However, insurance premiums are likely to increase as ‘insurers seek to recoup some of their losses’

The Supreme Court’s ruling on 15 January regarding Covid-19-linked business interruption (BI) claims will serve as a “financial vaccine” for struggling businesses as insurers had their appeals dismissed by the highest court in the UK.

Following an oral and written statement, the Supreme Court confirmed on Friday that appeals made by the FCA and lobby group the Hiscox Action Group (HAG) would be permitted, while those made by insurers have been dismissed.

Roger Franklin, head of insurance litigation at Edwin Coe and committee member of the London Solicitors Litigation Association (LSLA), described the Supreme Court’s judgment as a “financial vaccine”.

He said: “This is an important and keenly awaited decision for the many thousands of commercial policyholders seeking to recover losses caused by Covid-19.

“It’s been a desperate time for small businesses and this positive judgment is like the arrival of a financial vaccine for them. The FCA is to be commended for taking the initiative in clarifying these issues, as are the lawyers involved and the court system for bringing the case to such a swift conclusion.”

Insurer impact

Franklin added that “the financial hit to the insurance industry will be significant” because “the potential claims considered in the judgment arose out of the first lockdown. There have since been two more lockdowns”.

Rob Benson, head of insurance at Grant Thornton UK, agreed that the ruling “imposes an increased financial burden on some insurers”.

Furthermore, he thinks “brokers have already been reconsidering which insurers to place business interruption cover with in light of the pandemic and [the] judgment will further inform these decisions”.

Benson added that the decision regarding the Orient Express v Generali case will also add to insurers’ workloads.

“The Supreme Court’s ruling that the Orient Express case was wrongly decided removes one of the most significant precedents relating to business interruption, causation tests and liability. All insurers will therefore need to review a huge volume of policy wordings in order to assess the resulting impact on their potential liabilities and consider how best to respond to this,” he explained.

Premium hikes

Meanwhile, policyholders should expect an increase in their premiums as a result of the ruling, said Paul Smethurst, partner and forensic investigation specialist at accountancy firm Menzies.

“The fallout from this case will be both positive and negative for businesses. Premiums will increase as insurers seek to recoup some of their losses, perhaps with the requirement to buy separate pandemic or disease coverage and policy wording will certainly be tightened - particularly in clauses related to the circumstances of business interruption claims,” he said.

“On a positive note, consumers can also be assured of a more proactive and protective regulator going forward, with the FCA having demonstrated that it is ready to intervene on their behalf where there is a matter of public interest and insurers appreciating the overarching requirement for clarity in policy wordings.

“While today’s Supreme Court ruling provides clarity for many claimants, it is unlikely to provide a clear-cut resolution for all. There are still a number of untested issues, which could give rise to further litigation. For example, the question of aggregation and whether insurers should accept that the disruption caused by the pandemic is one event or more.”

For Martin Chapman, forensic accounting partner at Azets, the judgment will only solidify the lack of trust customers have for the insurance sector.

“The future of the industry isn’t easy to predict, but there has undoubtedly been a loss in confidence in insurers by businesses,” he noted.

“Insurers who bear the brunt of these payments will undoubtedly look at increasing premiums to recover those payouts. Businesses may now move insurers if they have been let down by the service they received.

“Policy wording will no doubt be changed, which is already being seen with the outbreak and impact of Covid-19 being listed as a non-claimable event on newer policies.

“Without a doubt, Covid-19 has had and will continue to have an impact on the insurance industry for a long time.”

Benson agreed, adding: “The FCA has already issued guidance requiring insurers to make preparations to pay customers promptly following the conclusion of the appeals process, and it is vital that all valid claims are now settled as soon as possible in order to avoid causing any further damage to the industry’s reputation.

“The fact that the judicial system has had to be further employed before these insurers have paid out will reinforce many stakeholders’ worst pre-existing opinions about the insurance industry.”