if their insurer will pay out imminently, or keep them waiting while they appeal the case brought by the Financial Conduct Authority (FCA) against eight insurers.

An agreement is needed by close of business on Wednesday, the FCA said in a statement.

London’s High Court has ruled that some of the world’s biggest insurers were wrong to reject claims from small firms battered by the COVID-19 pandemic.

The court found in favour of policyholders’ arguments on the majority of key issues, the FCA said earlier this month.

The case is being closely watched in Britain and overseas as it is estimated to impact 370,000 policyholders across more than 60 insurers, with similar policy wordings and billions of pounds in claims.

The FCA said it continues to “work closely and at speed” with the eight insurers and two intervenors that participated in the test case to reach agreement in principle on a range of issues, so avoiding an appeal. It said seven insurer parties had also made precautionary appeal filings.

A court hearing in relation to the appeal applications will take place on Oct 2.

RSA, one of the insurers involved, said it has sought leave to appeal while another, Hiscox, said it had taken the necessary steps to apply for an expedited appeal but “has not yet made a decision on whether it will seek to appeal”.

Discussions are ongoing with the FCA and other parties to try to resolve any outstanding issues before the Oct 2 hearing, Hiscox said. QBE and MS Amlin also said they had sought leave to appeal.

Zurich Insurance said it had not filed an application to appeal as the ruling confirmed that its policy wordings did not provide cover for business interruption in relation to the pandemic.

Talks had been taking place all weekend between the FCA and insurers, but were not resolved before the appeal application deadline, according to one source familiar with the matter. Interpretation of some aspects of the ruling was causing a stumbling block, the source added.

Reporting by Huw Jones; Editing by Dhara Ranasinghe, Sinead Cruise and Philippa Fletcher

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