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Berkshire Hathaway Specialty Insurance

UK court ruling backs BI claimants 'on key issues'

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The UK High Court has ruled against insurers on key points in a business interruption test case brought by the Financial Conduct Authority (FCA) on behalf of policyholders.

“We are pleased that the court has substantially found in favour of the arguments we presented on the majority of the key issues,” FCA Interim CEO Christopher Woolard said after the decision was handed down overnight.

“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.”

Opinions differed on the implications from the judgment, with the Association of British Insurers (ABI) saying it “divides evenly” between insurers and policyholders on the main issues. The potential for an appeal has also been flagged.

The Insurance Council of Australia (ICA), which will have its own test case heard in the NSW Court of Appeal on October 2, says it will review the UK decision for any implications for local insurers and customers.

“However, the UK court examined issues that are not being examined by the ICA’s test case, which is focused on the application of certain infectious diseases exclusions in business interruption policies,” spokesman Campbell Fuller said.

The High Court’s 160-page decision follows an eight-day hearing in July that considered 21 sample wordings from eight insurers that agreed to take part.

Participants were Arch, Argenta Syndicate Management, Ecclesiastical Insurance Office, Hiscox, MS Amlin, QBE, Royal & SunAlliance and Zurich.

Click here to see QBE's response to the judgment.

FCA says the judgment finds that most, but not all, of the disease clauses in the sample wordings provide cover, while some denial of access clauses also provide cover depending on detailed wordings and issues such as whether the business was subject to a mandatory closure order or had to shut 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,” it says.

The FCA has said some 370,000 policyholders have been identified as having cover that may be affected by the test case decision.

“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,” Mr Woolard said.

“They should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.”

The ABI says, given the judgment's complexity, it will take a little time for those involved to understand what it means and to consider any appeals.

“Individual insurers will be analysing the judgment, engaging with the regulator, taking account of the appeal process and keeping their customers informed in the period ahead,” Director-General Huw Evans said.

Lloyd’s says it will “take the time” to carefully consider and respond to the judgment, while noting it retains less than 2% of the overall UK property SME market.

Law firm Mishcon de Reya, which represented the Hospitality Insurance Group Action and the Hiscox Action Group during the court hearings, described the decision as “overall a resounding victory for the policyholders”.

It notes insurers have asked for more time to put in an application for permission to appeal, indicating they are likely to pursue that course of action.

AM Best expects COVID-19 related business interruption claims to have a material impact on UK commercial property insurers’ earnings this year, but aggregate solvency should remain robust.

The ratings company estimates commercial property premiums account for about £7.5 billion ($13.2 billion) of the £50 billion ($88 billion) gross premiums written by UK-domiciled insurers, and around 10% of commercial property premiums relate to business interruption extensions.

“A key factor determining the financial impact of the test case ruling on UK insurers will be their ability to make recoveries from reinsurers,” it says.

UK claims resolution firm Mactavish says the case should have looked at a wider range of issues and policy wordings and the vast majority of business interruption claims will be unaffected or only marginally better off due to the judgment, while there are still many legal hurdles to 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.

The full judgment can be seen here.