The U.K. Supreme Court's Jan. 15 ruling on the country's business interruption test case was a victory for policyholders at the expense of insurers. But while the test case may have concluded, the challenges for both parties look to be far from over.
"It would be wrong to think this is the end," said Joe Bryant, partner at law firm Beale & Co, in an interview. "There is still plenty of mileage in this one yet."
The test case was brought by the U.K.'s Financial Conduct Authority, or FCA, to clear up disputes over coronavirus-related business interruption claims. It originally involved eight insurers, with the FCA arguing the policyholders' position for the purposes of the case. Six insurers, the FCA and one of the policyholder groups appealed the High Court's Sept. 15 ruling.
The resulting Supreme Court judgment "comes out very much in favor of policyholders and improves the situation [for policyholders] considerably from the High Court decision," Aaron Le Marquer, a partner at Fenchurch Law, said in an interview.
A blow to insurers
The High Court split the business interruption wordings into three categories: those which could provide cover for infectious disease, those which could provide cover for prevention of access to premises and hybrid wordings. The Supreme Court retained the favorable outcome for policyholders on disease wordings, which the High Court had determined would largely pay out, and also lowered the threshold for claims under prevention of access and hybrid wordings. The Supreme Court deemed the High Court's proclamation that these could only be triggered by orders to close that had the force of law as "too narrow."
The Supreme Court also rejected the High Court's finding that insurers could take coronavirus-related downturns in business that occurred before coverage was triggered into consideration when calculating payouts.
In a further blow to insurers, the court found that the so-called "but for" test — generally used to determine which set of concurrent events caused a loss by envisioning scenarios without one of the events — has limitations in situations where several events, which on their own would be insufficient, are equal causes of a loss. Insurers had relied heavily on the "but for" test in their arguments. It also found that the 2010 Orient Express ruling, which had in part hinged on that causation test, was "wrongly decided."
The ruling has put some insurers in a markedly worse position. Under the High Court decision, only one of the three of Australia-based QBE Insurance Group Ltd..'s notifiable disease wordings under consideration would respond to coronavirus claims. Under the Supreme Court verdict, however, all three will do so. QBE said that while its U.K. business interruption claims bill, net of reinsurance, remains at $70 million, the increase in gross claims had eaten further into its aggregate reinsurance limit, prompting it to boost its risk margin by $185 million.
RSA Insurance Group PLC said it did not expect net loss estimates from policies considered by the court "to change materially from those previously reported." Hiscox Ltd. said it faced an additional $48 million in claims, net of reinsurance, from a combination of the judgment and "further government restrictions" aimed at slowing the spread of the virus.
Dominic Simpson, a vice president at ratings agency Moody's, in an emailed statement called the verdict "credit negative for UK insurers and reinsurers." Simpson said the financial impact on individual insurers "should be manageable, net of reinsurance" but "precedents have been set which could widen the circumstances in which policyholders make future claims."
Challenges to come
Applying the decision more widely may not be straightforward. The test case directly covered 28 clauses and 21 lead policies across eight insurers, but the FCA said that the outcome affects 700 policy types from 60 insurers and 370,000 policyholders.
Lydia Savill, counsel in law firm Hogan Lovells' international insurance team, noted that while the court had ruled on the meanings of clauses and there was now "far greater clarity," it had not decided on the outcome of individual claims. Applying decisions to individual cases is "not always a straightforward matter," she said, and wordings that were not appealed would be subject to the Hight Court ruling rather than the Supreme Court one.
"There will be a rump of claims and wordings where there will be further analysis that needs to be done to work out where you're left," Savill added.
Le Marquer said that while he hoped that insurers with small business policies would move on to making payments and not "quibbling over the amounts," he acknowledged that there would be policyholders with larger, more complex claims where there will be disputes.
Although some insurers clearly expect their reinsurance programs to pay for some of claims stemming from the case, there may be some pushback.
"You are also potentially going to have disputes between insurers and their reinsurers regarding whether or not they can make a recovery for these claims under reinsurance treaties," Naz Gauri, principal associate in law firm Eversheds Sutherland's insurance litigation team, said in an interview.
Wider implications
Bryant agreed with the Supreme Court's findings on causation because "it produces the right outcome." However, that outcome will promote "additional uncertainty" about risk pricing and ramifications of the ruling could "go far beyond just business interruption."
The Supreme Court's finding on the Orient Express case, where a business interruption claim for a hotel damaged by Hurricane Katrina was denied because it was found it would have suffered the interruption anyway because of the damage the hurricane caused to the surrounding area, could lay insurers open to more claims. Le Marquer said the Supreme Court verdict "has brought some clarity to the issue," but has "quite significant implications going forward" as it "considerably broadens coverage provided under business interruption policies."
While lawyers see challenges for the industry from the Supreme Court ruling, they have welcomed the clarity it brings. Le Marquer said that while the verdict on Orient Express broadens cover, it would prompt insurers to redraft policies so that they only cover business interruption from property damage, or also include cover for the underlying cause of the property damage at a higher price. He said this was "a good thing for everyone" because it makes the buying process clearer.
