Insurers stand up to be counted in COVID-19 test case

“Rather than select firms by market share, we have identified policies which are representative of the key arguable issues.” FCA

· Collective test case is response to business interruption cover confusion
· Sample process intended to make the process ‘as swift as possible for the court’  
· FCA does not expect all policy wordings to respond to the pandemic
· BI policyholders send more than 1,200 submissions to FCA in call for evidence

With COVID-19 losses mounting, the FCA and major insurers are moving ahead with a High Court test case that aims to gain a definitive resolution on disputed BI claims.

As major insurers agree to take part in a UK High Court test case to decide disputed COVID-19 payouts, insurers across the industry will need to check their policy wordings as analysts say they expect “most” will be directly affected.

This is the test case brought by the Financial Conduct Authority (FCA) to resolve uncertainty around the wordings in business interruption (BI) policies relating to coronavirus pandemic claims.

On May 1, 2020, the FCA announced plans for a test case, saying the action was designed to resolve a selected number of key issues that span the industry. It said the case would provide greater clarity for insureds and insurers.

With the case scheduled to go ahead as soon as July 2020, the FCA has confirmed a sample of 17 policy wordings, from 16 insurers (listed below), that includes most of the clauses being disputed. To determine these, the FCA asked 56 insurance companies to provide information on their BI policies with more than 500 policyholders. These insurers were also asked how they intended to handle these claims.

Following this, on May 15 the FCA invited BI policyholders to share their arguments for why claims should be paid. There were more than 1,200 submissions.

This process also identified eight representative insurers (listed below) who were invited to participate in the High Court hearing.

“Rather than select firms by market share, we have identified policies which are representative of the key arguable issues and invited insurers to participate on the basis of securing the maximum relevant coverage for relevant policies while minimising the number of parties engaged before the court to make the process as swift as possible for the court,” the FCA said.

Check your policies

Analysts from financial services firm Jefferies International Limited, Philip Kett and Nidhi Shah, said: “Insurers must now check their policy wordings and decide if these will be directly impacted by the test case; it is expected that most will be.”

However, Kett and Shah emphasised that many insurers have welcomed the collective court action and the clarity it is expected to bring for the whole industry. They highlighted RSA, Hiscox and Zurich as examples of companies that do not expect their claims costs to change much after the court ruling.

“RSA’s update is perhaps the most comprehensive, adding that the group’s aggregate reinsurance protection would ‘provide substantial protection in the event that the downside claims scenarios were to arise’,” the analysts said.

In a statement, Zurich said it has received limited claims in relation to the FCA test policies. The insurer added that it “remains confident in its interpretation of UK policy wordings based on received legal opinion”.

The Swiss-headquartered insurer reconfirmed its expected $750 million cost for COVID-19 related claims for 2020, as previously announced on May 14. However, the company did concede that “uncertainty exists given the continuing nature of the event”.

A definitive resolution

In an interview with Intelligent Insurer Tulsi Naidu, chief executive officer of Zurich in the UK, said she was keen to see uncertainty for customers “resolved in a definitive way”.

Asked if the policy disputes could have been resolved on an individual basis, she said: “The fact is that they haven’t been resolved. There has been a lot of confusion in the last several weeks around what these BI extensions cover.

“The FCA looked across the industry and identified 200 or so wordings they think need to be looked at. The sample 17 wordings are representative of the 200 and they have asked individual insurers to participate to represent different points in the range of wordings, so I think it is very much an industry matter.”

Naidu added: “We agreed to assist in this process when we were asked by the FCA in relation to our versions of a standard industry wording. Ultimately, the entire industry will benefit from the legal analysis of a small number of test cases.”

The FCA has been clear that it does not expect all policy wordings to respond to the pandemic and that policyholders should not expect that the inclusion of a wording in the test case implies that their policy will be one that should be paid out.

Naidu said: “Where our policies do cover losses related to the outbreak, we are paying claims as quickly as we can. Based on our own review of wordings and the advice from external legal counsel, we remain confident in our interpretation of our policy wordings.

“To date, we have received limited claims in relation to the policies being tested by the FCA.”

Asked about a worst-case scenario where the judgement was negative for insurers, she said we would see insurers across the sector paying claims they don’t currently expect. In the context of the pandemic that would be expensive.

However, she emphasised: “The reputation of the industry and confidence in the products and claims is important, so making sure there is confidence in how we go about this is important.

“This test case process will achieve that and that is a good thing. We play our part both as an individual firm and as part of the industry.”

July court dates

The High Court test case is expected to begin in July, with skeleton arguments and replies in the first half of the month and a court hearing of between five to 10 days in the second half of the month.

The FCA has said it will file the claim form and case particulars on June 9, then on June 11 there will be a case management conference, where the court will confirm the timetable. Insurers will be expected to file their defence on June 23, with the FCA due to file a reply on July 3.

The FCA said: “We expect the test case to provide guidance for the interpretation of many other BI policies that are not in the representative sample.”

The FCA has published its proposed questions for determination by the court; a proposed issues matrix; and a number of assumed facts. It invites comments on these documents—available on its website—by 3pm on June 5. Kett and Shah highlighted the FCA’s matrix as “useful” for its explanation of major policy types and summaries of relevant “prevention of access and disease vicinity clauses” from major insurers.

Christopher Woolard, FCA interim chief executive, said: “The court action we are taking is aimed at providing clarity and certainty for everyone involved in these BI disputes, policyholders and insurers alike.

“We feel it is also the quickest route to this clarity and by covering multiple policies and insurers, it will also be of most use across the market. The identification of a representative sample of policies, and the agreement of insurers who underwrite them to participate in these proceedings, are major steps forward in progressing the matter to court.”

Insurers which use at least one of the sample policy wordings
Allianz Insurance (part of Allianz)
American International Group UK (part of American International Group)
Arch Insurance (UK) (part of Arch Capital Group)
Argenta Syndicate Management (part of Hannover Re)
Aspen Insurance UK (part of Aspen Insurance Holdings)
Aviva Insurance (part of Aviva)
AXA Insurance UK (part of AXA)
Chubb European Group (part of Chubb)
Ecclesiastical Insurance Office
Hiscox Insurance Company (part of Hiscox)
Liberty Mutual Insurance Europe (part of Liberty Mutual Group)
MS Amlin Underwriting (part of MS&AD Insurance Group Holdings)
Protector Insurance UK (part of Protector Forsikring)
QBE UK (part of QBE Insurance Group)
Royal & Sun Alliance Insurance (part of RSA Insurance Group)
Zurich Insurance (part of Zurich Insurance Group)

Insurers participating in the High Court hearing
Arch Insurance (UK)
Argenta Syndicate Management
Ecclesiastical Insurance Office
Hiscox Insurance Company
MS Amlin Underwriting
QBE UK
Royal & Sun Alliance Insurance
Zurich Insurance