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Sep 21, 2020

FCA test case on business interruption - updated with statements from Hiscox, QBE, Zurich, RSA and Ecclesiastical and Herbert Smith Freehills summary

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The result of the FCA's test case involving eight UK property insurers and 21 different policy wordings concerning the scope of cover for business interruption ("BI") has been handed down by the High Court.

The trial took place in July wherein each insurer made its case for the suite of wordings chosen. According to the FCA 370,000 policyholders were identified as holding policies that may be affected by the outcome of the test case.

The FCA argued on behalf of policyholders that BI cover should be provided following Covid-19 and the lockdown.

The judgement by Mr Justice Butcher and Lord Justice Flaux appears to be broadly favourable for policyholders but each policy needs to be considered against the detailed judgment to work out what it means for that policy.

Hiscox has announced 15 September - click here for full Press Release to LSE - "As a result of the Judgment, the Group estimates additional COVID-19 claims arising from business interruption to be less than £100 million net of reinsurance. This encompasses claims from all divisions including Hiscox Re and is a reduction of £150 million from the upper end of the Group's previously published risk scenario." Also, "The Judgment comprises more than 160 pages of legal analysis by the Court addressing important points of insurance law for the industry and customers. The Judgment clarifies that fewer than one third of Hiscox's 34,000 UK business interruption policies may respond. Coverage under these policies is essentially limited to those customers who were mandatorily closed by Government orders, and then only in certain circumstances." Hiscox's share price initially fell but is currently up nearly 10%.

The full judgement is available on the FCA's website - here scroll to the bottom of the page - and this morning's Press Release here

We await the responses and analysis of the consequences of the judgement and whether the insurance companies will appeal. The FCA Press Release expects any appeals to be on an expedited basis possibly proceeding directly to the Supreme Court.

We will update this page as more news and views comes through.

17 September -

QBE Ins Grp is considering its options to appeal the outcome of the case. It has estimated US$170m before reinsurance - its statement after the court outcome included "The Court ruled in favour of QBE with respect to two out of three of QBE’s notifiable disease policy wordings examined and in favour of insurers generally with respect to denial of access policy wordings. However, the Court ruled in favour of insureds with respect to one of QBE’s notifiable disease policy wordings and QBE is considering its options to appeal that decision. Based on the notified claims affected by the FCA test case and having regard to individual policy sub-limits, QBE’s estimate of its UK business interruption claims exposure is around $170M before allowing for recoveries under the Group’s catastrophe reinsurance protections. Consistent with the Group’s previous announcements, QBE believes that catastrophe reinsurance will limit the net cost of business interruption claims in our UK insurance business to $70M (which formed part of the $335M net cost of COVID-19 allowed for in our recently announced 1H20 result)."

Zurich Ins - issued a statement available here that the UK High Court "confirmed that the wordings represented by Zurich in the FCA test case do not provide cover for business interruption in relation to the COVID-19 outbreak."

Ecclesiatical - "The High Court Judgment published on 15 September 2020 stated that losses arising from the Covid-19 pandemic are not covered by Ecclesiastical’s Business Interruption policies and therefore we are not required to pay claims on those policies."

RSA - commented "Our interpretations of some provisions impacting RSA were upheld by the Court and some were not....Based on our initial review, RSA estimates the additional financial impact to RSA of today’s judgment to be approximately £104m on a gross basis across its portfolio of relevant business interruption policies. After the application of our catastrophe reinsurance protection, RSA estimates the impact of this judgment to be around £85m which is in turn expected to reduce further through qualifying as a loss covered by the group-wide aggregate reinsurance programme." See here for full statement.

21 September - Summary of judgment- available now on Herbert Smith Freehills website

The FCA's website says "The judgment is complex and runs to over 150 pages. Our legal team at Herbert Smith Freehills have published a summary on their website."

Lloyd's CEO wrote to the market's CEO's as follows

"As you know, the outcome from the FCA BI Test case ruled largely in favour of policyholders for the majority of issues covered. We will now take the time to carefully consider and respond to the implications of this complex judgment for our customers as well as its impact on the Lloyd’s market, which retains less than 2% of the overall UK property SME market."

"There is a requirement for insurers to issue an update to policyholders within seven days of the judgment being issued and our immediate focus is working with the you on this, including preparing a model template letter that you can use for this purpose. We will issue update letters directly to those policyholders who had already escalated complaints to us"

"Over the next week, we will be meeting with all materially impacted managing agents to discuss their initial view of the impact of the case on claims and their operational metrics"

"It's important to reiterate that our extremely strong capital position ensures that we are well prepared to respond to the financial implications of the High Court’s judgment and support our impacted customers."


We will write a precis in the forthcoming September Newsletter