Insurers narrowly avoided ‘catastrophic’ Covid-19 BI losses: DBRS Morningstar

Buyers are likely to see tighter policy wordings and the promise of greater contract certainty following high-profile legal challenges to business insurance (BI) policies for Covid-19 claims, according to analyst DBRS Morningstar.

In a briefing note, DBRS said BI losses from Covid-19 claims “could have been catastrophic”, but in the US at least, legal disputes have largely fallen in favour of insurers.

“Some small players in the industry could have found themselves facing liquidation, or significant capital depletion at the very least, while some companies’ credit ratings could have been adversely affected,” said Victor Adesanya, vice-president, insurance at DBRS Morningstar.

DBRS said governments or industry regulators could intervene and force insurers to pay claims where insurance policies, not limited to BI, are not clear enough. That happened with the BI Covid-19 test case in the UK, which was brought by the Financial Conduct Authority, and in Australia where one of two test cases fell more in favour of policyholders after the cases unpicked ambiguous policy wording for non-damage BI claims.

“We expect that insurers that faced adverse court decisions, or test cases as observed in the UK and Australia, will move quickly to tighten their policy wording. Insurers in general should review their policy wording regularly to avoid ambiguity, costly litigation and regulatory intervention,” Adesanya said.

US insurers were largely saved in the courts by exclusions inserted in response to severe acute respiratory syndrome, known as SARS, back in 2002/2003, the analyst said. “US state and federal court rulings on coronavirus-related BI claims have been overwhelmingly in favour of insurers, but outcomes have been less favourable for insurers in other jurisdictions,” the briefing noted. “The revised policy wording has allowed insurance companies to avoid massive payouts to settle BI claims resulting from the coronavirus pandemic.”

Australian insurers in particular were caught out by not keep pacing with the country’s laws, with many insurers referencing Australia’s Quarantine Act, which dates back to 1908, in their policy wording. “This was an oversight by the industry and shows the importance of keeping policy wording up to date to reflect existing rules and regulations,” DBRS added.