Insurers, Policyholders, Analysts React to UK’s COVID-19 Business Interruption Ruling

Insurers and observers are weighing in on the ruling by a London court in a test case brought by Britain’s Financial Conduct Authority (FCA) to clarify insurance coverage for COVID-19 related business interruption claims.

The FCA says the court brought clarity to the COVID-19 coverage issues for many small-to-medium (SME) businesses by finding in favor of its policyholder arguments on the majority of key issues, while insurers point out they won some parts, too. (See related article titled: Financial Conduct Authority Hails Business Interruption Ruling as Policyholder Win.)

The FCA acknowledges that the judgment did not say that insurers are liable across all of the 21 different types of policy wording considered by the court in the test sample. “Each policy needs to be considered against the detailed judgment to work out what it means for that policy,” said the FCA.

The case was brought against eight insurers including Hiscox, RSA, QBE and Zurich over whether various business interruption (BI) policy wordings should cover for closures and disruption put in place due to the pandemic.

Hiscox said the judgment clarifies that fewer than one third of its 34,000 UK business interruption policies may respond and it estimates additional COVID-19 claims arising from business interruption to be less than £100 million net of reinsurance

Insurer RSA said the ruling upheld some but not all of its interpretations of provisions and it estimates the impact of this judgment to be around £85m, which it expects will be reduce further through reinsurance.

Zurich Insurance said the decision affirms its policy interpretations.

QBE said that catastrophe reinsurance will limit the net cost of business interruption claims in its UK insurance business to $70 million. It is weighing whether to appeal. (See below for comments from QBE).

Analysts at rating agency AM Best said they expect COVID-19-related BI claims to have a material impact on U.K. commercial property insurers’ 2020 earnings; however the “aggregate solvency of the U.K. non-life insurance sector should remain robust.” AM Best estimates that commercial property premiums account for approximately GBP 7.5 billion of the GBP 50 billion gross premiums written by U.K.-domiciled non-life insurers, and that approximately 10% of commercial property premiums relate to business interruption extensions.

Moody’s said the financial impact on individual insurers should be manageable, net of reinsurance.

Fitch said its ratings of UK non-life insurers are likely to be unaffected by the decision since the amounts likely to be involved appear within ranges already disclosed and considered in its ratings sensitivities.

Lawyers for the policyholders’ Hiscox Action Group said they are writing to Hiscox “demanding immediate interim payments for many clients who are struggling to survive.”

“Clients deserve clarity, and the fact that this case had to take place at all is a rebuke to our industry and the often obscure language we use,” commented Christopher Croft, CEO, London & International Insurance Brokers Association.

There is speculation over possible appeals by insurers but also some doubt. “While some appeals may arise, it is possible that, for the sake of the insurance industry’s reputation, and due to the fact that claims are manageable (especially considering lower claims frequency on other lines of business), the insurers may decide to pay and move on,” analysts at Berenberg Capital Market wrote.

According to Meyer Shields, analyst at Keefe, Bruyette and Woods (KBW), the test case did not discuss the key question in the U.S. of whether COVID-19 constitutes physical damage, rather it focused on whether government actions constituted a “mandatory denial of access.” Shields noted that exposed insurers, especially Hiscox, are trading up today, with “the decision seen as better than potential worst-case scenarios.” Still, Shields wrote, he expects the impacted insurers to appeal the decision, with final resolution still some time away.

The Association of British Insurers said it is important to look ahead so that there is a solution in the event of another pandemic. It favours a public-private partnership for that.

Lloyd’s of London said it welcomes the test case judgement for bringing coverage clarity and said it will “carefully consider” the implications for its customers as well as its impact on the Lloyd’s market, which it said retains less than 2% of the overall UK property SME market.

Some of the reactions to the 162-page ruling:

Association of British Insurers, commented in part:

“Covid-19 and the application of insurance in relation to Business Interruption insurance created a complex situation requiring legal consideration of the many different issues of proximate causation and wording interpretations. That is why, from the outset, we welcomed the FCA intervention in bringing this test case and the ultimate clarity the judgement will bring (once any appeal process is complete).

“We recognise how important this case is for customers and the insurance industry alike and we will study the judgement in detail over the coming days while waiting to see if any of the parties appeal.

“Meanwhile, the outcomes do not prevent individual policyholders from pursuing issues through the courts, or eligible complainants from taking a complaint to the Financial Ombudsman Service.

