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UK non-life policyholders find patchy relief

28 September 2020 Gareth Stokes

The long-awaited ruling in a test case brought by the United Kingdom’s Financial Conduct Authority (FCA) against eight non-life insurers active in that market was handed down by the UK High Court on 15 September 2020. The Court was set the difficult task of deciding whether 21 ‘typical’ sample wordings used in non-physical damage business interruption (BI) insurance policy extensions would indemnity insureds for claims triggered by pandemic. The FCA expected around 370 000 policyholders, on cover under 700 policy wordings, issued by 60 different insurers to benefit from legal certainty following the ruling.

The ‘legal certainty’ catchphrase

The test case sought legal certainty around the grounds used by UK non-life insurers’ to refuse BI claims made against non-physical damage BI extensions on policyholders’ insurance policies. Readers should keep in mind that many insurers, domestically and offshore, have accepted liability under their BI extensions, where they believe the policies perform. “But in many cases, insurers have disputed liability [despite] policyholders considering that it existed, leading to widespread concern about the lack of clarity and certainty,” wrote the FCA, in a media release immediately following the Court ruling. 

“We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market,” said Christopher Woolard, Interim Chief Executive of the FCA. He added that the Court had found “substantially in favour” of the regulator’s arguments on the majority of key issues; but the reality is that each side won a few skirmishes. It is also probable that the affected insurers will challenge the High Court ruling all the way to the Supreme Court. FAnews chatted to a UK publisher, who observed that the test case was flawed and that it was likely to be appealed. And insurance law expert, Rebecca Carrera of Pinsent Masons, observed that some of the insureds in the test case were considering a ‘leapfrog’ appeal directly to the Supreme Court. 

Brushing aside the pro-consumer media

The FCA is more cautious than the pro-consumer media who are already trumpeting a glorious victory for insureds over their insurers. “The judgment did not say that the eight defendant insurers are liable across all of the 21 different types of policy wording in the representative sample,” they wrote. In what this writer can only describe as a déjà vu moment, they observed: “Each policy needs to be considered against the detailed judgment to work out what it means for that policy”. In laypersons’ terms; whether a business is covered for a non-physical BI claim vests in the policy wordings and how the court might interpret them. The High Court ruling does not offer ‘blanket’ legal certainty, and each claim must still be weighed on its unique merits. 

Aspects of the judgment highlighted by the FCA as a victory for insureds include that both the ‘disease’ and ‘denial of access’ clauses tested by the Court provide cover in the context of COVID-19; that the pandemic is a trigger on policies that contain such clauses; and that the Covid-19 pandemic and the government and public response were a single cause of the covered loss. But each victory requires further qualification. The judgment notes that most, but not all, of the ‘disease’ and ‘denial of access’ clauses in the sample provide cover, before adding that a successful claim depends on the detailed wording of the clause and how the business was affected by government’s response to the pandemic. 

Meanwhile, in South Africa

Local non-life insurers fit into one or more of the following camps: There are those who have paid non-physical damage BI claims; those who have offered conditional or unconditional settlements to qualifying policyholders; and those who are seeking clarity from the courts. The South African insurance regulator, the Financial Sector Conduct Authority (FSCA), has been in constant communication with insurers since the impact of pandemic on business and insurance became apparent, around March 2020. And both the SA and UK regulators have been consistent in their position that the contractual agreement between an insurer and insured should be honoured. Court actions and other engagements between regulators and insurers are thus not entered into on the basis that claims are always valid; but rather to ensure that claims are paid-out timeously when they are valid. 

In a media release dated 16 September 2020 the FSCA acknowledged the UK High Court outcome with the following comment: “The majority of [South African] non-life insurers have advised us that … the cases that are currently before the South African courts [viewed alongside] the test case brought by the FCA in the United Kingdom, will provide the required legal certainty on contingent BI policy wordings”. Our regulator has indicated that it will monitor the outcomes of the various court processes and only reengage the industry “should there be any elements of the contingent BI policy wordings that remain unclear” thereafter. 

No end in sight for unhappy CBI claimants

The FCA has meanwhile requested UK insurers to reconsider all BI claims that may be affected by the judgement and to communicate ‘next steps’ to policyholders. “Our aim throughout this Court action has been to get clarity for as wide a range of parties as possible, as quickly as possible, and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful,” concluded Woolard. But insurance stakeholders are likely to defer to the UK High Court ruling until such time as the appeals process is exhausted. And this means that decisions around pandemic-related claims will remain entirely dependent on the detailed policy wording and the nature of the loss. 

Writer’s thoughts:
The complexity of the contingent BI market is illustrated by the fact the UK High Court took more than 150 pages to rule on the 21 clauses brought before it. It is also worth noting that these 21 clauses are merely a subset of the policy wordings that may have been used in the UK market. Against this backdrop: Is it possible for advisers and brokers in a highly competitive risk environment to remain adequately informed to advise on BI and other complex risk covers? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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