UK Supreme Court judgement disappoints insurers, as CII warns of 'huge ramifications' for industry
After ten months of uncertainty the UK Supreme Court has delivered its final verdict that insurers must pay out billions in business interruption (BI) claims to companies forced to close during the COVID-19 pandemic lockdown, ruling in favour of the Financial Conduct Authority (FCA) in a landmark case. Insurers and industry bodies have shared their reactions to the judgement with some warning that it could have "huge ramifications" for insurance beyond BI.
Specialist re/insurer Hiscox, which participated in the UK insurance industry test case alongside seven other insurers, has responded to the judgment, noting that it has added a further $48 million net of reinsurance to 2020 COVID-19 estimate for business interruption, and started the claims settlement process.
Hiscox said fewer than one third of its 34,000 UK BI policies may respond as a result of the judgement. "The Supreme Court largely confirms the outcome of the High Court's ruling that, except in rare circumstances, cover is restricted to Hiscox policyholders who were mandatorily closed."
"As previously stated, Hiscox's exposure to potential business interruption claims arising from further UK government restrictions to contain the spread of COVID-19 has been running off at approximately 8% per month from June 2020, with residual exposure to be fully run off by the end of June 2021," the company said in a statement. "Following the Judgment, the Group estimates exposure to restrictions already announced in 2021 at less than $20 million if restrictions extend to the end of March."
The test case was brought by the FCA to resolve the lack of clarity and certainty around the wordings in BI policies relating to coronavirus pandemic claims, for both the policyholders and the insurance industry. However, Chartered Insurance Institute's (CII's) Matt Connell highlights that the judgment dismissing the insurers’ case could have potential long-term ramifications that needs to be looked at.
“This pandemic has had a disastrous effect on our society, our way of life and our economy, so I genuinely hope this will provide a conclusion to a difficult journey many people and businesses have had to experience over the last year,” said Connell, director of policy and public affairs of CII, warning that the “judgement will have huge ramifications for insurance beyond business interruption and it is important this is also looked at as openly as possible.”
“The CII has long discussed the importance of trust and confidence in insurance and we believe both can be restored if this process remains open and transparent to the public,” he added.
The message was echoed by Christopher Croft, CEO of the London & International Insurance Brokers' Association (LIIBA), who argued that “clients deserve this transparency at the point of purchase – not after a legal battle”.
“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,” said Croft.
“Everyone in the insurance value chain needs to be committed to ensuring that customers understand exactly what it is they are getting, in language they recognise and presented in a way which makes sense to them.”
Clive O’Connell, partner and head of insurance and reinsurance at London-based law firm McCarthy Denning, welcomed the judgement, noting that the FCA played a vital role in achieving this clarity and eliminated years of costly litigation and uncertainty.
“The judgement answers, once and for all, the question of the impact that a pandemic, whose nature and effect were not known to those that drafted policies or those that sold or bought them, has had on those policies. While the courts have not examined every possible wording, the sample is sufficient to allow everyone to gain an understanding of just about all policies,” said O’Connell, adding that the "focus will now turn to reinsurance recoveries and potential claims against brokers by policyholders whose policies have not responded.”
Federation of Small Businesses (FSB) National chair Mike Cherry hailed the ruling as a “big victory” for small businesses that he said contribute trillions to the economy and deserve to be protected.
“For many, it has been a long and difficult road to get to this stage so this will bring clarity and hope to the thousands of firms which have been left in financial limbo for almost a year," he said. “It’s disappointing that so many small businesses have had to wait to get the money they desperately need under policies they believed were there to protect them, policies they bought in good faith.”
“They have been failed by their insurers and are now trying to make up for lost time,” Cherry added. “Providers must now pay-out quickly, and consider the steps they can take to progress these claims in a swift and seamless manner. Any paperwork required of claimants shouldn’t be onerous or time-consuming.”
Meanwhile, insurance ratings agency Moody's has said that today’s judgment is "credit negative for UK insurers and reinsurers".
“Despite the outcome, the financial impact of the judgment on individual insurers should be manageable, net of reinsurance. However, precedents have been set which could widen the circumstances in which policyholders make future claims,” it said.
“More positively for insurers, most SME business interruption policies are designed primarily to protect property damage interruption, and do not cover pandemic-related claims, and the clarity provided by the judgment will help end damaging disputes with clients,” Moody's added.
