The following is an editorial by Alicja Grzadkowska, senior news editor at Insurance Business. To reach out to Alicja, email her at [email protected]
In mid-January, the final ruling on the appeal of the Financial Conduct Authority (FCA)’s business interruption case in the UK was announced, with the Supreme Court revealing that it would allow the FCA and Hiscox Action Group (HAG)’s appeal, while dismissing insurers’ appeals.
The 112-page long verdict by the Supreme Court received a wealth of reaction from across the UK insurance industry, but the decision was also being watched on a global stage.
In the UK, the decision was largely a win for insureds, but there were several caveats, as explained by Firth & Scott Insurance Brokers director Stevie Jeffrey in a LinkedIn post. “What has happened is the Supreme Court has supported the previous decision that where policy wordings (part of the terms of your contact) are vague and ‘accidentally’ cover COVID-19 losses, insurers must now pay these claims even though that was not their intention,” he wrote, stressing that where there is clarity, in that the exclusion is explicit, the Supreme Court ruling “changes nothing” and insurers will not need to compensate.
Even so, for an insurer like Hiscox, the ruling will be particularly impactful on its bottom line, with its total 2020 COVID-19 estimate for business interruption increasing by US$48 million net of reinsurance, as a result of the Supreme Court ruling as well as further government restrictions. However, the company also issued a statement that in part read, “The Supreme Court largely confirms the outcome of the High Court’s ruling that, except in rare circumstances, cover is restricted to Hiscox policyholders who were mandatorily closed. Fewer than one third of Hiscox’s 34,000 UK business interruption policies may respond as a result.”
Globally, the ruling will have generally more limited consequences, though it will likely add to the growing pressure that insurers are already facing in the business interruption legal landscape.
In Canada, the Insurance Bureau told Insurance Business, “We understand that most business interruption policies written in Canada require that there be property damage caused by an insured peril for coverage to be triggered. The UK Supreme Court judgment relates to non-damage business interruption insurance extensions and consequently its potential relevance will be limited.”
However, other experts have argued that the decision could have bigger implications, considering that Canadian courts tend to follow decisions from UK courts when interpreting similar wordings. According to insurance lawyers at Miller Thomson, who wrote an analysis on the impacts after the initial FCA ruling in September, “Underwriters must consider this decision and how it will influence their exposure in Canada. Practically, a number of the insurers who were parties to the test case also participate in the Canadian market and will not want to advance inconsistent interpretations.”
By contrast, in the United States, business interruption policy wordings vary starkly from those in the UK, and there is also a reluctance on the part of US courts to look at international decisions in deciding national issues, which together will likely limit the impact of the FCA decision on US policyholders and insurers. Nonetheless, argued the law firm Bryan Cave Leighton Paisner LLP, “Given the largely policyholder favourable ruling, it would not be surprising to see policyholders cite some parts of the test case.”
Another potential impact of the test case ruling on related US coverage litigation could be a fall in confidence among US insurers, who have largely come out the winners in a number of rulings. Yet, courts across the country have also been sporadically ruling against insurers on the BI coverage issue, and the FCA judgment has “now added to an increasing list of cases that policyholders may cite to argue the ‘majority position’ is wrong,” noted The National Law Review. Indeed, policyholders across markets may feel a renewed energy in their fight for coverage on the back of the UK ruling.
Moving over to Australia, major insurer QBE has moved to increase its provisions for COVID-19 losses from US$600 million to US$785 million, adding to the risk margin to include the potential for Australian BI claims, in the wake of the FCA ruling. This move also follows a test case heard by the New South Wales Court of Appeals late last year, which rejected the insurance industry’s argument that policies should not cover COVID-19 pandemic-related losses.
The Insurance Council of Australia previously stated that the insurance industry in the country faces up to AU$10 billion in claims if insurers will be required to take on the BI-related costs of the pandemic, and local companies have already taken steps to deal with the potential fallout. For instance, after the NSW Court of Appeals ruling, Insurance Australia Group (IAG) immediately halted trading and set out to raise AU$750 million in new equity capital as it prepares itself for an increase in claims.
No matter the extent of the impacts in various markets, the Supreme Court ruling has revealed cracks in the insurance industry, particularly in policy wordings and its broader responsibility (and ability) to provide coverage for widescale catastrophic events. It’s critical that the lessons of 2020 are applied in the world of insurance and risk moving forward to prevent future similar disputes that take a toll on insurers and insureds alike.
As Sian Fisher, CEO of the Chartered Insurance Institute (CII) in the UK, has argued, insurers, brokers, and governments should focus on reducing “the current ambiguities and expectation gaps, and therefore the need for court cases such as these in the future.”