Following the High Court’s ruling in September on the FCA’s business interruption test case, Insurance Times explores some of the key areas that could impact on quantifying these coronavirus-related claims

The High Court’s test case decision regarding the wide area damage principle, initially seen within the 2010 Orient Express Hotels v Assicurazioni Generali case, is “one of the most important take aways” for calculating the quantum of Covid-19-related business interruption (BI) claims.

According to Sareena Bamrah, director at independent claims preparation firm Accuracy, how the wide area damage test will “play a part in the quantification of these claims” is the “question on everybody’s lips”.

In the Orient Express case, the hotel submitted a claim after its premises was damaged during Hurricane Katrina in 2005, however the insurer involved rejected this, stating that regardless of whether the hotel was damaged or not, it would still have been unable to trade because of the large scale evacuation of the area and the state-wide decimation.

The court agreed with the insurer, but in the end the parties made an out-of-court settlement.

This ‘but for’ methodology was cited by a number of insurers during the FCA’s test case, yet the presiding High Court judges disagreed with their colleagues’ initial judgment.

Bamrah explained: “It’s very interesting to learn that if that case was heard again now, that it would have been ruled in an opposite way, where wide area damage would not have played a part in the claim calculation.

“That’s been very important because I think where policyholders will be penalised will be around that issue and whether or not they would have still generated revenue or profit ‘but for’ the pandemic, with all the government restrictions in place and the movement of people, closure orders, etc.

”I think that’s been perhaps one of the most important take aways from a quantification perspective.”

Bamrah added that quantifying claims could, therefore, be “very subjective” and that insurers have “got a difficult job” ahead of them.

“I think everybody involved will have a view on how the quantification should be undertaken to reflect some of those adjustments,” she said.

Unanswered questions

For Peter Diskin, chief client officer for the UK at Gallagher Bassett, there are still a number of “unanswered questions” when it comes to quantifying BI claims linked to the pandemic.

He said: “There’s still some unanswered questions around what applies and what doesn’t and there’s no blanket answer on it. The judge basically says that.”

For example, Diskin explained that identifying the policy trigger itself can still prove difficult following the High Court’s ruling. “Do insurers need to amend their wordings – I think the answer is yes, but it still remains unanswered as to what that wording should be,” he added.

Furthermore, Diskin asked whether insurers will need to agree on a standardised definition of pandemics to be used across the industry, such as has been done for floods and terrorism, “to ensure we’re not in this ambiguous situation again”.

Diskin added that although a uniform definition for pandemics won’t impact on industry competitiveness, finer details such as exclusions will still require brokers to shop around on behalf of their clients.

“What would have a big bearing on competitiveness is what are the inclusions and exclusions and what are the sub limits, so brokers could still shop for a good deal for their customers in regards to what the policy will respond to,” he said.

Diskin has also seen problems arise when considering the government’s furlough scheme and its impact on quantum calculations.

He explained: “An issue that one of the insurers [we work with] had was whether the insurer is declining parts of the claims on the basis that the policyholder had access to government funds through a furlough scheme and we’ve had one insurer in particular having to change its stance from a legal opinion that they got originally that those claims would be discounted on government subsidies and then that was reversed – they were actually indemnified to the customers.”

Appeal process

The FCA and a number of the insurers involved in the test case have confirmed that they are appealing the High Court judgment – it was agreed on 2 October that the appeals process will leapfrog straight to the Supreme Court.

Bamrah, however, thinks it may be more beneficial if the High Court’s initial ruling is not contradicted.

She said: “Where there is already an outcome, I think it would be very difficult to overturn that outcome now and is it better for insurers to accept what the ruling is and to proceed rather than to go back and appeal on that ruling?

“This isn’t working against each other – I think it’s really to work together, insurers and insureds and all the representatives, whether that be claims preparers like ourselves, lawyers, to really try and attain the best outcome possible for policyholders, who obviously paid premiums to cover these types of risks.

”But then also to support insurers, to understand what is the right settlement?

“This should set a precedent. I think everybody can learn from the outcome.”

Claims spike

Bamrah noted that her firm has “seen a spike in claims – obviously as a result of Covid”.

Furthermore, she believes that there will now be an uptick in BI claims linked to the pandemic “because there was a number of insureds that perhaps had no idea that they could put forward a claim resulting from Covid and so I think there will be a lot more insureds who are now perhaps going to try and make a claim”.

Primarily, claims will centre on the hospitality industry, she added.

“The hospitality [sector] has taken the hardest hit with closure and the movement of people. In fact, the cases that we’re working on at present are within the hospitality industry,” she said.

What is the process for quantifying a claim?

Sareena Bamrah, director at independent claims preparation firm Accuracy, explained: “Policy dictates that you look 12 months prior to the date of the incident and see how well the business was performing historically, but then we would also look at forecasting and budgeting and see what was the expectation for the period in question?

“We would also take into consideration the adjustments clause, so understand – and I think this is where the wide area damage argument plays a part – what adjustments do you make given the global downturn due to the pandemic? That’s an area which is very subjective. We would also look at how was the market doing, specifically in that industry and then generally.

“We would also have a look [at] the uninsured working expenses, to understand what is the gross profit that has been insured by the business? And then we would apply the rate of gross profit to the forecasted sales for the period of interruption.”

What can brokers do?

Bamrah continued: “Brokers should be advising their clients, the policyholders, on the outcome of the FCA [test case] and they should be advising that policyholders seek legal advice to determine whether or not they have a valid claim under their policy.

“There may be some policies which have explicit exclusions for pandemics and so those policies perhaps will not respond, but again they should be advising the insureds to seek that legal advice as a first step and based on the outcome, then to engage a claims preparation team to support them with preparing a robust claim for presentation and submission to insurers.”