Guarded insurer response to FCA ruling suggests appeal is likely

The UK’s insurance industry representative associations and Lloyd’s have understandably issued a more guarded response to the High Court ruling on business interruption (BI) cover in response to the Covid-19 pandemic than Airmic and the broker associations, because it is generally regarded as being in favour of policyholders.

The Association of British Insurers (ABI), the International Underwriting Association (IUA) and Lloyd’s all said that clarity and avoidance of dispute is always a good thing and stressed the support that the sector has given to policyholders during the pandemic, despite it being heavily criticised by some for failing to respond adequately.

The ABI’s response strongly hinted that the FCA ruling would be appealed, meaning that this will not be an end to the matter and true clarity and certainty has not actually been reached.

The IUA and Lloyd’s agreed with the British Insurance Brokers Association that the whole matter stresses how important it is for the whole sector to work with government to design a workable public-backed insurance mechanism to deal with future health crises that the sector cannot cover alone.

“Insurers have supported this fast-track court process led by the Financial Conduct Authority (FCA) to help bring clarity for customers, and we welcome the speed with which the court has delivered a ruling. The judgment divides evenly between insurers and policyholders on the main issues. The national lockdown was an unprecedented situation that posed understandable questions of interpretation for some business insurance contracts,” said Huw Evans, director-general of the ABI.

“Insurers always regret any contract dispute with their customers and will continue to reflect on feedback from recent events. We recognise this continues to be a difficult time for many businesses, small and large, and for society as a whole. That is why insurers have made a range of commitments to help both businesses and individual customers through the crisis and why the industry expects to pay out over £1.7bn in Covid-19 claims,” he continued.

“This is a complex judgment spanning 162 pages and 19 policy wordings, and it will take a little time for those involved in the court case to understand what it means and consider any appeals. Individual insurers will be analysing the judgment, engaging with the regulator, taking account of the appeal process and keeping their customers informed in the period ahead,” concluded Mr Evans.

Dave Matcham, chief executive of the IUA, said: “The impact of the Covid-19 crisis on the London company market has been widespread and profound. IUA members have supported their clients, making claims payments across a range of business classes, but most notably on contingency and business interruption policies.

“Where there have been coverage disputes, companies have cooperated fully with the FCA in its legal test case to bring about a resolution as speedily as possible. The court decision provides a degree of certainty for both sides.

“The economic losses brought about by Covid-19 are unprecedented and have raised important questions for risk managers. Insurers are now working with clients and government to ensure that effective preparations are in place for any future pandemics.”

Lloyd’s said that it welcomes the FCA’s test case judgment because it brings coverage clarity for many policyholders with certain non-damage business interruption insurance extensions.

“We will now take the time to carefully consider and respond to the implications of this complex judgment for our customers, as well as its impact on the Lloyd’s market, which retains less than 2% of the overall UK property SME market. Our extremely strong capital position ensures that we are well prepared to respond to the financial implications of the High Court’s judgment, and importantly to support our impacted customers,” it stressed.

Lloyd’s said that it expects to pay out £5bn in Covid-19 claims to its customers around the world across a wide range of policies, including event cancellation, property, casualty and credit. It added that the corporation has also committed a £15m package of support for charitable organisations responding to the pandemic, together with £15m in seed capital investment to develop a Systemic Risk Centre of Excellence, which aims to better understand, model and provide insurance for systemic catastrophic events.

“We are also progressing at pace a number of solutions to support insurance industry and government partnerships to fast-track societal and economic recovery and build resilience to future systemic and ‘black swan’ catastrophic events,” concluded the Lloyd’s statement.