Clarity… but not closure
In only a few hours time we will discover the outcome of a critically important Covid-19 legal test case in the UK High Court.
Indeed, it is no exaggeration to describe the process as the most important Covid-19 related (re)Insurance dispute in the global industry thus far. Using an untested (until now) legal mechanism, the UK regulator identified eight UK property insurers and 17 different policy wordings to test the applicability of BI coverage for primarily smaller businesses impacted by the Covid-19 restrictions and lockdown measures imposed this year. The expedited trial took place virtually in July and the judgement is imminent.
Other nations – with the recent exception of Australia – have not taken this broad sweep approach. The US, the spiritual home of the plaintiff bar and coverage litigation, has naturally seen a spurt of BI disputes but a narrower range of wordings and in particular the popularity of the ISO policies has had a tempering impact.
Continental Europe has also seen a plethora of coverage disputes but they are less concentrated than the UK while also – and to their credit – some carriers have been proactive with early settlements. Notable examples include Switzerland’s Helvetia and Germany’s HDI Europe.
In contrast, the FCA estimates as many as 370,000 policyholders could be impacted by the legal outcome today. This seems high but if one took a yardstick of £50,000 as an average policy limit, then nearly £20bn in potential insured losses could be issued based on this estimate.
What these rough calculations do demonstrate is that – together with event cancellation and perhaps trade credit – BI is the area of largest Covid-19 loss exposure for (re)insurers. It is also where the industry has experienced the greatest dent to its reputation. It’s general stance of “you’re not covered” - despite, in many cases, policy wordings to the contrary - has setback the industry’s standing in the eyes of many of its business customers.
One reason for insurers’ willingness to see their reputation suffer may simply be that they cannot afford not to do so. Certainly, an additional £20bn of UK BI losses will be painful to individual and the collective industry balance sheet. It would also lead to a substantial acceleration of reinsurance loss notifications and presumably a fresh wave of disputes focused around following the fortunes of the primary carrier vs event definitions and hours clauses (classic reinsurance dispute territories).
But in reality today’s decision is unlikely to bring the certainty at the primary level let alone reinsurance level.
First, the decisions of Mr Justice Butcher and Lord Justice Flaux will almost inevitably be appealed – the presumption being an accelerated process straight to the Supreme Court, the UK’s ultimate appellate court.
Second, even if the Court determines broadly in one particular direction there are many different policy wordings at issue. The judges cannot simply hand down a binary judgement; they have to consider the nuances and meaning of different wordings in different policies and how they relate to each other.
What, for example, is required for one circumstance to “follow” another circumstance? Is a nationwide pandemic an “emergency” for the purpose of these BI wordings? Were businesses “prevented” or “hindered” from using or accessing their premises when the country was put into lockdown? How close (geographically) must something be for it to occur in the “vicinity” of an insured premises? These are all meanings to be determined with reference to the individual policy language as a whole.
But also at stake are the broader issues of causation and loss calculation which are generic to all of the UK BI disputes.
Ahead of the FCA test case trial, many London (re)insurance lawyers felt the advantage was with the industry. Not least because of the English Courts’ current interpretation of the “but for” doctrine around causation.
Inevitably, the eight insurers effectively argued at trial for the status quo (ie “but for the existence of x, would y have happened”). For example, if insurers can prove that the BI loss was caused by the general existence of covid-19 (not insured) rather than the lockdown (insured), then under this interpretation the loss is not strictly caused by the lockdown.
Unsurprisingly, The FCA claimed otherwise. It argued on behalf of policyholders that the existence of Covid-19 and all of the consequences of the pandemic (including lockdown) form one indivisible cause of loss and/or it is therefore artificial to differentiate the two for the purposes of loss causation.
The Court has to make a determination in this regard.
Then there is the closely related issue of the quantum of losses suffered by policyholders.
The infamous case of Orient Express Hotels vs Assicurazioni Generali has served as the leading authority on the application of trends clauses for a decade now in English Law. In essence it says insurers can legitimately determine the quantum of the BI loss by calculating what would have been suffered by, say, restaurants or hotels if they had remained open even while the pandemic (and the fear of it) ravaged the country.
Both interpretations – on causation and damages – are, of course, currently unhelpful from an insureds’ perspective.
What can we expect in a few hours time? Well, The ReInsurer anticipates the Court may be less industry-friendly in its interpretation of these two key issues to the benefit of policyholders. Why do we think that?
First, one can argue that the English Law as it stands is too absolutist in its current interpretations and this can lead to overly harsh results. If a restaurant explicitly buys pandemic BI coverage, for example, it feels patently unfair that it is not covered for the lost trade it would reasonably anticipate at say the beginning of the year but instead only for the reduced trade from those hardy folk who persevered in dining out while the rest of the nation stays indoors.
Interestingly, this was the effective outcome in a recent South Africa case - Cafe Chameleon vs Guardrisk Insurance Company - a jurisdiction which has parallels to English Law.
It should also be noted that the UK judiciary have become increasingly interventionist in recent years and confident of applying decisions that fit with its view of what is right. Arguably, we saw this with the Supreme Court’s controversial intervention over parliamentary sovereignty/proroguing last year but perhaps also in more conventional insurance disputes such as the recent Ardonagh/Gallagher poaching dispute (an outcome which surprised many seasoned legal observers).
In a few hours we will know the Court’s decision but it will not immediately provide certainty.
Nor is this simply because of the near inevitably of an appeal. There are also other issues still to be determined that may well be influenced – but not decided – by today. For example, a notable trend in recent months is property cat reinsurers beginning to challenge reinsurance coverage on the basis of Covid-19 not being a “named peril”/catastrophe for the purposes of hours clauses and relying on contamination/pollution clauses.
If the verdict today adds to primary insurers’ expected BI loss, then these reinsurance disputes are only going to magnify - no doubt centred around classic reinsurance dispute triggers such as event definition and hour clauses.
But there is nothing unusual about (re)insurance disputes after major, complicated industry losses. Indeed, Orient Express Hotels was itself a claim relating to Hurricane Katrina.
And from these ugly disputes and uncertainty can also come welcome improvements. For example, the shame imposed upon the industry by its failure to consistently issue policy wordings ahead of coverage was exposed during the Silverstein one-two event WTC litigation after 9/11. The dispute trundled on for years but a welcome outcome was the commitment by carriers to “contract certainty” - ie issuing policy wordings on time. This is now the norm. It wasn’t twenty years ago.
If a similar positive legacy can occur from the FCA litigation – perhaps around clarity over loss quantum, causation or greater consistency around wordings and coverage – then this is to be welcomed.
But don’t expect closure and certainty today…