“Looking forwards, it is important that we have a solution so that customers can be protected in the event of another pandemic. It Is our belief that that a public-private partnership would be the best means. Already in the UK we have been looking at a model called Pandemic Re and many other nations are also considering these types of shared risk models. Pool Re, which is the UK’s answer to terrorism risk, provides a working example of how such a partnership could work in practice.”

Financial Conduct Authority. Christopher Woolard, interim chief executive of the FCA, commented in part:

“Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. 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.

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

‘If any parties do appeal the judgment, we would expect that to be done in as rapid a manner as possible in line with the agreement that we made with insurers at the start of this process. As we have recognised from the start of this case, thousands of small firms and potentially hundreds of thousands of jobs are relying on this.”

The Hiscox Action Group, a 400-member policyholder group participant in the case:

This group said the High Court ruling means that “hundreds of Hiscox Action Group members who were forced to close their premises during the pandemic should now receive an insurance pay out from Hiscox Insurance.” The law firm Mishcon de Reya said it is writing to Hiscox Insurance “demanding immediate interim payments for many clients who are struggling to survive. This is part of a twin track strategy being pursued by the law firm which also includes an expedited arbitration to ensure the matter is resolved as soon as possible.”

Attorney Richard Leedham, the Mishcon de Reya partner representing HAG: “Today’s High Court judgement is a landmark ruling for many thousands of business who are struggling to survive the impact of the pandemic. It’s also very good news for our clients who have led this fight and for whom we are now seeking an immediate interim payment.”

Attorney Richard Leedham from Mishcon de Reya says: “Today’s judgement by the High Court is one of the most significant in recent years and will provide a lifeline for small businesses across the country. We joined the court case as we believed it was vital for businesses to have a voice in the proceedings and we are delighted they have finally been heard. We were delighted to support the FCA and its legal team.”

Mark Killick, a Hiscox Action Group steering committee member: “Today’s judgement represents a huge victory for the Hiscox Action Group. We led this campaign and our stance has been fully vindicated by the Court. The most important thing now is that the insurers accept this ruling and start to pay out rather than embark on a fruitless appeals process that will just cause more suffering for the very policy holders they were meant to protect.”

RSA Insurance, an insurer participant in the test case:

“Our interpretations of some provisions impacting RSA were upheld by the Court and some were not.

“RSA is committed to responding to the wide-ranging impacts of the pandemic in the best interests of our customers and business. Our H1 Interim Report showed that RSA had paid or reserved for c.£57m in claims in relation to COVID-19 losses, as well as participating in industry initiatives to provide support and relief to customers and communities affected in all our territories.

“Based on our initial review, RSA estimates the additional financial impact to RSA of today’s judgment to be approximately £104m on a gross basis across its portfolio of relevant business interruption policies. After the application of our catastrophe reinsurance protection, RSA estimates the impact of this judgment to be around £85m which is in turn expected to reduce further through qualifying as a loss covered by the group-wide aggregate reinsurance programme.

“The court judgment is complex given the breadth of questions posed across the different policy wordings considered. If there are appeals, further legal actions, or other relevant rulings on these or other policy wordings not yet considered, they may impact our assessment of the estimated gross figure upwards or downwards, potentially materially. This, alongside the inherent complexity of business interruption claims more generally, means the financial impact of the judgment will not be fully resolved for some time but, as above, reinsurance protection is expected to apply should the figures increase.”

Hiscox Ltd., an insurer participant in the test case, commented in part:

“The Judgment clarifies that fewer than one third of Hiscox’s 34,000 UK business interruption policies may respond. 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 Judgment 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 Judgment will be assessed on a case-by-case basis as part of the normal insurance loss adjustment process for claims.

“As a result of the Judgment, the Group estimates additional COVID-19 claims arising from business interruption to 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.

“All parties involved now have an opportunity to apply to the Court for permission to appeal some or all of the Judgment to a higher court. The parties may also ask that any appeal proceed directly to the Supreme Court, rather than to the Court of Appeal first, in order to expedite the appeal process. It is expected that a ruling on any such application would be made in October. The outcome of any appeal could impact loss estimates.

