On 15 January The Supreme Court issued its final judgment on the FCA business interruption insurance test case. The complex trial dominated media attention for months and was centered around business interruption insurance: a critical part of commercial policies which is meant to pay out a firm if it cannot trade due to an unexpected event. When businesses were forced to close due to Covid-19, many policyholders claimed they should have received a cash sum from their insurers to help deal with the implications.
However, insurers argued that while their policies may have included provision for infectious disease scenarios, this did not cover a government-imposed lockdown, forcing the FCA to launch a test case to provide clarity on the matter. Ultimately the court ruled in the favour of 370,000 small firms leaving insurers to pay out a potential £1.2bn in business interruption insurance claims.
Before the word ‘pandemic’ became a household name, policyholders likely never even thought about how such an event could disrupt their business – let alone if they needed insurance coverage to protect them. “It is the fundamental paradigm of insurance. The premiums paid by the many cover the losses incurred by the few”, explains Seth Rachlin, global insurance leader, at Capgemini.
“Insurers and reinsurers can cover even the most catastrophic natural disasters because their impact is typically limited to a small geographic area. Far more challenging are systemic events where the impact is felt on a global level. When the history of the Covid-19 epidemic is written, it is likely to go down as the most significant insurance event of all time.
“At the heart of matter is business interruption, a coverage provided in standard commercial property policies that reimburses businesses for lost revenue due to their inability to use the premises subsequent to a loss event. It is meant to cover a factory forced to close as a result of storm damage or a store recovering from a fire.
“But what happens when the event is a virus like Covid-19 which, although it does no physical damage to a property, renders it unusable? Such questions force insurers, policyholders and their [lawyers] to resort to the subtle examination of policy language and ultimately to the courts,” he adds.
“Though early court rulings in both the US and UK tended to favor insurers and exempt Covid-19 losses from the duty to pay, the tide has most certainly shifted. A few key rulings in US lower courts foreshadowed the most recent ruling by the UK Supreme Court. Insurers will be on the hook for a significant if not devastating amount of business interruption losses given the sheer number of businesses across the globe who have suffered due to Covid-19.”
Insurers at risk
Following the verdict, market leaders such as Hiscox and MS Amlin have appealed against aspects of the ruling – however any attempts of a retrial have been shot down by the Supreme Court. Hiscox has since announced that work is underway to ensure claimants receive their payouts – however is there any way insurers can protect themselves against similar situations?
“Insurers are already protecting themselves by limiting their policies and looking at how they word their policies”, says Katie Chandler, lead product liability and product safety partner at law firm Taylor Wessing. “It’s a contract at the end of the day, a contract between insurers and customers. The policy was interpreted as any person would interpret the words on the page. In the future insurers will have to tighten up their wording,” she adds.
“Right now insurers are saying this is a great result for the policyholder because it was a bit of an accident. None of these clauses were ever really meant to cover a pandemic. But will that happen to them in the future? Probably not, because they are going to change their approach and what they offer.”
As the dust slowly settles on this landmark case the insurance industry is looking for ways to rebuild trust with clients and figure out what the best practices should be progressing into 2021.
“The judgement brought clarity about the legal principles that apply to business interruption insurance. Insurance professionals recognise they need to act now to reduce the need for legal proceedings like the FCA’s business interruption test case in future.” says Matt Connell, director of policy and public affairs at the Chartered Insurance Institute.
Connell told Insurance Wire that he has urged insurers and brokers to focus on these areas of activity moving forwards: “Look to establish a more holistic approach to advising clients (and review non-advised buying processes) to help clients understand both the insurable and non-insurable risks they face, and what they can do about each one”, he explains
“Establish an approach to pandemics and other systemic risks that clearly sets out the scope of government intervention. If the government clarifies the risks it is prepared to cover, the market can be clear on how it will cover the risks that it is capable of covering. Looking to the future, it is clear that insurers, brokers and the government recognise the need to act now to reduce the need for court cases such as this one in future and build trust in the profession.”