FCA testing UK BI wordings. Zurich & RSA highlight reinsurance covers

The UK’s Financial Conduct Authority (FCA), one of the key financial market regulators and part of the Bank of England, is to run a test case to help establish the validity of business interruption claims from the Covid-19 pandemic.

Numerous major global insurers are involved, including leading players such as AIG, Allianz, Arch, Argenta, Aspen, Aviva, Hiscox, Liberty Mutual, MS Amlin, QBE, RSA and Zurich.

In total 56 insurers have been approached, with more than 500 policies reviewed as a result. The process will culminate in a five to ten day court hearing, during which wordings will be tested to establish whether some business interruption claims from the pandemic should be honoured or not.

Christopher Woolard, Interim Chief Executive at the FCA, explained, “The court action we are taking is aimed at providing clarity and certainty for everyone involved in these BI disputes, policyholder and insurer alike. We feel it is also the quickest route to this clarity and by covering multiple policies and insurers, it will also be of most use across the market. The identification of a representative sample of policies and the agreement of insurers who underwrite them to participate in these proceedings is a major step forward in progressing the matter to court.”

The aim is to provide clarity, for policyholders and for insurers, to identify a large majority of wordings related to business interruption and help to drive settlement without the need for numerous legal cases to be raised.

The FCA’s own opinion is that, “Most SME insurance policies are focused on property damage (and only have basic cover for BI as a consequence of property damage) so, at least in the majority of cases, insurers are not obliged to pay out in relation to the coronavirus pandemic.”

As a result, this test case and the court actions will be focused on the remainder of policies that could be argued to include business interruption cover and specific wordings have been identified for testing.

Alongside legal action in the United States, this test of wordings aims to help accelerate the settlement of disputes, while focusing on the main areas of ambiguity.

While the FCA’s action will only test the policy wordings of a representative set of re/insurers, the results of the court action will “provide guidance for the interpretation of many other BI policies that are not in the representative sample.”

“This means that other insurers will also be affected by the test case and its conclusions. In early July, we expect to publish a comprehensive list of other insurers and many other BI policies in the market that we expect the test case to affect, based on firm submissions,” the FCA said.

The goal is to lift the deadlock, without flooding the courts with individual cases on business interruption claims validity and to expedite the delivery of claims payment support where it should be valid and wordings have not excluded pandemic related claims.

Of the insurers that have been working with the FCA on this test case, it is Zurich and RSA that are the first to highlight that should the court action result in some policies being found to cover business interruption from Covid-19, they have reinsurance in place to cover many of the costs associated with BI claims being identified as valid.

Zurich said that it remains, “Confident that the total P&C claims cost for the full year will remain in line with the approximately USD 750 million disclosed with the first-quarter update on May 14, 2020, though the continuing nature of the event means that this is subject to significant uncertainty.”

However, it notes that, “In the unlikely event that the UK High Court were to judge that all industry wordings reviewed in the FCA process do provide cover for business interruption in relation to COVID-19, then Zurich estimates that this would result in approximately USD 200 million of claims net of reinsurance in addition to the scenario for full-year 2020 claims related to COVID-19 presented on May 14. This amount includes assessment of the potential impact to all Zurich UK business, not limited to SME. The continuing nature of the event means that this is subject to significant uncertainty.”

It’s not clear at this time what reinsurance treaties Zurich would hope to claim additional business interruption claims costs from, but the insurer believes that it will be able to do so, should the FCA’s test case and court action drive claims its way.

RSA is of the same opinion, highlighting that its claims from the Covid-19 pandemic so far are £25m net of reinsurance.

However, the insurers points out that, “The FCA expects the outcome of the court proceedings and related rulings to be directly relevant for all insurers providing business interruption insurance in the UK.”

Adding that, “RSA continues to treat claims in line with legal advice, precedent and case law.”

Then, RSA points to the fact it too has reinsurance protection that it believes it can call on should the FCA’s case push additional business interruption claims its way.

“RSA has a comprehensive reinsurance programme, with core catastrophe covers in place across the Group (including the UK) as well as a group-wide aggregate protection. These arrangements (described in the Group’s full year results) are expected to provide substantial protection in the event that downside claims scenarios were to arise.”

It’s particularly interesting that RSA mentions catastrophe reinsurance, as it would more typically be assumed that any BI claims would fall under other reinsurance arrangements first.

Legal actions and efforts to enable businesses to realise more valid claims related to business interruption from the pandemic have been expanding in recent months, with potentially significant ramifications for some in the reinsurance and insurance-linked securities (ILS) market should any succeed.

In the U.S., some plaintiff attorneys believe there are legal precedents that could mean insurers end up taking more business interruption claims than initially thought.

The FCA’s court action looks set to test the robustness of some of the main wordings used in UK business insurance contracts and the fact these two insurers are expecting their reinsurance to respond to any escalation in claims costs suggests that the majority would look to do so.

As we’ve explained before, it is the lack of exclusions and poor wordings in insurance and reinsurance contracts that are likely to drive the majority of claims through routes such as this, with potential ramifications for some insurance-linked securities (ILS) fund managers as a result.

The UK action is another avenue where there could be some additional claims set to flow to reinsurance capital providers, although the size of this would likely be much smaller than the threats from action in the United States.