It’s here – the moment that the insurance industry and consumers have been waiting for since the early days of the Covid-19 pandemic – the final ruling on the appeal of the Financial Conduct Authority (FCA)’s business interruption case in the UK. It’s a ruling that is likely to have major repercussions for the insurance industry internationally – and it didn’t go insurers’ way.
In its judgment, the Supreme Court chose to substantially allowing the FCA’s and the Hiscox Action Group (HAG)’s appeal and dismissed insurers’ appeals.
The Supreme Court noted that the case was brought forward by the FCA to appeal certain issues on which it did not succeed in the High Court cases, along with HAG. Six insurance companies also appealed the decision of the High Court on other issues and also responded to the FCA’s appeal. The insurers were Arch Insurance (UK) Limited, Argenta Syndicate Management Limited, Hiscox Insurance Company Limited, MS Amlin Underwriting Limited, QBE UK Limited and Royal & Sun Alliance Insurance Plc (RSA). Zurich Insurance Plc, was also a respondent to the FCA’s appeal, but did not separately appeal the decision of the court.
The court addressed the issues arising on the appeals of the FCA with respect to six areas:
1, The interpretation of “disease clauses”
2. The interruption of “prevention of access” clauses
3. The question of what causal link must be shown between business interruption losses and the occurrence of a notifiable disease
4. The effect of “trends clauses”
5. The significance in quantifying business interruption losses of effects of the pandemic on the business which occurred before the cover was triggered
6. In relation to causation and the interpretation of trends clauses, the status of the decision of the Commercial Court in Orient-Express Hotels Limited v Assicurazioni Generali SpA (trading as Generali Global Risk)
Commenting on the fact that the Supreme Court has backed policyholders in the FCA test case judgment, Richard Leedham, partner at Mishcon de Reya, the firm which represents the Hiscox Action Group, said he is glad the court has found that the vast majority of policyholders of non-property damage BI cover will have cover for their business interruption losses caused by the national response of Government to Covid-19.
“This includes most of the members of the Hiscox Action Group, whom we represented in the case,” he said, “and RSA and now all QBE policyholders whom we represented at first instance through my partner Sonia Campbell and Hospitality Insurance Group Action.”
He cited this as recognition by the Supreme Court that, when this cover was needed most by thousands of UK businesses, insurers did not have the right to argue that coverage was only applicable where narrow local restrictions were in place or to deny claims because the cover had not been intended to be provided, or because the interruption and losses would have occurred in any event.
“The judgment should be a massive boost to all businesses reeling from a third lockdown who can now demand their claims are paid,” Leedham said. “The hope and expectation of our clients is that the claim adjustment process starts immediately and that insurers will not continue to cause further distress by further unnecessary delay.”
Meanwhile, Manoj Vaghela, partner at Charles Russell Speechlys noted the impact of Covid-19 on businesses and said today’s ruling helps signal some light at the end of the tunnel.
“Although insurers argued that you could not simply rewrite the insurance contract to expand the scope of indemnity, it is a relief to see that the Supreme Court has shown a willingness to develop a new line of law on this occasion to support businesses,” Vaghela said. “In practical terms, this allows businesses to recover losses caused by Covid-19 cases within, for example, a certain radius of their premises even if it would still have suffered loss of turnover because of Covid cases outside of that area,”
Paul Smethurst, partner and forensic investigation specialist at accountancy firm, Menzies LLP, highlighted that, while today’s Supreme Court ruling provides clarity for many claimants, it is unlikely to provide a clear-cut resolution for all.
“There are still a number of untested issues,” he said, “which could give rise to further litigation. For example, the question of aggregation and whether insurers should accept that the disruption caused by the pandemic is one event or more.”
This ruling is a landmark decision allowing policy holders to claim BI losses without property damage. Insurers will react by an unprecedented increase in premium to stabilise their liquidity after absorbing these unreserved losses.
I am curious as to whether this issue is being pursued in our local legal system. If not, then possibly because of the perception of insurers. Brokers and their clients out there may wish to test our legal system to set precedent, because adjusters will strictly follow the contract unless there is legal backing to support a contrary view.
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When the first wave of corona disease cane to light, I had suspected that insurers may not be able to decline all BI losses arising from the extension to the policy covering on this type of loss. It is difficult to forecast the effect on BI underwriting generally, but one thing is certain. A rise in premium is likely to take place and most probably the wordings of policy coverage looked into. Covid is a new development and must on its own introduce new underwriting ideas. A big underwriting job for the experts to handle to ensure uninterrupted business flow.
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