Initial Reactions to UK Supreme Court’s Ruling on Business Interruption Claims

By | January 15, 2021

Insurers, policyholders and industry observers have issued comments on the UK Supreme Court’s ruling that insurers should pay small businesses for many business interruption claims from the COVID-19 lockdowns.

The UK Supreme Court dismissed appeals by six insurers – Hiscox, RSA, QBE, Argenta, Arch and MS Amline – determining that “many thousands of policyholders will now have their claims for coronavirus-related business interruption losses paid.” The insurers had argued that business interruption policies contained pandemic exclusions and should not be covered. No further appeals will be allowed.

The full judgment is available on the Supreme Court website.

Here are some of the initial reactions to the Supreme Court ruling:

Hiscox

Hiscox estimated its 2020 COVID-19-related business interruption claims had risen by $48 million as a result of the ruling, reaching a total for the year of approximately £136 million (US$186 million). For this year, business interruption claims to the end of March 2021 are estimated at $20 million, a Hiscox representative said. The insurer welcomed the “clarity” provided by the final judgment, saying it has begun to pay the claims. Hiscox noted that fewer than one-third of Hiscox’s 34,000 UK business Interruption policies are affected by the decision.

Moody’s Investors Service

“Today’s judgment in the FCA’s business interruption insurance test case is credit negative for UK insurers and reinsurers as the Supreme Court has found in favor of policyholders,” said Dominic Simpson, a vice president at Moody’s Investors Service in London, in a statement, noting that 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. 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,” he added.

Fitch Ratings

Fitch Ratings said the ratings of UK non-life insurers are likely to be unaffected by the Supreme Court ruling. “The ruling largely went in favor of policyholders but the ultimate claims costs should still be within Fitch’s rating sensitivities for the insurers affected,” said Fitch, noting that updated claims estimates published by insurers in response to the ruling suggest modest increases to previous estimates. For example, Fitch said, Hiscox will add US$48 million of reserves (net of reinsurance) to the US$130 million it had in place at the end of the third quarter of 2020 for BI claims. “Its total BI reserves, net of reinsurance, will now equate to 7% of its total end-1H20 equity of US$2.4 billion.”

The Association of British Insurers

“The insurance industry expects to pay out over £1.8 billion [$2.5 billion] in COVID-19 related claims across a range of products, including business interruption policies. Customers who have made claims that are affected by the test case will be contacted by their insurer to discuss what the judgment means for their claim,” said Huw Evans, director general of the Association of British Insurers (ABI).

“All valid claims will be settled as soon as possible and in many cases the process of settling claims has begun. Some payments have already been made where valid business interruption claims have not been impacted by the test case ruling,” he added.

“We recognize this has been a particularly difficult time for many small businesses and naturally regret the COVID-19 restrictions have led to disputes with some customers. We will continue to work together as an industry to ensure customers have the clarity they need when it comes to what they can expect from their business insurance policies.”

Airmic

“The Supreme Court’s landmark ruling today on the FCA’s business interruption (BI) insurance case for COVID-19 claims is one of the most important legal issues of the last decade. Affected policyholders will welcome the ruling to unanimously dismiss insurers’ appeals and to substantially allow all four of the FCA’s appeals in favour of policyholders,” said John Ludlow, CEO of Airmic, the UK risk management association..

“To provide some scale to the significance of this morning’s Supreme Court ruling, the FCA has estimated that some 370,000 policyholders would be affected by today’s Supreme Court decision, paving the way for up to £1.2 billion [$1.6 billion] in BI claims payments, across 700 policy types, from 60 insurers,” commented Julia Graham, Airmic’s deputy CEO and technical director.

Hiscox Action Group

“The judgment should be a massive boost to all businesses reeling from a third lockdown who can now demand their claims are paid,” said Richard Leedham, a partner at law firm Mishcon de Reya who represents the Hiscox Action Group. Leedham was quoted in an article published by Reuters.

“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,” he added in the article.

Reed Smith, UK Law Firm

“It can be said, without fear of hyperbole, that in principle at least this really is a catastrophic outcome for insurers. The finding on causation will have very significant consequences for business interruption policies and many other types of policy. If it weren’t for remote working, we would likely have heard the collective groan of insurers as the Supreme Court issued its verdict,” commented Mark Pring, partner at Reed Smith, a UK law firm.

“Lord Hamblen, handing down the Judgment for the Supreme Court this morning, reminded us that potentially up to 370,000 policyholders would be affected by this Judgment. The key headline is that the appeals of the FCA and Hiscox Action Group were substantially allowed and the Insurers’ appeals were largely dismissed,” Pring added.

“The FCA has certainly made life easier by throwing its weight behind relevant policyholders, ensuring that they don’t have to conduct individual battles with insurers, but it is still incumbent on businesses to demonstrate the losses suffered were caused (broadly, and subject to policy language) by the pandemic. This is no easy task, even if the FCA and Supreme Court have sought to make the burden of proof easier,” he said.

“Prior to Judgment today, insurers had been warned not to damage the reputation of the sector by continuing to challenge claims that are backed by some evidence of financial loss in reliance on complex technicalities. The message to insurers is now very clear, return to your offices and, where some evidence of a loss can be provided, prepare to pay out.”

London & International Insurance Brokers’ Association (LIIBA)

“That this decision delivers final clarity on the issue of business interruption is to be welcomed. The FCA is to be congratulated on the speed with which the test case process has allowed us to reach this point. But clients deserve this transparency at the point of purchase – not after a legal battle,” emphasized Christopher Croft, CEO of the London & International Insurance Brokers’ Association (LIIBA).

“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. 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,” Croft continued.

Federation of Small Businesses (FSB)

“Today’s judgement is a big victory. It cements the high court’s decision to grant businesses left on the brink the insurance pay-outs they are rightfully owed. 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,” said Mike Cherry, National Chair of the Federation of Small Businesses (FSB).

“While this is good news, and while the law has to follow procedure, 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,” he said, explaining that businesses deserve to be protected in a timely way but have been “failed by their insurers.”

“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,” he continued. “Small businesses contribute trillions to the economy. The Financial Conduct Authority (FCA) was right to argue that disease or denial of access clauses within interruption policies should trigger pay-outs in the event of coronavirus-linked disruption. We are hugely grateful for its work in this space.”

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