Analysts at credit rating agency DBRS Morningstar warned insurance companies of the pitfalls of “imprecise policy wording,” pointing to the “deluge of insurance lawsuits” that came as a result of COVID-19 lockdowns.
In commentary published earlier this week, Victor Adesanya and Marcos Alvarez wrote that the number of business interruptions (BI) claims filed in the initial aftermath of the COVID-19 pandemic “could have been catastrophic for the insurance industry” if not for policy wordings that were “precise enough to withstand court challenges in most cases.”
The insurance industry has largely benefited from its experience with the SARS outbreak in the early 2000s, Adesanya and Alvarez said, with providers inserting virus exclusions in most of their commercial property policies in its aftermath.
Due to these exclusions, BI losses related to the COVID-19 pandemic are generally exempt from coverage seeing as the virus did not cause physical damage to insured properties. As the Insurance Bureau of Canada said in 2020, most BI policies “require that the insured premises sustained physical damage” such as in the case of fire, heat, or flooding.
Indeed, according to Adesanya and Alvarez, most US courts have ruled in favour of insurers with regards to BI claims related to COVID-19. However, litigation outcomes in other jurisdictions have not been as favourable to insurers, considering how some disputes have led to government intervention and million-dollar payouts in cases where policy wording had been “vague or not current.”
In the UK, for example, the Financial Conduct Authority (FCA) brought a test case to the High Court on behalf of policyholders against eight BI insurance providers. The High Court “ruled largely in favour” of the FCA, with the Supreme Court rejecting the insurers’ subsequent appeals. This equated to “£1.2 billion in claims at the time of the ruling,” noted Adesanya and Alvarez.
The pair also pointed to a class action suit filed against TD Insurance to emphasize that COVID-related disputes aren’t limited to BI cases and that insurers should be cognizant of having precise policy wording for other scenarios as well.
Last October, the Canadian insurer had agreed to settle and pay $4.8 million to compensate policyholders whose travel insurance claims it had denied following trip cancellations caused by pandemic lockdowns. TD Insurance also agreed to pay $300,000 for administration costs, bringing its total payout to $5.1 million.
