Following the High Court ruling yesterday on the FCA’s business interruption test case, Insurance Times looks at the potential impact on insurers 

Insurers have supported the High Court’s proceedings over the past few months as claimant the FCA sought legal action in order to gain coverage clarity for customers who had made business interruption (BI) claims linked to the Covid-19 pandemic. Judges in the test case delivered their verdict yesterday.

However, it will take time to comprehend the full extent of the ruling and for any appeals to follow.

This is according to the ABI’s director, Huw Evans. He said: “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 analysing the judgment, engaging with the regulator, taking account of the appeal process and keeping their customers informed in the period ahead. The judgment divides evenly between insurers and policyholders on the main issues.”

The court case saw eight defendant insurers’ policy wordings examined over the course of eight days during a virtual hearing, conducted online due to the coronavirus pandemic lockdown.

It is for this reason that the court case is “unprecedented”. Evans explained: “The national lockdown was an unprecedented situation that posed understandable questions of interpretation for some business insurance contracts.”

The eight participating insurers included Arch Insurance, Argenta Syndicate Management, Ecclesiastical Insurance, Hiscox, MS Amlin, QBE, Royal and Sun Alliance Insurance and Zurich.

‘Widespread and profound’

Meanwhile, Dave Matcham, chief executive of the International Underwriting Association (IUA), acknowledged that the impact of the Covid-19 crisis on the London Market has been “widespread and profound”.

He continued: “IUA members have supported their clients, making claims payments across a range of business classes, but most notably on contingency and business interruption policies.

“Where there have been coverage disputes, companies have cooperated fully with the FCA in its legal test case to bring about a resolution as speedily as possible. The court decision provides a degree of certainty for both sides.

“The economic losses brought about by Covid-19 are unprecedented and have raised important questions for risk managers. Insurers are now working with clients and government to ensure that effective preparations are in place for any future pandemics.”

What did the insurers say?

Zurich Insurance 

Tulsi Naidu, outgoing chief executive of Zurich UK, said: “Zurich agreed to participate in the FCA’s test case, which tested a wide range of insurer policy wordings, to help provide certainty to policyholders about their business interruption insurance. The Court’s decision in respect of the Zurich policy wording has confirmed our interpretation and approach under these policies is correct. We are pleased that Zurich’s participation in the process has helped achieve clarity for policyholders across the UK.”

RSA

Scott Egan, chief executive of RSA UK and International, said: “Throughout the pandemic, RSA has been settling claims from both commercial and personal lines customers, as well as participating in industry initiatives to support communities around the UK. We’re committed to continuing to play our part to help individuals and businesses manage and recover from the impact of Covid-19.

“The test case set out to consider how a number of business interruption policy wordings should respond to Covid-19 and [the] judgment is an important milestone for customers and for insurers. It is also a complex judgment and it will take some time for all parties involved to review it. We are now working through the judgment to determine next steps and we will continue to work with our partners to communicate fully with our policyholders throughout the coming weeks, whether they have currently made a claim with us or not.”

Hiscox

A statement from Hiscox read: “Hiscox is assessing the judgment in detail to ascertain how the Court’s conclusions should be applied to the claims and circumstances of individual Hiscox policyholders. Any issues not addressed by the judgement will be assessed on a case-by-case basis as part of the normal insurance loss adjustment process for claims.

“As a result of the judgment, the group estimates additional Covid-19 claims arising from business interruption to be less than £100m net of reinsurance. This encompasses claims from all divisions, including Hiscox Re, and is a reduction of £150m from the upper end of the group’s previously published risk scenario.

“Hiscox recognises these are extremely difficult times for businesses and regrets any contract dispute with customers, which is why it is committed to seeking an expedited resolution through this industry test case. The group remains focused on supporting its customers and employees through this challenging period.”

Ecclesiastical Insurance

Ecclesiastical said in a statement: “We are very aware that the Covid-19 pandemic is causing hardship across the UK economy and that many are experiencing difficulties in this unprecedented situation. We also appreciate that the Financial Conduct Authority (FCA) has received a number of questions and concerns from customers across the insurance industry where their business interruption policies do not cover Covid-19 losses.

”The High Court ruled yesterday that losses arising from the Covid-19 pandemic are not covered by Ecclesiastical’s BI policies and therefore we are not required to pay claims on those policies.

“We recognise that whilst the ruling supports the position we have taken throughout this period, the judgment will clearly be disappointing to a small minority of our customers who had a different view. We are very mindful that this is an unprecedented situation that has been tough for customers and wanted to take part in the legal proceedings so we could gain maximum clarity for all in the shortest amount of time.”

Appeal or not to appeal?

The ruling will have a “significant impact” on approximately 370,000 policyholders that were insured by these policy wordings, said Mohammad Khan, UK general insurance leader at PricewaterhouseCoopers (PWC).

He continued: “The court has found in favour of policyholders in the majority of the issues under scrutiny; it remains to be seen whether there will be appeals. However, if the insurers appeal, this may mean there will be a further delay for impacted policyholders and we would not expect a decision before January 2021.

“Insurers with affected portfolios should have a clear view of what policies are affected by each clause by now. For those not defending the test case, they should also have a mapping of their own clauses to the ‘equivalent’ clauses subject to the test case.”

The ABI’s Evans added: ”Insurers always regret any contract dispute with their customers and will continue to reflect on feedback from recent events. We recognise this continues to be a difficult time for many businesses, small and large, and for society as a whole. That is why insurers have made a range of commitments to help both businesses and individual customers through the crisis and why the industry expects to pay out over £1.7bn in Covid-19 claims.”

Nuances

Khan warned that the judgement presents “some nuances of interpretation”, which could mean further analysis to identify those policies that the court found in favour of insurers as well as where claims will not be paid up.

“These relate to a potential narrow definition of prevention of access and inability to use premises. This means that the same type of business might find itself covered or not depending on whether it was still selling or whether it was mandated to close by the government rulings rather than its advice,” Khan added.

“Such mapping is essential to enable insurers to communicate with policyholders within seven days about the status of their claims and complaints, as required by the regulator. There are 370,000 affected policyholders, so acting fast is an operational challenge and insurers need to consider their ability to handle large volumes of claims and complaints promptly and accurately.”

’More claims’

However, the industry could also see more claims.

Khan said: “The judgment might also lead to more claims being made in the coming weeks and, in the longer term, these rulings will have an impact on how insurance policies are worded and potentially sold.”

He believes that there will be a “renewed focus on policy wording standardisation”, which may impact the freedom of brokers to set slightly different wordings for their clients.

“Insurers and brokers will need to consider the use of technology to ensure that different wordings are provided to customers to meet their insurance needs whilst also ensuring they meet the requirements arising from the ruling and through the appeals process,” Khan said.

“It is worth remembering that although we have increased clarity on business interruption claims, the Covid-19 impact on insurance businesses is far broader.”

Khan added that the ruling will provide some certainty as to how much insurers may pay out for these claims, and that the Covid-19 impact on other lines of business in insurance is still significant and will impact insurers’ results.