Business interruption (BI) insurance policyholders across the globe have raised concerns around their insurers’ responses to their claims for business interruption losses arising from the COVID-19 pandemic. With many countries in lockdown, many businesses have been significantly affected. Those business have typically found that their claims for lost revenue/profit have been declined.

Many BI policies contain specific exclusions for loss arising from pandemics such as COVID-19. This has not stopped many insureds from approaching their insurers, and regulators in some instances, for clarification on their entitlements.

In the UK, the Financial Conduct Authority (FCA) has asked policyholders to detail their disputed claims. It has sought a court judgment to clarify matters for policyholders who may have genuine uncertainty about whether their policy provides cover. We understand that the case is likely to reach the High Court by the end of July 2020. According to FCA’s interim CEO, Christopher Woolard, “decisive action” is needed, given the “severity of the potential consequences for customers.” Some organised advocacy groups seeking to bring about policy change are not willing to wait for the FCA’s court ruling. Examples include:

• Hundreds of bars, nightclubs, and other hospitality firms have formed the Hospitality Insurance Group Action (HIGA) which has made representations to large insurers, such as Aviva and QBE, to challenge their declinatures of COVID-19 related claims.
• Another group with more than 400 policyholders, named the Hiscox Action Group, has been given permission to commence action against global specialist insurer, Hiscox, regarding around £40 million worth of declined cover for various small and medium enterprises covering lockdown costs under their BI policies. The action also includes claims under the Enterprises Act 2016 for additional damages for late claim settlements. Lawyers representing HAG, Mischcon de Reya, say they are launching an “expedited arbitration claim”, funded by a litigation funder, Harbour.

Many members of these groups say that they face insolvency due to COVID-19-related lockdown measures and that the result of these cases could be pivotal for them. While Hiscox has been firm in its position that most UK SMEs are not covered under their BI policies for pandemic-related losses, policyholders are alleging that this amounts to a volte-face after – they say – previously being told otherwise.

The FCA released an update on 1 June regarding its impending High Court test case. It identified a representative sample of 17 policy wordings that reflect the key arguable issues, and the Court’s declaration of this test case will be binding on the eight insurers that underwrote these policies. This is expected to provide guidance for other insurers in the interpretation of BI policies not included within the sample. The FCA also published new draft guidelines on its expectations, requesting that insurers review their policy wordings to determine how the test case may impact incoming claims, review existing claims and complaints, and reassess previously rejected claims. This is important so that insurers can identify how they may be affected by the upcoming test case.

There may be more hope for policyholders elsewhere. The United States insurance market has seen an increase in litigation from businesses that had to shut down operations and several members of the House of Representatives have proposed federal legislation to void any policy provisions which would appear to exclude COVID-19 related losses. However, others hold opposing views: six senators recently made statements to President Trump that commercial insurers “could experience significant economic strain and insolvencies” if the industry were forced to “retroactively cover perils that were never accounted for”. We address these issues and similar proposed legislation by some US States in a separate article in this issue of Cover to Cover.

The suggestion is that a federal override on BI policies would be made available for losses from suspended business operations and pre-emptively bar any state laws that permit exclusions of such coverage. Such significant retroactive intervention would be likely to impact the insurance industry drastically and shape its market going forward.

In Japan, with the year-long postponement of the 2020 Olympics, the International Olympic Committee is discussing with its insurers whether compensation is available for resulting losses. While it has event cancellation insurance, there is uncertainty about whether there is cover for a delay of one year from COVID-19. The costs from these delays are expected to reach into the billions for the organisers in Japan. Its operations director, Pierre Ducrey, said that the aim with insurers is to “find the right level of compensation to help us bear the cost of having to wait another year”.

In New Zealand, most businesses have found that they are not covered for COVID-19-related losses. However, there have been some exceptions, including in the event cancellation market. One specialist group of businesses obtained BI pay-outs because of the specific terms of their cover – broker Crombie Lockwood had arranged limited cover for childcare centres under a particular product up to a quarter of their declared annual turnover, subject to a cap (of $250,000). We understand that other insureds have also been able to claim under coverage extensions. However, in recognition of the unusual nature of these policy entitlements, many insurers are now applying a COVID-19 exclusion for future policies and renewals.

The Financial Markets Authority (FMA) has been active in communicating with insurance industry participants. Director of Banking and Insurance, Clare Bolingford, penned an open letter to industry bodies outlining expectations in tackling the unfolding situation. The FMA has encouraged a proactive stance in dealing with the COVID-19 crisis and specified courses of action that could be taken, including:

• publicising relief offers;
• providing resilience and vulnerability training for staff distributors to better support customers; and
• undergoing welfare checks on existing customers.

The FMA has stressed that insurers should clearly communicate any COVID-19 related exclusions in their policies.

Unlike the UK’s FCA, which made a public statement that most SME BI policies do not cover pandemics, the FMA has been silent on a blanket statement for now. We see this as a sensible approach as all policies turn on their particular terms.

The FMA has also allowed a two-month extension on the audit deadline for insurers and financial entities to assess the COVID-19 impact on their businesses. It may be that New Zealand businesses could follow those from other countries’ and litigate against insurers to challenge policy exclusions. The next few months will be ‘wait and see’ for the insurance industry, but regulators promise to actively monitor the sector.

Read Cover to Cover: Issue 20