The UK High Court has found largely in favour of insurance policyholders in the Financial Conduct Authority’s (FCA)’s business interruption insurance test case.
The move means insurance firms may end up facing paying for many more business interruption claims from the COVID-19 pandemic than they had been hoping to, as the decision suggests coverage should largely be honoured including in many cases where insurers had denied it.
Christopher Woolard, Interim Chief Executive of the FCA, commented, “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. We are pleased that the Court has substantially found in favour 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. We are grateful to the court for delivering the judgment quickly and the speed with which it was reached reflects well on all parties.
“Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful.
“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.
“If any parties do appeal the judgment, we would expect that to be done in as rapid a manner as possible in line with the agreement that we made with insurers at the start of this process. As we have recognised from the start of this case, thousands of small firms and potentially hundreds of thousands of jobs are relying on this.”
The FCA has suggested that clauses and terms under consideration were relevant to some 370,000 UK businesses that could have been affected by the judgement, with it having been said that the total payout from insurers relevant to the test case could be as much as UK £4 billion.
The judgement from the High Court will now set in motion appeals from the insurers included in the test case, it is assumed.
But it could apply much more broadly across the industry and also influence courts elsewhere around the world, so has clear ramifications for the insurance, reinsurance and potentially also the insurance-linked securities (ILS) sectors.
It will take some time for clarity on the impacts to be understood, but the ruling, being largely in favour of policyholders, does suggest more Covid-19 business interruption claims flowing through the market than there would have been had the ruling been in favour of the insurance market.
The FCA summarises what the ruling means:
What today’s judgment decides
In order to establish liability under the representative sample of policy wordings, the FCA argued for policyholders that the ‘disease’ and/or ‘denial of access’ clauses in the representative sample of policy wordings provide cover in the circumstances of the Covid-19 pandemic, and that the trigger for cover caused policyholders’ losses.
The judgment says that most, but not all, of the disease clauses in the sample provide cover. It also says that certain denial of access clauses in the sample provide cover, but this depends on the detailed wording of the clause and how the business was affected by the Government response to the pandemic, including for example whether the business was subject to a mandatory closure order and whether the business was ordered to close completely.
The test case has also clarified that the Covid-19 pandemic and the Government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid even if the policy provides cover.
What today’s judgment means for policyholders
Although the judgment will bring welcome news for many policyholders, the judgment did not say that the eight defendant insurers are liable across all of the 21 different types of policy wording in the representative sample considered by the Court. Each policy needs to be considered against the detailed judgment to work out what it means for that policy. Policyholders with affected claims can expect to hear from their insurer within the next 7 days.
The test case has removed the need for policyholders to resolve a number of the key issues individually with their insurers. It enabled them to benefit from the expert legal team assembled by the FCA, providing a comparatively quick and cost-effective solution to the legal uncertainty in the business interruption insurance market.
The test case was not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers. The judgment does not determine how much is payable under individual policies, but will provide much of the basis for doing so.
It is possible that the judgment will be appealed. Any appeal does not preclude policyholders seeking to settle their claims with their insurer before the outcome of any appeal is known.
It is important that policyholders, action groups, insurance intermediaries and their legal representatives are properly engaged throughout the test case process.
The FCA also noted that this test case means policyholders don’t need to resolve key issues of contractual uncertainty and causation individually with their insurers, allowing them to benefit from the legal expertise and also meaning the judgement should flow broadly through the market as a result, it seems.
While defending insurers relied heavily on a previous judgment called Orient Express, the FCA said that the Court ruled that this specific case does not reduce the liability of insurers where the policy provides cover.
As we’ve explained before, some business interruption claims are set to flow to the insurance-linked securities (ILS) market and ILS funds or other collateralised reinsurance vehicles, but overall this is expected to be relatively minimal.
It is now possible, if this ruling stands after the expected appeals, that the level of business interruption losses flowing to the ILS market increases a little.
However, most ILS funds will have taken the FCA test case into account when reserving for any COVID-19 exposure, so in many cases this possibility will already have been booked as conservative reserves, we’d imagine.
Insurer Hiscox has already responded to the judgement, saying, “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 Judgment 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 £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.”
Insurer RSA has also commented, saying, “Our H1 Interim Report showed that RSA had paid or reserved for c.£57m 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.
“Based on our initial review, RSA estimates the additional financial impact to RSA of today’s judgment to be approximately £104m on a gross basis across its portfolio of relevant business interruption policies. After the application of our catastrophe reinsurance protection, RSA estimates the impact of this judgment to be around £85m which is in turn expected to reduce further through qualifying as a loss covered by the group-wide aggregate reinsurance programme. “