Last year, the United Kingdom's Financial Conduct Authority filed a test case on behalf of commercial policyholders against various insurers regarding COVID – 19 business interruption claims. The FCA case, which was mainly found for policyholders, has implications and implications for the global insurance industry.
The FCA case, which went directly to the UK Supreme Court, provides some clarity on coverage, and this clarity will be reflected in insurances in the future. This will help policyholders make informed decisions to cover the risk of infectious diseases. although it now seems that the decision may actually come out of their hands.
Many insurance executives have argued that systemic risks, such as global pandemics, may be more appropriate for governments to take rather than insurance companies. If such coverage were to be provided by the insurance industry, pricing would become a problem. Insurers are honest about decisions to exclude pandemic coverage from future policies, for many it was still always the intention. Even specialized policies for uninjured business interruptions rule out pandemics.
Business interruption is complicated
U.K. The FCA case was groundbreaking ̵
The most important coverage extension clauses reviewed by the Court were:
- Infectious disease. ] Combined (or hybrid) whereby cover is provided for denial of access (on behalf of a civil authority) due to infectious disease.
There were some important results that have far-reaching implications for future insurance coverage and claims around the world, including:
Extension vs exclusion
Extensions explicitly provided now take precedence over general exceptions. In the future, insurers must make the intention clear and link these exceptions directly to specific extension clauses. 19659002] The decision in the FCA case violated a precedent in the 2010 Orient-Express Hotels Limited v. Assicurazioni Generali Spa case, although some of the judgments were common to both cases. In Orient-Express, a hotel damage occurred in New Orleans after Hurricanes Rita and Katrina in 2005. The disputed loss of business interruption is calculated by comparing expected revenue with actual revenue. Expected revenue should reflect business trends in a "but for" scenario – the FCA case referred to this as "counterfactual".
The Orient-Express decision stated that expected revenue would be "but for the damages" with a strict interpretation of the wording (instead of "but for" the hurricane). With minimal damage, this claim left much lower. It assumed that the hotel and its expected revenue would in any case have been affected by the hurricane, whether the hotel was damaged or not. The trend therefore reflected the devastation already created by the hurricane and expected revenues were much lower as a result.
The FCA case found that expected revenue should actually be "but for" the insured risk (not the damage). Orient-Express losses should have been much higher; expected revenue should have been "but for" the hurricane. In the FCA case, it was the "but for" the disease, which removed the impact of the pandemic and lockout from expected revenue. This increases the calculation of loss massively. A decision that now provides clarity for everyone involved.
Losses before triggering
If the impact of the insured risk is obvious in the results of operations before the insurance is triggered, that trend should not be included in the calculation of expected revenues in counter-facts. A logical decision, because the purpose of the insurance is to put the insured back in the position they would have been before the loss.
Some insurers were found to have robust exemptions, so no coverage was granted. Pure denial of access without mentioning illness can be covered depending on the category of activity, but even if it is covered, the losses would be minimal. The case referred to "what was covered but not causal versus what was causative but not covered." In essence, the insured risk – denial of access to premises – was not the cause of the loss. Any calculation of expected income in the counterfactual would be "but for" the insured risk; all other issues would have affected the business in any case. Expected revenue would therefore be the same as actual revenue. in other words, there would be no loss.
Impact on UK policyholders
For many companies, their insurance policies did not have an exemption for pandemic risks, in which case insurers would be liable, even if the intention was only to cover business interruptions related to physical injury. Clarity in coverage was achieved for those with infectious disease disease supplement clauses or hybrid extensions. For those who do not have policies that match the test case, disputes continue. The Swedish Competition Authority continues to put pressure on insurers. it continues to publish data on the number of claims that are not resolved for each insurer.
It is worth noting that this is only the beginning of the damage process. We are now in the "quantification machinery" phase where forensic auditors are taking the step to determine the expected revenues for these companies and quantify the losses.
Consequences for the United States Disputes
In the United States, policies may include a communicable disease claim bearing a sublimity significantly less than the actual loss. By and large, US disputes have taken place on a case-by-case basis, with most courts ruling on the benefit of insurers. Some complainants have tried to centralize the solution to business interruptions in multi-district disputes. However, the MDL panels have largely rejected the plaintiff's attempts to consolidate such cases, finding that there was nothing in common between the different defendants and that the cases involved different insurances with different coverage provisions and exceptions. UK law, the world has noted and similar principles are being considered elsewhere, including the US Orient-Express case involved a British company and British law but a US website, so it has always been of interest, and its termination is important for insurers globally.
Other issues continue to arise. For example, we have seen examples where there is a lack of uniformity in the wording between insurers about the same risk, which resulted in only part of the damage being paid, as some insurers had an exclusion in place and others did not. A situation that may seem bizarre to everyone outside the industry. We have also seen disputes related to inconsistencies between wordings for reinsurance purposes, as there may be different wordings and different exceptions.
Many questions remain, the big one is: "Does the impact of the coronavirus cause physical harm?" The answer so far is no in most places around the world, where courts accept that property damage policies remain fenced for material damage and tangible dangers. Some US courts have ruled that coverage may exist, but the cases are complex. Business breaks are never easy.