In mid-January 2021, the UK Supreme Court ruled in favour of the UK Financial Conduct Authority (FCA) appeal made on behalf of policyholders with regards to BI insurance. The FCA appeal aimed to ‘remove any of the roadblocks’ to claims by policyholders who suffered substantial loss and distress to businesses due to the coronavirus.
As reported by the FCA itself, the Supreme Court has ‘substantially allowed the FCA’s appeal on behalf of policyholders’, which means that many thousands of policyholders will have their claims for coronavirus-related BI losses paid – likely to amount to billions of pounds for UK insurers.
FCA to work with insurers to get claims resolved
“We will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible,” the FCA wrote in a statement issued on its website. “Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.
“As we have recognised from the start of this case, tens of thousands of small firms and potentially hundreds of thousands of jobs are relying on this. We are grateful to the Supreme Court for delivering the judgment quickly. The speed with which it was reached reflects well on all parties.”
Stephen Netherway, Partner at UK-based law firm Devonshires Solicitors LLP, noted that the Supreme Court ruling does not mean that every BI policy must pay out for Covid losses. “Some polices are very specific that cover is only provided for named infectious diseases and those do not name Covid. The judgment does not change the position that these polices do not pay for Covid losses, nor other policies with more specific wording.”
Re-examining policy language
Commenting on what this ruling means for the insurance industry going forward, Seth Rachlin, Global Insurance Industry Leader at Capgemini, a global technology and consulting firm, reasoned that BI cover is meant to cover, for example, a factory forced to close as a result of storm damage, a store recovering from a fire, or some other event that causes businesses to lose revenue due to the subsequent inability to use their premises. “But what happens when the event is a virus like Covid-19, which, although it does no physical damage to a property, renders it unusable?” Rachlin mused. “Such questions force insurers, policyholders and their attorneys to resort to the subtle examination of policy language and ultimately to the courts.”
He continued: “Though early court rulings in both the US and UK tended to favour insurers and exempt Covid-19 losses from the duty to pay, the tide has most certainly shifted. A few key rulings in US lower courts foreshadowed the most recent ruling by the UK Supreme Court. Insurers will be on the hook for a significant if not devastating amount of business interruption losses given the sheer number of businesses across the globe who have suffered due to Covid-19.”
Implications of ruling extends beyond Covid and disease claims
Netherway notes that the Supreme Court’s ruling is not specific to Covid or disease claims. “We will see this referenced in other BI claims, particularly property damage claims, to widen coverage for the benefit of policyholders where there may be in fact many connected causes of loss,” he said. “Hitherto, it could be significant to get a pay-out or not for a claim if any interdependent causes were not considered to be an insured risk, but this decision means this may all now be legally irrelevant provided no interconnected, albeit uninsured cause, is in fact excluded for cover under the policy.”
Netherway adds that UK’s Enterprise Act is a ‘ticking time bomb’ for insurers: “Where claims payments have been unreasonably delayed, then a further damages claim by policyholders can be brought on top of the claim payment. The pandemic is almost a paradigm example for the Act’s intervention: if a business has failed because of a delay in claims payment, then the Act should permit damages to be claimed for that business failure.”
BI ruling exposes the larger, industry-wide issue of the protection gap
Rachlin predicts that the long-term impact to insurers’ balance sheets will be significant. He expects that there will be ‘a significant increase in rates for such insurance, as well as a profound tightening of policy language’ to address the wake of Covid-19. “This will inevitably force governments and other new reinsurance pooling-type arrangements to step in – as they did in the aftermath of 9/11 with respect to terrorism coverage – to close what is certain to be seen as a significant ‘protection gap’,” he added.