“Hiscox recognises these are extremely difficult times for businesses and regrets any contract dispute with customers, which is why it is committed to seeking an expedited resolution through this Industry Test Case. In line with FCA Guidance, Hiscox will communicate an update on the Industry Test Case to relevant policyholders through the appropriate channels.”

Zurich Insurance, Tulsi Naidu, CEO Zurich UK:

“Zurich agreed to participate in the FCA’s test case, which tested a wide range of insurer policy wordings, to help provide certainty to policyholders about their business interruption insurance. The Court’s decision in respect of the Zurich policy wording has confirmed our interpretation and approach under these policies is correct. We are pleased that Zurich’s participation in the process has helped achieve clarity for policyholders across the UK insurance sector.”

Lloyd’s of London:

“Lloyd’s welcomes the FCA’s test case judgement which will bring coverage clarity for many policyholders with certain non-damage business interruption insurance extensions. We will now take the time to carefully consider and respond to the implications of this complex judgement for our customers as well as its impact on the Lloyd’s market, which retains less than 2% of the overall UK property SME market. Our extremely strong capital position ensures that we are well prepared to respond to the financial implications of the High Court’s judgement, and importantly to support our impacted customers.

“Lloyd’s expects to pay out £5 billion in COVID-19 claims to its customers around the world across a wide range of policies, including event cancellation, property, casualty, and credit. The Corporation has also committed a £15m package of support for charitable organisations responding to the pandemic, together with £15 million in seed capital investment to develop a Systemic Risk Centre of Excellence, which aims to better understand, model and provide insurance for systemic catastrophic events. We are also progressing at pace a number of solutions to support insurance industry and government partnerships to fast-track societal and economic recovery and build resilience to future systemic and black swan catastrophic events.”

QBE Insurance, commented in part:

“The court ruled in favour of QBE with respect to two out of three of QBE’s notifiable disease policy wordings examined and in favour of insurers generally with respect to denial of access policy wordings. However, the Court ruled in favour of insureds with respect to one of QBE’s notifiable disease policy wordings and QBE is considering its options to appeal that decision.

“Based on the notified claims affected by the FCA test case and having regard to individual policy sub-limits, QBE’s estimate of its UK business interruption claims exposure is around $170 million before allowing for recoveries under the Group’s catastrophe reinsurance protections.

“Consistent with the Group’s previous announcements, QBE believes that catastrophe reinsurance will limit the net cost of business interruption claims in our UK insurance business to $70 million (which formed part of the $335 million net cost of COVID-19 allowed for in our recently announced 1H20 result).

“The FCA test case decision is highly complex and will take time for the industry to fully consider and for claims to be resolved. All parties involved now have an opportunity to apply to the court for permission to appeal some or all of the ruling with a decision on any such application expected to be made in October. Given the possibility of appeals and further legal action, the estimated gross cost to QBE could increase or decrease, however, the net cost to QBE is not expected to vary.”

British Insurance Brokers’ Association (BIBA):

“COVID-19 and the application of insurance in relation to Business Interruption insurance created a complex situation requiring legal consideration of the many different issues of proximate causation and wording interpretations. That is why, from the outset, we welcomed the FCA intervention in bringing this test case and the ultimate clarity the judgement will bring (once any appeal process is complete).

“We recognise how important this case is for customers and the insurance industry alike and we will study the judgement in detail over the coming days while waiting to see if any of the parties appeal.

“Meanwhile, the outcomes do not prevent individual policyholders from pursuing issues through the courts, or eligible complainants from taking a complaint to the Financial Ombudsman Service.”

London & International Insurance Brokers Association, Christopher Croft, CEO:

“Clients deserve clarity, and the fact that this case had to take place at all is a rebuke to our industry and the often obscure language we use. Customers deserve to understand exactly what it is they are getting in language they recognise.

“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.

“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.”

AM Best, commented in part

“Although COVID-19-related BI claims will have a material impact on UK commercial property insurers’ 2020 earnings, AM Best expects the aggregate solvency of the overall UK non-life insurance sector to remain robust. At year-end 2019, the Solvency II ratio for the combined 100 largest non-life UK insurers stood at around 170%.

“The impact of BI losses on individual insurers’ results and solvency will depend on the nature of business written, the level of reinsurance protection in place and the diversification of earnings.

