Advisen

Some policies should have paid out for COVID BI claims, UK court rules

By Erin Ayers, Advisen

Policyholders in the United Kingdom claimed a win after a London High Court ruled that some insurers should not have denied thousands of claims for business interruption losses caused by the COVID-19 pandemic.

In a test case brought by the UK Financial Conduct Authority (FCA), the High Court of Justice evaluated 21 different policy wordings used by eight insurers. While not all language was deemed to provide coverage for non-damage business interruption losses, many of the policies examined should have paid out, according to the justices.

Arch, Argenta, Ecclesiastical, Hiscox, MS Amlin, QBE, Royal & Sun Alliance, and Zurich agreed to be part of the FCA’s test case and to be bound by the results, although the ruling could be appealed. Some policies, including those by Zurich and Ecclesiastical, held up to the court’s scrutiny.

The FCA had estimated that about 370,000 policyholders could be affected. The financial regulator agreed that most policies in the UK insurance market expressly do not cover pandemics but identified some areas of ambiguity. The policy provisions at issue largely address non-damage business interruption clauses that in some cases specifically covered diseases and in others covered prevention of access to the insured premises.

“We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market,” said Christopher Woolard, FCA interim chief executive. “We are pleased that the Court has substantially found in favor of the arguments we presented on the majority of the key issues. Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders.”

He added, “Insurers should reflect on the clarity provided here and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgment says should be paid.  They should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.”

Woolard said that if any insurers appeal the ruling, it should be done as quickly as possible, bearing in mind that “thousands of small firms and potentially hundreds of thousands of jobs are relying on this.”

The Association of British Insurers (ABI) said insurers had supported the court process initiated by the FCA and commented that the judgment “divides evenly between insurers and policyholders on the main issues.”

“The national lockdown was an unprecedented situation that posed understandable questions of interpretation for some business insurance contracts,” said Huw Evans, ABI director general in a statement. “Insurers always regret any contract dispute with their customers and will continue to reflect on feedback from recent events.”

He added, “This is a complex judgment spanning 162 pages and 19 policy wordings and it will take a little time for those involved in the court case to understand what it means and consider any appeals. Individual insurers will be analyzing the judgment, engaging with the regulator, taking account of the appeal process and keeping their customers informed in the period ahead.”

Christopher Croft, CEO of the London and International Insurance Brokers Association (LLIBA), commented on social media, “Clients deserve clarity, and the fact that this case had to take place at all is a rebuke to our industry and the often obscure language we use. Customers deserve to understand exactly what it is they are getting in language they recognize. The swift action taken by the FCA to bring clarity after the fact is to be commended. Many other countries are looking on with interest as their BI cases grind slowly through their legal systems.”

Sonia Campbell, partner with Mishcon de Reya, which represents many businesses with BI claim disputes, called the ruling “a real lifeline” for some smaller businesses in an interview with Sky News. “This rips up all previous denials of cover,” she added.

Hiscox, which in August increased its COVID-related loss estimates, said it is assessing the ruling and believes the financial results will be less than expected.

“As a result of the Judgment, the Group estimates additional COVID-19 claims arising from business interruption to be less than £100 million net of reinsurance. This encompasses claims from all divisions including Hiscox Re and is a reduction of £150 million from the upper end of the Group's previously published risk scenario,” the specialty insurer said in a statement.

Zurich Group praised the ruling for affirming that its policy wordings do not provide cover for pandemic-related BI claims.

Zurich’s CEO Mario Greco said, “While we welcome the judgment of the High Court in respect of Zurich’s wordings, we recognize that COVID-19 has caused immense suffering for our customers, their families and their businesses. We will continue to do all we can to support our customers and our communities at this time.”

AM Best reported that the decision will likely have a “material impact” on UK commercial property insurers’ earnings for 2020, but overall solvency should not be threatened. Some clarity has been achieved, but “questions remain” on the number and severity of now-valid claims, the rating agency said in an analysis. Insurers’ ability to recover from their reinsurers also remains to be seen, Best said.

Editor Erin Ayers can be reached at eayers@advisen.com.