Home / Analysis / UK case set to boost pandemic BI payments
21 September 2020
Amid the assessments following the complex UK High Court test case judgment last week on business interruption there have been a few clear messages.
Subject to appeal, some business interruption claims that were previously set to be declined will be paid out, policy wordings that provided cover where not intended will be tidied up, and stakes are rising over the approach to future pandemic risks.
The Financial Conduct Authority (FCA) agreed before launching the case that most business interruption policies offered basic physical damage cover that excludes COVID-19. The court action was triggered by disputes over extensions for diseases and prevention of access.
AM Best says business interruption policies for infectious diseases were historically aimed at outbreaks on or near a site, and it’s unlikely insurers were contemplating the type of widespread shutdowns triggered by COVID-19 when developing their policies. Nevertheless, in some cases the court found cover does apply.
The 160-page High Court judgment, being combed through by lawyers in the UK and in Australia, makes separate assessments on 21 sample wordings from eight insurers, while looking at some common key issues.
FCA legal advisers Herbert Smith Freehills say the judgment tilts toward policyholders, while the Association of British Insurers says it “divides evenly”.
On disease extensions, the court says that excluding two QBE wordings, local outbreaks are “indivisible” from the general pandemic, meaning cover is not limited to outbreaks occurring wholly or exclusively within an area specified.
On access problems due to restrictions triggered by authorities, outcomes still depend on policy terms and specific situations, such as, for example, whether a restaurant was offering both dine-in and take-away service.
“The court concluded that, generally speaking, these clauses were to be construed more restrictively than the majority of the disease clauses, albeit their findings provide for cover for some insurers under some wordings,” Herbert Smith Freehills says.
A key consideration was issues that can reduce business interruption claim payments by adjusting for matters that would have affected a business anyway.
Insurers cited a key New Orleans case where hotel owner Orient Express was denied business interruption cover following hurricanes Katrina and Rita, as the surrounding area was completely devastated. No matter what had happened to the hotel itself, business was going to be wiped out.
Lord Justice Flaux and Mr Justice Butcher suggested that approach would not have been theirs, and it can’t have been intended that “the worse the fortuity which befalls the insured and the vicinity of the insured’s premises, the less the insurance responds”.
The justices did not accept that a local instance of the outbreak is the covered peril, leaving the wider pandemic effects and associated government responses as background “trend” issues affecting the business.
Stripping out government restrictions from the pandemic is “entirely artificial”, they say in part of the judgment. The approach “ignores the inextricable connection between the various elements of the insured peril, both as a matter of legal analysis and as a matter of practical reality given the nature of the pandemic emergency”.
Lawyers Weightmans highlighted a drafting issue by major insurer RSA that was raised in the test case. The way the policy document is laid out suggests disease cover is available up to £10,000 ($17,700), but the insurer says the intention was to exclude infectious diseases and provide an overall loss limit up to that sum.
“Even if RSA were able to establish that in positioning the words in the exclusion they had made a mistake, the mistake was entirely theirs, to which insured policyholders cannot be said to have contributed, so there is no scope for the application of the doctrine of rectification,” the judgment says.
AM Best says “actions are now being undertaken across the commercial insurance market to reduce the ambiguity in BI wordings and provide explicit exclusions relating to pandemic risk”.
Recoveries from reinsurance will also depend on program structures, deductibles and limits, and the way events are defined.
The British Insurance Brokers Association (BIBA) says individual policyholders may still pursue issues through the courts or take complaints to the Financial Ombudsman Service, and it continues to favour a model for future pandemics along the lines of terrorism-focussed Pool Re.
The FCA has estimated that, in addition to the sample wordings, some 700 types of policies across 60 insurers and 370,000 policyholders could be affected by the High Court test case.
But claims resolution firm Mactavish says the test case should have looked at a wider range of issues and wordings, and the vast majority of business interruption claims will be unaffected or only marginally better off due to the judgment, and many legal hurdles must still be overcome.
“A lot now hinges on how the FCA uses its muscle to advance the interests of policyholders and hold the feet of insurers and brokers to the fire,” it says.
Any appeals are expected to be heard quickly, but despite the fact that some clarity has been provided battles are set to continue. Insurers will be tightening wordings as the current pandemic still has some way to run. The more they do so, the more heat they will face, and businesses will increasingly worry about risks from future outbreaks.