The consequences of the coronavirus pandemic have impacted on every industry sector across the globe; none more so than the insurance sector. Initially in the UK, insurance companies, many of whom are well versed in rebuffing claims, were confident that for the most part the general, often considered ambiguous, wording of the commercial insurance policies would allow them to avoid paying out for business interruption claims arising from the coronavirus pandemic. However, as the clamour from businesses that believed they were protected rose to a height that could not be ignored, particularly the struggling hospitality industry, regulators and business associations stepped in.
The Financial Conduct Authority (FCA) has taken the bold step of embarking on a High Court test case to determine legally, once and for all, whether business interruption insurance covers losses that derive from the government-driven lockdown in response to the coronavirus pandemic. The FCA has announced that it has selected eight insurers, a list of names to be published in early in July, whose policies and the wording incorporated in the selected insurers' policies are representative of the types of clauses commonly found in the policies and clauses that are leading to the disputed claims. Christopher Woolard, interim chief executive at the FCA stated "the court action we are taking is aimed at providing clarity and certainty for everyone involved in these business interruption disputes, policyholder and insurer alike."
The FCA has asked insurers who have previously denied claims to write to their policyholders again and inform them of the FCA court case and how it could affect their claim. Also, those insurers that made early settlement offers to their policyholders must inform their customers about the case and how it could affect their compensation claim.
Giambrone's insurance and re-assurance team has extensive experience in negotiating with insurance companies and believe that the FCA test case will be keenly awaited by both the insurers and the insured. The insurance sector has significant financial reserves but the level of claims across the globe may never have been experienced before. Lloyd's of London anticipates a level of claims amounting to £2.4 billion, on a par with previous disasters, such as the ash cloud across Europe in 2010 and the previous tragedy of the 2004 Boxing Day tsunami which affected 13 countries, being the closest events to the present situation.
Our lawyers in the insurance and re-assurance team consider that there will be a fundamental change in the insurance sector, including the how insurance brokers dealings are conducted. Mactavish, a leading independent expert on insurance industry governance, drafted a Broker Conflicts Report which highlights where brokers receive their income and has been described as shining a light on a "huge conflict of interest" relating to the fact that broker revenue is mainly derived from insurers.
Class actions have been embarked upon by the hospitality sector in the UK, in an effort to compel insurers to pay out on clauses which they believe are valid and have been unfairly rebuffed may become redundant depending on the High Court decision when the FCA's case is heard.
In the meantime, the insurance industry are proactively attempting to put in place a safety net for insurance in the form of a government-funded reinsurance programme similar to that set up to address terrorist attacks to cover future pandemic losses. Dave Matcham, the CEO of the International Underwriting Association, (IUA)which represents London insurers trading outside the Lloyd's of London umbrella said "I am pleased that Pandemic Re has been able to gain support for its work from many volunteers across our industry,clearly demonstrates our sector's commitment to helping mitigate risk and finding more effective recovery solutions." The government announced that former Home Secretary Amber Rudd will oversee a working group looking at the legal, regulatory and governance implications of the reinsurer.
Giambrone's corporate and commercial lawyers are keenly following the FCA legal action and believe the decision of the High Court will define the future actions regarding payouts in relation to the business interruption clauses. The matter will be heard in High Court in the second half of July and is likely to last between five to ten days.
Whilst the FCA's High Court action will settle the legal position and reinsurance programme will protect against the future in the UK, insurance companies are based across the world and the decision and action will not be relevant to them. Giambrone's insurance and re-assurance team are experienced in a wide range of cross-border insurance disputes and have both multi-lingual and multi-jurisdictional expertise which makes our lawyers well-placed to assist and advise our clients
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Originally published June 3, 2020.
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