UK court substantially upholds pandemic business interruption judgement

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The UK Supreme Court has found largely in favour of insurance policyholders in the Financial Conduct Authority’s (FCA)’s business interruption insurance test case appeals.

covid-business-interruptionThis judgement means some insurance firms will end up on the hook for many more business interruption claims from the COVID-19 pandemic than they had been hoping to face.

The decision to overrule the appeals made to the initial judgement means that, for those affected insurance carriers, coverage will have to be honoured including in many cases where insurers had previously denied it.

Which has ramifications for the reinsurance market, as we explained earlier today, as a number of the insurance carriers involved do expect any further business interruption claims to be at least partially covered by their reinsurance programs.

Meaning there are also ramifications for some insurance-linked securities (ILS) funds as well, plus for any collateralised reinsurance players still exposed to

In announcing the decision today, the representative of the court said, “The appeals of the FCA and the Hiscox Action Group are substantially allowed and the appeals of the insurers dismissed.”

In addition it is understood the appeal from the Hospitality Insurance Group Action is also included in those substantially allowed.

Some 700 700 types of insurance policies, around 60 insurance companies, affecting 370,000 policyholders and potentially billions of pounds in claims are considered exposed to the decision, with a number of insurers involved directly but the ramifications having wider reach into the industry.

Some estimates suggest up to $1.2 billion of claims are subject to this decision to side with the appeals.

What this means is that many business insurance policies that insurers say were never designed to cover claims due to a pandemic, will now be required to afford coverage and honour claims.

So the ramifications are clear for the reinsurance sector, that if enough claims pile up for the insurers subject to this appeal judgement, there will be claims that flow to reinsurance capital providers, potentially including any exposed ILS or collateralised covers.

With the courts announcement just made, it’s not clear how large an impact this will have overall on the industry, but it does set another precedent in terms of claims for pandemic coverage being allowed on policies where the industry has been adamant that coverage had never been intended.

As we explained in our article earlier though, many ILS funds and collateralised reinsurance players had reserved for all possible outcomes of the test case, as they segregated potentially exposed reinsurance contracts from the rest of their portfolio to protect investors.

The Supreme Court has backed business owners in these appeals. Which isn’t that surprising given the pressure on businesses under the continuing pandemic conditions in the UK.

However, for the insurance and reinsurance industry this will be disappointing, as it had felt strongly that its policies should not hold any exposure to such claims.

We expect those impacted insurers will make announcements or publish filings related to the decision, which may give some more clarity on what the reinsurance market can expect to see in the way of claims flowing down the line to it.

The Supreme Court’s summary of the judgement can be downloaded here.

Sheldon Mills, Executive Director, Consumers and Competition at the FCA, commented on the judgement, “Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. This test case involved complex legal issues. Our aim throughout this test case has been to get clarity for as wide a range of parties as possible, as quickly as possible, and today’s judgment decisively removes many of the roadblocks to claims by policyholders.

“We will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible. Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.

“As we have recognised from the start of this case, tens of thousands of small firms and potentially hundreds of thousands of jobs are relying on this. We are grateful to the Supreme Court for delivering the judgment quickly. The speed with which it was reached reflects well on all parties.”

Interestingly, the FCA also explained that the judgement has ramifications more widely than pandemic coverage as well.

“Insurers relied heavily on a previous judgment from 2010 called ‘Orient Express’ in their submissions on causation. The Supreme Court has ruled that the case was wrongly decided. This has wider implications beyond the pandemic that BI policies are more likely to respond to other types of ‘wide area damage’ such as storms or floods,” the FCA explained.

That has future ramifications for property insurance in the UK and as a result catastrophe reinsurance program language.

Update: Hiscox announced that, as a result of the ruling, it may now face an additional estimated $48 million of pandemic related business interruption claims, all net of reinsurance recoveries.

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