U.S. Insurers Should Pay Attention to U.K. CaseOn Business Interruption

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As U.S. property/casualty insurers navigate various legislative and judicial approaches to disputed COVID-19-related business interruption claims, they would do well to keep an eye on developments in the United Kingdom.

The Financial Conduct Authority (FCA), which regulates U.K. insurers, has indicated that it doesn’t believe COVID-19 causes property damage that would trigger most business insurance policies. It currently is litigating a test case involving policies of eight insurers that don’t require property damage to trigger coverage (Hear a three-minute explainer from the Center for Better Insurance).

This case is the first intervention by the FCA on behalf of claimants  since it was established in 2013, according to the Guardian. Hopefully it will provide greater clarity for companies and insurers than having claimants bringing individual cases at a time would. The FCA is looking at 17 policy wordings from the eight insurers and asking whether COVID-19 triggers a payout. Based on other policies the regulator has studied, the Financial Times reports, the court’s ruling are “expected to apply to nearly 50 insurers, who sold coverage to 370,000 customers.”

Senior executives from specialist insurance and reinsurance underwriter Hiscox Group warned that the FCA’s eventual findings could drive additional COVID-19 losses to its reinsurance book, Artemis reports.

In the United States, the number of lawsuits against insurers brought by businesses seeking coverage for COVID-related interruptions recently passed the 700 mark.

Tom Baker – an expert in insurance law and policy at the University of Pennsylvania – compared the current level of COVID-19 cases in federal courts to the business-interruption coverage suits filed after past natural catastrophes – in particular, Hurricanes Ike, Irma, Harvey, and Superstorm Sandy.

“They exceed the norm by two or three times all the nat cats,” Baker said.

A recent ruling in Michigan has been celebrated as a victory for insurers on the question of whether a property insurer is liable for financial damages caused by a coronavirus closure order. Judge Joyce Draganchuk of Michigan’s 30th Circuit Court ruled that some tangible alteration to a property is required to trigger coverage. Further, the judge said, a virus exclusion in the policy would have barred coverage, even if the claimants had alleged the virus did cause physical damage.

The American Property and Casualty Insurance Association said the decision is believed to be the first “dispositive motion ruling” in a case seeking business interruption coverage for COVID-19 losses.

“A one-two punch,” the Hurwitz & Fine law firm, headquartered in Buffalo, New York, said in a blog post. “All in all, a big win for the insurance industry.”

Not so fast, warned Baker.  He argued that the decision reflects a “defective pleading on the part of the plaintiffs” and said any celebration is premature. He also said the U.K. case being litigated by the FCA is a “one-way ratchet” for U.S. insurers.

“If the carriers lose or end up having a lot of coverage, that’s going to be bad for them here” in the U.S.,  Baker said. “I think if the carriers win, the insurance policies [in the U.K.] are really different. They tend to be named-peril, rather than all-risks policies. I think it will be easy to distinguish them.”

A ruling by the FCA is expected in mid-September. This week, the regulatory body said that, while the case doesn’t address how any resulting claims payments would be calculated, “We may intervene and take further actions where firms do not appear to be meeting our expectations and treating their customers fairly.”