The word from Hiscox after last Friday’s judgement;
UPDATED: Extra comment by Seth Rachlin, Global Insurance Industry Leader, at Capgemini, has just been added below the Hiscox info.
UPDATED 19.01.2021 – Extra comment from Flaxmans Solicitors below as well.
Hiscox Ltd (LSE:HSX), the international specialist insurer, notes the judgment of the Supreme Court (the “Judgment”) delivered today in the appeal of the UK insurance industry test case on the contractual interpretation of business interruption wordings in certain UK property insurance policies (the “Industry Test Case”).
- Hiscox welcomes the clarity of final Judgment; claims settlement process has begun
- The outcome of the Supreme Court’s Judgment confirms that fewer than one third of Hiscox’s 34,000 UK Business Interruption policies may respond
- Hiscox Group 2020 COVID-19 estimate for business interruption increased by $48 million net of reinsurance
- Hiscox’s capital position remains strong and the Group maintains an “A” rating for financial strength from S&P.
In order to achieve clarity for customers on the application of relevant policies as quickly as possible, Hiscox agreed in May 2020 to assist the Financial Conduct Authority (“FCA”) by participating in the Industry Test Case alongside seven other insurers. Following the ruling handed down by the High Court in September 2020, permission to appeal to the Supreme Court was granted to the FCA, a policyholder group and six insurers, including Hiscox.
The Judgment handed down today comprises more than 100 pages of legal analysis by the Supreme Court addressing important points of insurance law and setting new precedent for over 50 insurers and almost 400,000 policyholders. The Supreme Court largely confirms the outcome of the High Court’s ruling that, except in rare circumstances, cover is restricted to Hiscox policyholders who were mandatorily closed. Fewer than one third of Hiscox’s 34,000 UK Business Interruption policies may respond as a result.
The Judgment represents the final outcome of the Industry Test Case, and there can be no further appeals. Hiscox welcomes the clarity that the Judgment provides and the processing of claims has begun.
As a result of the Judgment as well as further government restrictions announced during 2020, the total Hiscox Group 2020 COVID-19 estimate for business interruption increased by $48 million net of reinsurance. In addition the previously disclosed additional loss estimate of up to $40 million for event cancellation if government restrictions continued into 2021, will now be recognised in our 2020 financial result due to the expectation that covered events will be cancelled.
As previously stated, Hiscox’s exposure to potential business interruption claims arising from further UK government restrictions to contain the spread of COVID-19 has been running off at approximately 8% per month from June 2020, with residual exposure to be fully run off by the end of June 2021. Following the Judgment, the Group estimates exposure to restrictions already announced in 2021 at less than $20 million if restrictions extend to the end of March.
The Group remains focused on supporting its customers and employees through this challenging period. It continues to deploy capital for growth in an improving market. Hiscox’s capital position remains strong and the Group maintains an “A” rating for financial strength from S&P. The Group will provide a comprehensive update of its performance in its preliminary results announcement on 3 March 2021.
It is the fundamental paradigm of insurance. The premiums paid by the many cover the losses incurred by the few. Insurers and reinsurers can cover even the most catastrophic natural disasters because their impact is typically limited to a small geographic area. Far more challenging are systemic events whose impact is felt on a global level – those times when everybody loses. Litigation surrounding the 2017 Notpetya cyber-attack has yet to be settled. And when the history of the COVID-19 epidemic is written, it is likely to go down as the most significant insurance event of all time.
At the heart of matter is business interruption, a coverage provided in standard commercial property policies that reimburses businesses for lost revenue due to their inability to use the premises subsequent to a loss event. It is meant to cover a factory forced to close as a result of storm damage or a store recovering from a fire. But what happens when the event is a virus like COVID-19 which, although it does no physical damage to a property, renders it unusable. Such questions force insurers, policyholders and their attorneys to resort to the subtle examination of policy language and ultimately to the courts.
Though early court rulings in both the US and UK tended to favor insurers and exempt COVID-19 losses from the duty to pay, the tide has most certainly shifted. A few key rulings in US lower courts foreshadowed the most recent ruling by the UK Supreme Court. Insurers will be on the hook for a significant if not devastating amount of business interruption losses given the sheer number of businesses across the globe who have suffered due to COVID-19.
While their balance sheets can certainly sustain such a payout, the long-term implications are significant. Business interruption coverage of the type ordained by the Court is not priced into commercial property coverage. Look for a significant increase in rates for such insurance as well as a profound tightening of policy language – the viral equivalent of an act of war exclusion — to address the wake of COVID-19. This will inevitably force governments and other new reinsurance pooling-type arrangements to step in – as they did in the aftermath of 9/11 with respect to terrorism coverage – to close what is certain to be seen as a significant “protection gap.”
More than 370,000 thousand UK businesses have suffered unnecessarily at the hands of the UK insurance industry but more suffering is soon to come.
The spectacular common sense of the Supreme Court’s judgment on the FCA initiative to challenge the industry’s integrity towards its business ‘customers’ has paid off but at what cost and what is going to be the ‘payback’ by the industry?
“The insurers have lost their battle to avoid paying out business interruption claims to bona fide business owners in serious trouble through no fault of their own” says Roger Flaxman, Chairman of Insurance Advocates Flaxmans.
He continues “Covid was not selective as to whom it attacked and the court has determined that the promises made by the insurers offering cover for disease based interruption to their business were clearly misled as to what they were buying if the insurer’s defence was to be accepted. The Supreme Court has rectified that misunderstanding, but it does not address the remedy resulting from its decision.”
A provable loss?
The reluctant insurers, now required to pay out as ‘promised’, will have to decide how much they will pay and when. This could prove to become a minefield of
obfuscation and delay as insurers and their agents demand from the business owners information, data and statistics to justify their losses; which of course most
businesses will not have kept.
“Never before have businesses been expected by insurers to keep the critical information needed to measure a loss from a ‘lockdown’” explains Flaxman, “and in the absence of that data the insurer will be able, if they wish, to deny any payment. Now that there have been three lockdowns the opportunity for insurers to string out the payments will project the pain in to 2022 or 2023, by which time the companies will be long gone and so save the more reluctant of the insurers the cost of paying out at all.”