COVID-19 BI case: the knock-on effect of the Supreme Court’s ruling

The industry needs to talk to clients more carefully about the products they are buying and ensure that their clients know exactly what they are covered for. January’s UK Supreme Court ruling represents a tipping point for the insurance industry and will require far-reaching changes in future.

But at the same time, how do insurers cover a systemic event and how will they take the lessons learned and collaborate more in future?

The nature of risk is changing and so is the nature of products, so policies must change as well. Those are among the main takeaways from a panel discussion titled “Implications of the Supreme Court Business Interruption ruling” held on Intelligent Insurer’s Re/insurance Lounge.

The event featured Matthew Connell, policy and public affairs director, the Chartered Insurance Institute (CII); Clive O’Connell, head of insurance and reinsurance, McCarthy Denning; Julia Graham, deputy chief executive officer and technical director, Airmic; and Seth Rachlin, global insurance industry leader, Capgemini.

“No-one wants to go to court with their customers, but the national lockdown created major uncertainty.” Matthew Connell, CII

The UK Supreme Court’s landmark ruling on January 15, 2021, on the Financial Conduct Authority’s (FCA) business interruption (BI) insurance case for COVID-19 claims, represented one of the most important legal issues of the last decade for insurers. Affected policyholders will welcome the ruling unanimously to dismiss insurers’ appeals and substantially to allow all four of the FCA’s appeals in favour of policyholders.

The decision could cost insurers as much as £700 million. At this Re/insurance Lounge event, the panel of experts discussed the implications of the case for the UK, what it might mean for similar legal disputes in other countries and how insurers may now adjust their wordings in future policies as a result.

Rachlin said that the ruling was not as surprising as many predicted. “In fact, I believe that it is a catalyst for much-needed change in the global insurance industry,” he said.

Graham added that while justice was done for many policyholders, the ruling was a great disappointment for the insurance industry as well as buyers who thought they were buying something they did not get.

Connell of the CII said the ruling will create important lessons to be learned.

“No-one wants to go to court with their customers, but the national lockdown created major uncertainty,” he said. “I believe there will be significant changes in how policies are constructed in future,” he added.

O’Connell from McCarthy thinks the FCA took on a difficult issue, and that the way insurers reacted was appropriate. “No-one could have foreseen the COVID-19 pandemic and how products would respond,” says O’Connell.

“A quick decision had to be made and I believe the correct judgment was made.

“However, this will impact the way policies are worded in future, and how premiums will be affected as well,” he said.

The role of brokers

Graham believes that the clients’ first port of call is to return to their brokers and put in claims that may now be necessary.

“While the FCA approach was a positive one, brokers now have a significant role to play and they must ensure that customers have a stronger understanding of polices in future,” she said.

Connell said that the industry needs to create boundaries of a workable voluntary market that covers a greater number of risks.

“In the past we have seen massive risks excluded because they seemed unlikely and therefore it was difficult to get people engaged,” he explained.

Rachlin added that the premise of insurance is to restore damage done when people were pushed to the brink.

“We need to look at the wording of policies,” he said. “Insurers are having to rethink the products they offer in the market. Policies are sold and people do not always understand certain nuances,” he added.

O’Connell believes the ruling does set a wider precedent for other UK policies as well as BI claims in other countries.

“In my experience, disputes are created in soft markets and manifest in a hard market,” he said. “Policy wordings will need to be future-proof and insurers will need to ensure they are selling what they think they are selling.”.

Rachlin thinks this ruling will impact operations in the market significantly. “The small and medium-sized enterprises market will become a far more competitive space, as clients are approached in a different way in future,” he concluded.

To view the whole Re/insurance Lounge discussion  click here.