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 businesses by finding in favor of its policyholder arguments on the majority of key issues, while insurers point out they won some parts, too.

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.

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 favors a public-private partnership for that.

Reactions to the COVID-19 BI Ruling

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, 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.”

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.”

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.”

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 cognizant 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

“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.”

*This story ran previously in our sister publication Insurance Journal.