One would be mistaken if they thought the UK’s High Court business interruption (BI) test case was a simple win-lose matter for the Financial Conduct Authority (FCA) and the eight insurer defendants, respectively.
In fact, as noted by Association of British Insurers (ABI) director-general Huw Evans, yesterday’s “complex” ruling featured 162 pages and 19 policy wordings. It also meant triumph for some of the insurers in certain aspects. Ecclesiastical Insurance Office Plc, for instance, won’t have to compensate policyholders.
“The High Court judgement published on September 15, 2020 stated that losses arising from the COVID-19 pandemic are not covered by Ecclesiastical’s business interruption policies and therefore we are not required to pay claims on those policies,” stated the specialist financial services company.
“We recognise that while the ruling supports the position we have taken throughout this period, the judgement will clearly be disappointing to a small minority of our customers who had a different view.”
Essentially a winning defendant, as well, is Zurich Insurance Plc, with the High Court confirming that the wordings it represented do not provide BI cover in relation to the COVID-19 pandemic.
Commenting on the decision, group chief executive Mario Greco declared: “While we welcome the judgement of the High Court in respect of Zurich’s wordings, we recognise 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.”
Financial relief measures implemented by Zurich include premium rebates, payment holidays, and extensions of coverage.
Royal & Sun Alliance Insurance Plc, meanwhile, said its interpretations of some provisions impacting RSA were upheld by the court while some were not. At the same time, the insurance group expressed its commitment to responding to the wide-ranging repercussions of the coronavirus crisis in the best interests of its customers and business.
“Our H1 interim report showed that RSA had paid or reserved for circa £57 million in claims in relation to COVID-19 losses, as well as participating in industry initiatives to provide support and relief to customers and communities affected in all our territories,” highlighted RSA, which estimates the additional financial impact of the verdict to be around £104 million on a gross basis across the company’s portfolio of relevant policies.
The approximate hit, after the application of RSA’s catastrophe reinsurance protection, stands in the neighbourhood of £85 million.
RSA UK and International chief executive Scott Egan added: “We are now working through the judgement 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.”
Also mulling their next move is Australia-headquartered QBE Insurance Group, whose QBE UK Limited was among the defendants.
In a statement released in Sydney this morning, the group said: “The court ruled in favour of QBE with respect to two out of three of QBE’s notifiable disease policy wordings examined and in favour of insurers generally with respect to denial of access policy wordings. However, the court ruled in favour of insureds with respect to one of QBE’s notifiable disease policy wordings and QBE is considering its options to appeal that decision.”
According to QBE, its estimate of the UK BI claims exposure is US$170 million (around £131.8 million), based on the notified claims affected by the British test case and having regard to individual policy sub-limits. The amount is before allowing for recoveries under QBE’s catastrophe reinsurance protections.
The insurer went on to say: “QBE believes that catastrophe reinsurance will limit the net cost of business interruption claims in our UK insurance business to US$70 million (which formed part of the US$335 million net cost of COVID-19 allowed for in our recently announced 1H20 result).”
For Herbert Smith Freehills partner and global head of insurance disputes Paul Lewis, “the decision should bring welcome news to a significant number of policyholders who will need to read the judgement carefully and see how the principles laid down by the court apply to their particular policy wording.”
Herbert Smith Freehills acted for the FCA in the proceedings.
Holding a different view is known critic Bruce Hepburn – chief executive of specialist outsourced insurance buyer Mactavish – who believes the ruling is just the beginning, not the end, of the battle for policyholders and their advisers who now have to “work out” what the decision means for their respective claims.
“In practical terms, other than in a few specific cases, policyholders are now faced with the task of interpreting a very long and complex legal judgement – which may in itself be appealed – before taking up their specific case with their insurer,” asserted Hepburn.
“In reality, this means that having delayed taking these steps in the hope that the FCA case would bring clarity, they are about to embark on a lengthy and expensive journey to resolution. Some will have the means to pursue this, some will not, and some are no doubt already discussing closure.”
The British Insurance Brokers’ Association (BIBA), meanwhile, conceded that the test case does not prevent individual policyholders from initiating separate court proceedings, or claimants from taking a complaint to the Financial Ombudsman Service.
BIBA, nevertheless, acknowledged the benefits of the FCA undertaking, while exploring the feasibility of a Pandemic Re model for the UK insurance market.
“COVID-19 and the application of insurance in relation to business interruption insurance created a complex situation requiring legal consideration of the many different issues of proximate causation and wording interpretations,” said the trade body in a statement.
“That is why, from the outset, we welcomed the FCA intervention in bringing this test case and the ultimate clarity the judgement will bring (once any appeal process is complete). We recognise how important this case is for customers and the insurance industry alike, and we will study the judgement in detail over the coming days while waiting to see if any of the parties appeal.”
ABI’s Evans, whose camp applauded the speed with which the High Court has delivered a ruling, added that the national lockdown was an unprecedented situation that posed what he described as “understandable” questions of interpretation for some BI contracts.
He commented further: “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 £1.7 billion in COVID-19 claims.”
Meanwhile global credit rating agency AM Best expects coronavirus-related BI claims to have a material impact on the 2020 earnings of commercial property insurers in the UK. The good news is, the aggregate solvency of the country’s non-life insurance sector is still forecast to remain robust.