Top insurance companies, ordered by Britain’s highest court to pay thousands of small businesses millions of pounds in claims for COVID-19 disruption, are facing a battle with reinsurers over who should foot the bill, industry sources said.

Bars, beauty parlors, nightclubs and other small companies in January won the right to business interruption insurance payments after senior judges ruled many insurance policies should cover losses caused by lockdowns in a test case brought by Britain’s market watchdog.

But senior insurance executives said the judgment, which affects 60 insurers, has not helped to clarify whether insurers or their reinsurers — companies which provide financial protection to the industry — are on the hook for payments.

“We’re left to fight it out,” one senior insurance executive told Reuters.

“We’d expect reinsurers to take their share, but there’s always a bit of pushback – that’s how (reinsurers) are programmed.”

Britain’s handling of this case and any subsequent wrangling with reinsurers is being watched by investors around the world, where disputes between insurers and businesses over pandemic- related claims have in many cases yet to be resolved.

In the United States, for example, pandemic-hit businesses have filed nearly 1,500 individual lawsuits. Insurers have won a large chunk of cases so far.

Steve McGill, CEO of insurance broker McGill and Partners, said interpreting the wording of these complex policies often boils down to how insurers and reinsurers view “shades of grey.”

The Association of British Insurers said insurers are paying two billion pounds ($2.79 billion) for undisputed business interruption claims in 2020. But they could face billions more in claims after the Supreme Court judgment, industry sources said.

Some reinsurance contract clauses will limit the amount insurers can claw back from reinsurers, investment management firm Tangency Capital said in a recent investor letter, meaning that “business interruption losses will primarily be borne by insurers.”

Tail Risk?

The British case revolved around leading insurers such as Hiscox, RSA, QBE, Argenta, Arch and MS Amlin.

Big reinsurers include Munich Re, Swiss Re and syndicates in the Lloyd’s of London market.

Hiscox has already raised its 2020 estimate for pandemic-related business interruption by $48 million net of reinsurance, bringing total claims to nearly $190 million.

RSA has said that after applying catastrophe reinsurance protection, it estimates the Supreme Court judgment would cost it about 85 million pounds — before applying a further group-wide aggregate reinsurance program. Chief Executive Stephen Hester told Reuters last month that the company was not in any dispute with reinsurers.

MS Amlin, Argenta, Hiscox and QBE declined to comment. Arch did not respond to a request for comment.

Reinsurer Munich Re said it would not question valid claims, while Lloyd’s welcomed clarity for policyholders. Swiss Re declined to comment.

But investors remain concerned about potential disputes with reinsurers, said Colm Kelly, co-head of European insurance equity research at UBS.

.”..investors have asked the question – is there a tail risk, however small, that some reinsurers may contest payments?” he told Reuters. He also said: “There are small reinsurers operating in Europe that could have a solvency event if they had to cover claims of that size and nature.”

Under European Union solvency rules, insurers have to maintain certain levels of capital.

Damages

In the meantime, insurers have started to make payments or settlement offers. While one East London cafe said it had been offered just 13 pounds, other businesses are expecting tens of thousands in pay-outs.

Businesses have had to wait for 10 months for many insurance claims to be declared valid — piling on debts that have threatened their futures.

Ralph Fearnhead, legal director at law firm Mishcon de Reya, which represented some policyholders in the UK case, said subsequent claims for damages due to late payment of insurance could dwarf the size of an original claim if businesses had to make staff redundant or went into liquidation. And reinsurers are likely to question such claims.

“Where it’s a failure of an insurer to act in reasonable time, it’s hard to see that reinsurers would willingly pick up additional damages,” he said.

Disputes may not lead to further open court appearances, as disagreements between insurers and reinsurers are often settled in private arbitration hearings.

These types of hearings are already taking place in the so-called event cancellation market, after global sporting and music events and conferences were canceled due to the pandemic. ($1 = 0.7167 pounds)