Major UK Ruling on Business Insurance for COVID-19 Claims Expected Tuesday

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Insurers battered by coronavirus are about to find out how much worse the damage could get.

A London court is set to rule Tuesday in a case involving about 370,000 policyholders, companies including Zurich Insurance Group AG and Hiscox Ltd. and potentially billions of pounds of claims. The UK markets watchdog brought the case after small businesses struggled to get compensation from insurers for losses suffered during lockdown.

“Insurers and regulators around the world will be looking at this case,” said Bloomberg Intelligence analyst Sarah Jane Mahmud. The regulator “has never taken a step like this; it’s completely unprecedented.”

The Financial Conduct Authority is seeking legal clarity on disputed language in so-called business-interruption policies to help determine when payouts should be made. The ruling will be binding for the eight insurers named in the case, and could affect others that have policies containing the wordings, including Allianz SE, American International Group Inc. and Chubb Ltd. It will also provide guidance for interpreting similar clauses in future court cases, according to the FCA.

The London case is one of thousands of legal battles around the world centered on business-interruption policies that insurers contend don’t cover pandemics. In the U.S., New York retailer Century 21 Stores sued several of its insurance providers over the failure to pay about $175 million in claims, money the chain insists could have helped it avoid bankruptcy. In France, AXA SA agreed to cover losses sustained by several hundred restaurants after losing a court case brought by one owner.

Given the number of policyholders potentially affected, and assuming each makes a claim of as much as 20,000 pounds ($25,568), the total cost could stretch to more than 7 billion pounds, Deutsche Bank AG analysts wrote in a Sept. 8 note.

The insurers may not face the biggest burden, however, as long as the reinsurance policies they’ve bought to reduce their risks pay out, according to the analysts. “It is actually the reinsurers that potentially have more downside, while the UK primary companies should actually benefit from any clearing of the air,” they wrote.

The case centers on sample policy wordings that capture most of the key issues that could be in dispute, according to the FCA. Given this approach, it “may initially be difficult to assess whether the overall outcome is a net positive or negative for the insurers,” the Deutsche Bank analysts wrote.

The court ruling, which can be appealed, also probably won’t be the last word.

“Many businesses’ insurers say that their policies differ slightly but materially from the test case, and there will be others who face challenges from insurers when it comes to proving and quantifying their loss,” said Samantha Holland, head of insurance at law firm Gowling WLG. “It’s therefore realistic to expect a slew of hard-fought disputes with insurers and a continuing period of uncertainty for policyholders.”

–With assistance from Lukas Strobl.

Photo: A woman walks past a shop sign requesting customers “apply within” on August 05, 2020 in London, United Kingdom. Many UK businesses announced job losses due to the effects of the Coronavirus Pandemic and Lockdown. (Photo by Leon Neal/Getty Images)

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