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BI test case judgment – is the issue put to bed, or does the industry need to wake up?

Insurance

On Friday January 15th, the UK’s Supreme Court ruled on the various appeals arising from the original business interruption test case judgment.

The final ruling, in favour of claimants, should bring much needed clarity to insurers and policyholders alike. So does this ruling put the issue to bed, or is there still more for the insurance industry to consider?

The ruling in brief

The final judgement from the Supreme Court rejected arguments from insurers, but accepted several aspects of the FCA’s appeal. In short, this means more policyholders should be able to pursue claims than after the original judgement in September.

In practical terms, two key points from the ruling were:

  1. “Disease clauses” should respond to the pandemic provided the policyholder can prove even a single case of COVID-19 occurred within the relevant distance of the insured premises.
  2. “Prevention of access” clauses respond in even wider circumstances than the High Court ruled. These clauses provide cover where the insured is restricted from accessing their premises by the instructions of the government / local council / police etc. The Supreme Court said:

Prevention of access could be due to a government instruction (such as the Prime Minister’s speech on 20 March 2020), even if this was not written into law. The high court had previously ruled that legally binding restrictions were usually required to trigger these policies.

Businesses didn’t need to be completely shut down to claim. For example a pub reduced to takeaway service could claim for losses driven by the closure of its table service. The previous high court ruling required a complete closure.

Short term impact

In the short term, the judgement should give clarity to insurers about the circumstances in which they should compensate policyholders. The ruling is binding on the insurers participating in the test case, but also sets a clear precedent for other insurers with similar wordings.

The industry has had several months to prepare, so insurers should be able to quickly identify policies which respond to the pandemic, assess losses, and make payments. The industry’s reputation has suffered considerable damage as a consequence of the test case. I expect to see a flurry of settlement activity as insurers seek to avoid any suggestion that they are dragging their heels at policyholders’ expense.

Insurers not directly involved in the judgment will need to benchmark their wordings against the ruling. Some may find themselves in a difficult position, believing their wordings have important distinctions, but wary of continuing to hold out even after a judgment branded as final.

What could be done differently in the future?

The BI test case has not been a positive experience for either side. Insurers have emerged as villains, who will be seen to have wrongly denied cover and now face significant payouts on BI policies. Policyholders have waited nine months for cover to be clarified despite having the support of the FCA and access to expedited court proceedings.

Once the pandemic recedes, focus will inevitably turn to how to avoid this situation in the future. Here are my top 3 suggestions:

  1. Industry standard policy wordings - Competition law makes the use of standard wordings problematic for the industry, but it’s not clear that insurers are differentiating themselves from competitors on policy wording. Policyholders may be better served by pre-agreed cover-wordings that have been subject to more expert scrutiny, and where coverage decisions can be made faster and then apply consistently to all policyholders:
  2. Pandemic Re - Terrorism Pool Re and Flood Re have both been set up to provide coverage in important yet hard to insure areas. The insurer of last resort throughout the pandemic has been the Government, through its various business support programmes. A Pool Re or Flood Re model, run in partnership between the state and the industry would allow insurers to continue offering affordable BI cover and would give the state an already-in-place support structure for the businesses in the event of a future pandemic.
  3. Better communication of T&Cs - One of the industry’s biggest challenges is conveying the boundaries of cover simply and clearly to policyholders. The pandemic has put the conflict between policyholder expectations and the nuances of policy wording into the spotlight like never before. I expect to see insurers going to much greater lengths to set out examples of cover limits and exclusions to policyholders.

Summing up

For now, the industry’s focus will be on settling valid BI claims. Following the pandemic, I expect to see discussion of the lessons learned. To me, these lessons are not about insurers gaining a competitive advantage. Instead, the focus needs to be on multilateral changes to help re-build consumer trust in the industry and ensure businesses can be confident they have the cover they need.