QBE QBE Insurance Group Limited

By Berengere Sim

Of Financial News

The Financial Conduct Authority's business interruption insurance case is back in the headlines--but this time it is for a four-day appeal in the Supreme Court.

Why are the FCA and insurers in the court?

The appeal is the latest twist in the business interruption case, which the City's watchdog took to court to bring clarity to small and medium-sized enterprises who suffered losses as they were forced to shutter their doors during the first nationwide lockdown.

On May 1, the regulator announced that it was taking the case to court. "We have been clear that we believe in the majority of cases, business interruption insurance wasn't purchased to, and is unlikely to, cover the current emergency," Christopher Woolard, the interim chief executive of the regulator, said on May 1.

"Our intended court action is designed to resolve a selected number of key issues causing uncertainty as promptly as possible and to provide greater clarity for all parties, both insured and insurers."

Later, eight insurer defendants--Hiscox Ltd., QBE Insurance Group Ltd., Zurich Insurance Group AG, MS Amlin Underwriting, RSA Insurance Group PLC, Ecclesiastical Insurance Office PLC, Argenta Syndicate Management and Arch Insurance--agreed to participate in the test case after 56 were approached by the regulator for information on their business interruption policies and how they intended to deal with claims.

The FCA represented the interests of policyholders and is represented by law firm Herbert Smith Freehills.

The tension surrounding business interruption insurance is in fact not unique to the U.K.; there have been similar cases in the US, as well as in France.

What happened next?

On Sept. 15, the High Court in London ruled in favor of "most" of the companies who said their business interruption insurance policies should cover lockdown and pandemic-related losses.

The judgment pointed to disease clauses in certain business interruption insurance policies that would provide cover, but added that each policy will have to be considered against the judgment to work out what it means. If it hadn't been appealed, the judgment would have been legally binding to the eight insurers.

However, on Sept. 30, the FCA applied to "leapfrog" the case to the Supreme Court, "which we believe is the fastest way to get legal clarity as quickly as possible for all parties," the regulator said in a statement.

On Nov. 2, the Supreme Court granted permission to appeal, to the regulator and the Hiscox Action Group, as well as all the insurance firms except Zurich Insurance and Ecclesiastical Insurance. The wordings for both Zurich and Ecclesiastical don't provide cover for business interruption, as confirmed by the judgment.

How have things been going in the Supreme Court?

On Nov. 16, the first day of the appeal, Reuters reported that insurance companies told judges that thousands of small companies impacted by the Covid-19 pandemic weren't eligible for payouts. It was "reverse engineering" to suggest they would be.

The following day, Reuters reported the Supreme Court heard Colin Edelman QC, the FCA's lawyer, say: "[Insurers] are saying: 'We insure perils but not ones that are going to cost us a huge amount of money. We never contemplated that'. Well that isn't an answer."

What is at stake?

At the centre of the case is whether 28 clauses in 21 policy wordings by the insurers should cover disruption caused by responses to the pandemic. If they do have to cover the losses, the case could affect hundreds of types of policies and thousands of policyholders, with billions of pounds of claims in the balance.

Meanwhile, the industry has been trying to find other ways to better prepare and collaborate on pandemic-related issues in the future. On July 1, insurance marketplace Lloyd's of London proposed the creation of a "Black Swan Re" reinsurance framework.

The framework would provide reinsurance for commercial non-damage business interruption cover in future catastrophic "Black Swan" events. It would use industry-pooled capital and be back by the government if the pool had insufficient funds.

What happens now?

The hearing continues into its final day.

The Supreme Court has yet to set down a date on which it will publish its ruling.

Website: www.fnlondon.com

(END) Dow Jones Newswires

November 19, 2020 05:37 ET (10:37 GMT)

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