The Financial Conduct Authority (FCA), which regulates insurers in the United Kingdom, has indicated that it doesn’t believe COVID-19-related losses trigger most business insurance policies because such policies typically require a direct connection between financial loss and physical damage to the insured property.
Think fire, flood, wind, or earthquake damage.
The FCA is now 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 Centers for Better Insurance).
Is this case relevant to U.S. property/casualty insurers? It depends on whom you ask.
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.
Tom Baker – an expert in insurance law and policy at the University of Pennsylvania – called the U.K. case 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 United States, 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.”
Jason Schupp, founder and managing member of Centers for Better Insurance, disagrees that an adverse ruling for U.K. insurers will have much of an effect on their U.S. counterparts.
“In Europe, [FCA] authorization to provide miscellaneous financial loss insurance allows an insurance company to write business interruption insurance that does not require evidence of property damage” to pay a claim, Schupp says. Even though the United Kingdom is no longer part of the European Union, Schupp says, “U.K. law itself recognizes the miscellaneous financial loss class of insurance.”
What does this mean for pandemic business interruption coverage in the United States? Not much, according to Schupp.
“The outcome of the U.K. litigation is unlikely to be relevant to the dozens – or perhaps hundreds – of business interruption lawsuits making their way through U.S. courts, where the property damage question is front and center,” Schupp says.
He goes on to say that proposals coming out of Europe or the U.K. for pandemic insurance going forward – such as a Lloyd’s framework – contemplate non-property-damage business interruption insurance solutions…. These proposals do not appear compatible with the current U.S. insurance regulatory system.”
A ruling by the FCA is expected in mid-September. Last 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.”