And then it happened.
Those who were expecting an easy ride for insurance companies on delivery of the High Court test case verdict were given a rude awakening today when the decision went firmly against the industry’s arguments.
It was announced that that the majority of businesses that held business interruption insurance and were forced to close due to the COVID-19 pandemic are in fact entitled to be compensated by insurers. Indeed, subject to the limits of the policy, this compensation should return them to the position they would have been in had the pandemic never happened.
It’s a decision that has dumped a bucket of cold water over insurers’ protests that the policies were never designed to cover a pandemic of this scale – albeit the potential for an appeal looms large. However, was this really a knockout blow for insurers or more of a bloody nose?
How the insurers have reacted
Unsurprisingly, reaction has been flooding in on the verdict, with Hiscox, one of the insurers that took part in the test case eager to highlight that the judgement does carry limitations.
“The judgement clarifies that fewer than one third of Hiscox’s 34,000 UK business interruption policies may respond,” it said in a Press statement. “Coverage under these policies is essentially limited to those customers who were mandatorily closed by Government orders, and then only in certain circumstances.
“Hiscox is assessing the judgement 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 judgement will be assessed on a case-by-case basis as part of the normal insurance loss adjustment process for claims.”
Ultimately, it suggests that additional COVID-19 claims arising from business interruption will 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,” it said.
How the action groups have reacted
Meanwhile, actions groups involved in the decision were willing to go so far as to describe the result as a “triumph.”
Sonia Campbell, the Mishcon de Reya partner leading the action on behalf of Hospitality Insurance Group Action (HIGA), said: “This is fantastic news which has shown that we were right to pursue insurers who across the board denied cover for COVID-related losses. I know today’s result will be a relief for many hospitality companies who are relying on their insurers to pay out to continue running their business.”
She stated that she expects insurers to pursue an appeal but has called on further policyholders to get involved as they attempt to recover losses.
“Insurers have now asked for more time to apply for permission to appeal which suggests that insurers will seek to continue to contest coverage despite the court’s clear judgement,” Campbell said. “Any business insured through the Resilience Marsh/JELF wordings or the QBE1 (25 mile) disease wordings should feel free to contact us to consider next steps. Our claim is funded by one of the world’s largest litigation funders.”
What about the trade associations?
Risk management association Airmic welcomed the decision with CEO John Ludlow saying he was “pleased” with the outcome.
“2020 has already been a tough year for business across most sectors, due to COVID, which has been exacerbated by the harsh insurance market,” he said. “We think this ruling is to the benefit of businesses, risk professionals and insurance buyers, but importantly should serve to smooth a period of uncertainty faced by policyholders, and especially for those in the SME space.”
Meanwhile, LIIBA CEO Christopher Croft noted the key lesson is that customers deserve to understand exactly what it is they are getting from their insurance policies in language they recognise going forward.
“The swift action taken by the FCA to bring clarity after the fact is to be commended. Many other countries are looking on with interest as their BI cases grind slowly through their legal systems,” he said.
"The fact that the court found in favour of the policyholders hopefully brings this action to a close. The industry’s reputation has been damaged by the debate over exactly what is or is not insured, and we need to think hard about how we redress that and introduce absolute clarity into the product our customers buy. This will include challenging the principles at the heart of these cases -- principles which insurers have held dear but which we have seen make no sense to the general public.”
Anyone else having their say?
Despite the calls for a line to be drawn under the affair, Mohammad Khan, UK general insurance leader at PwC UK, noted that there are still plenty of “nuances of interpretation.”
“Insurers with affected portfolios should have a clear view of what policies are affected by each clause by now,” he said. “For those not defending the test case, they should also have a mapping of their own clauses to the ‘equivalent’ clauses subject to the test case.
“The judgement presents some nuances of interpretation which means further analysis to identify those policies where the court found in favour of insurers and where claims will not be paid up. These relate to a potential narrow definition of prevention of access and inability to use premises. This means that the same type of business might find itself covered or not depending on whether it was still selling or whether it was mandated to close by the government rulings rather than its advice.”
“The judgement might also lead to more claims being made in the coming weeks and, in the longer term, these rulings will have an impact on how insurance policies are worded and potentially sold,” he added.
Ultimately, however, there is little doubt over who will be celebrating the court’s verdict – that honour falls on the law firms and small businesses. Albeit with an appeal-themed caveat.
“Today’s judgement gives a much-needed lifeline to struggling businesses across the UK and could prevent many from going bankrupt. It provides, for many, a basis for presenting their COVID business losses under their commercial insurances,” said Stephen Netherway, partner and head of the insurance practice at national law firm Devonshires. “As a result, today’s victory for the FCA, provided payments are to be made now, will save thousands of people from losing their jobs. Fundamentally it will mean many millions of pounds being paid out to some of the businesses that are desperate for a cash injection.
“While this is a victory for the person on the street, the small business, there will undoubtedly be an appeal from the insurance industry, so we are effectively only at half time in this case. There is devil in the judgement detail and not all policyholders are in the same box seat with their insurers, depending on what actual insurance wording they hold. What is important now is that the FCA sits down with the insurance sector to discuss how they move forward and discuss if businesses can secure interim payments from their insurers pending any appeal.”