“A key factor determining the financial impact of the test case ruling on UK insurers will be their ability to make recoveries from reinsurers. The structure of programmes purchased will vary from insurer to insurer, and recoveries will depend on deductibles and limits. Uncertainty surrounds the extent to which COVID-19 claims will aggregate within and across different lines of business for reinsurance purposes. That aggregation will determine whether cover is triggered and if limits in excess of loss contracts are reached.

The definition of the event or occurrence that triggers the reinsurance cover is important. While loss triggers are likely to be a source of dispute, the clarification, as part of the test case, that the COVID-19 pandemic and government and public response form a single cause of a covered loss, is likely to increase insurers’ per event losses.

“The higher an insurer’s per event loss, the more likely it is to make recoveries on its excess of loss reinsurance policies. Dispute risk between insurers and reinsurers is lower where quota share cover is written back-to-back, with the reinsurer committed to following the fortunes of its cedent.”

Moody’s Investors Service, Dominic Simpson, a vice president and senior credit officer:

“The result of the FCA’s business interruption test case is broadly credit negative for UK insurers and reinsurers as policies that cover business interruption from disease and, to some extent, denial of access should pay out. Despite the outcome, the financial impact on individual insurers should be manageable, net of reinsurance. More positively for insurers, most SME business interruption policies are designed primarily to protect property damage interruption, and do not cover pandemic-related claims.”

Fitch Ratings, commented in part:

“The ratings of UK non-life insurers are likely to be unaffected by Tuesday’s High Court judgment on the test case brought by the Financial Conduct Authority (FCA) to help clarify the validity of business interruption (BI) claims related to the coronavirus pandemic. The case focused on a narrow set of policy wordings linked to the applicability of BI coverage. Insurers may now have to pay BI claims originally rejected on the grounds of policy wording. However, based on company estimates made public after the ruling, the amounts likely to be involved appear within ranges already disclosed by the affected insurers and considered by Fitch in its ratings sensitivities.

“BI claims are likely to be one of the main costs from the pandemic for the UK non-life sector, along with claims for event cancellation. They will affect underwriting results for the rest of the year and may not peak until 2021, particularly where litigation is involved. Most BI cover in the UK is provided by London market insurers, including Lloyd’s of London.”

International Underwriting Association, Dave Matcham, chief executive:

“The impact of the COVID-19 crisis on the London company market has been widespread and profound. IUA members have supported their clients, making claims payments across a range of business classes, but most notably on contingency and business interruption policies.

“Where there have been coverage disputes, companies have cooperated fully with the FCA in its legal test case to bring about a resolution as speedily as possible. The court decision provides a degree of certainty for both sides.

“The economic losses brought about by COVID-19 are unprecedented and have raised important questions for risk managers. Insurers are now working with clients and government to ensure that effective preparations are in place for any future pandemics.”

Airmic risk management association, John Ludlow, CEO, commented:

“On behalf of our members, we are pleased with the ruling. 2020 has already been a tough year for business across most sectors, due to COVID, which has been exacerbated by the harsh insurance market. 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.”

Analysts at Berenberg Capital Markets, commented in part:

“Although the ruling overall was in favour of the policyholders, the market will be relieved to have a judgement and early estimates suggest that the claims will be manageable for insurers. There may be some appeals on individual policies and there remains some uncertainty regarding the actual amount and timing of payments; nevertheless, in our view, this clarity will act as a positive for the sector since a catastrophic result has clearly been avoided.

“While some appeals may arise, it is possible that, for the sake of the insurance industry’s reputation, and due to the fact that claims are manageable (especially considering lower claims frequency on other lines of business), the insurers may decide to pay and move on. Any material appeal process is likely to cast further doubt on the industry and provide a headwind to shares from the uncertainty. We note, however, that insurers will be cognisant of the ramifications of accepting such a result and the impact a second wave could have on claims. The aim of this exercise was always to expedite the claims process and provide clarity for policyholders, and hence any appeal process would likely receive a ruling in October 2020.

“Hiscox: The high court ruling alleviates some of the uncertainty regarding Hiscox’s impact from the case which was one of the main reasons the shares have underperformed ytd, although it will not repair the reputational damage.

“RSA: RSA’s discussions with its lead reinsurers are positive, with both parties in agreement that their group aggregate reinsurance programme will be triggered. … RSA continues to benefit from lower claims frequency in various lines during the pandemic and hence the impact of the court case and lower claims frequency is neutral; this means RSA expects to meet consensus underlying earnings for the year.”