Mishcon has been closely involved in discussions with the insurance industry and in the FCA's business interruption (BI) insurance test case (the "FCA Test Case"), advised hundreds of policyholders and represented two major policyholder groups in the face of blanket coverage denials by insurers for businesses affected by COVID-19. In this article, we reflect upon the major milestones of the insurance industry's response to COVID-19.
The World Health Organisation declared COVID-19 a pandemic on 11 March 2020. Prior to that on 5 March 2020 a statutory instrument was made into law in the UK designating COVID-19 as a notifiable disease (meaning GPs are required to report all cases to Public Health England). Government action to combat the health crisis and protect public health had a huge impact on businesses who were largely or completely prevented from trading. Businesses in the hospitality and entertainment sectors were particularly severely affected. The world leading UK insurance market, in line with the insurance industry's stance globally, denied cover for the BI losses that resulted from COVID-19 and the lockdown and refused to pay out on BI insurance policies. Fairly early on, there was some indication in the US that legislators might require insurers to cover these losses. Throughout the crisis, there have been extensive discussions between the UK Government and leaders in the insurance market but, in our view, legislative intervention would be highly unlikely in this jurisdiction. As it became apparent that the losses flowing from COVID-19 globally would be immense, the insurance industry's position is that it never intended to cover these losses and, if insurers were forced to do so, this would be catastrophic for the insurance industry. Nonetheless, many policyholders and legal advisors were of the view that certain BI policies would be triggered by COVID-19 and insurers were wrong to issue blanket denials.
Hospitality Insurance Group Action
Hospitality Insurance Group Action (HIGA) was launched on behalf of hospitality sector businesses, whose insurers refused to pay losses flowing from COVID-19 and the Government's response. Mishcon reviewed hundreds of policies for hospitality businesses in distress and went on to identify two insurers against whom group claims may be brought: the insurers are Aviva Insurance Limited and QBE (UK) Limited in respect of specific forms of insurance policy wordings. Following a successful application to intervene, HIGA was able to make representations to the Court in the FCA Test Case. Policyholders with these insurers who have the specific policy wordings in place can still participate in a funded group claim. For more information, see the HIGA website.
Hiscox Action Group
Similarly, Mishcon acts for the Hiscox Action Group (HAG) which was established to represent the interests of a range of businesses who held insurance policies issued by Hiscox with specific BI extension wording which should respond to the present situation. Nonetheless, Hiscox denied claims under these policies. The HAG currently comprises nearly 400 members with claims totalling approximately £50 million in respect of policies that were triggered when access to premises was restricted following the outbreak of COVID-19.
These policies provide that any dispute must be decided by way of arbitration. The parties have now agreed that the claims can proceed by way of one consolidated arbitration before a panel of 3 arbitrators. For more information see the HAG website.
In addition to the arbitration, the HAG was also successful in its application to intervene in the FCA Test Case and those policyholders were able to make representations to the Court on the specific Hiscox wordings.
The FCA Test Case
The FCA, which regulates insurers, has suggested that up to 370,000 UK businesses could be affected by insurers' failure to pay out on BI claims which suggests the total amount involved could be £billions. On 1 May 2020, the FCA announced that, acting in the public interest, it would seek court declarations aimed at resolving contractual uncertainty in selected BI insurance policies. The FCA Test Case is intended to provide clarity on whether a sample of 17 different policy wordings, underwritten by eight major insurers, are responsive to COVID-19. It does not prevent individual policyholders from pursuing claims through negotiated settlement, arbitration, court proceedings as a private party, or taking eligible complaints to the Financial Ombudsman Service.
The judgment in the FCA Test Case will be legally binding on the insurer defendant parties to the test case in respect of the policies considered. It will also provide persuasive guidance for the interpretation of similar policy wordings and so will in our view directly impact the resolution of many more claims, beyond those which are subject to the specific wordings considered in the test case. The trial concluded on 31 July 2020 following eight days of submissions by the FCA, the interveners and the insurers.
Judgment is currently expected to be handed down in draft in mid-September. Many expect, as was echoed by Albert Benmichol, CEO of Axis Capital Holdings Ltd in a recent earnings call, that the judgment will be subject to appeal to the Supreme Court, given its significance.
Government response
The UK Government has been in discussion with the insurance industry throughout the crisis. While a number of stimulus and support packages have been implemented, it has not indicated that it would legislate to require insurers to pay out on BI policies. On 13 May 2020, HM Treasury did announce that the Government will temporarily guarantee business-to-business transactions currently supported by Trade Credit Insurance (TCI), ensuring the majority of insurance coverage will be maintained across the market. The Government will provide guarantees of up to £10 billion to TCI schemes on a temporary basis for nine months from 1 April 2020 (backdated) to 31 December 2020, with the potential for extension if required. There will then be a review of the TCI market led by the Department for Business, Energy & Industrial Strategy and Her Majesty's Treasury.
For more detail on how TCI works and what the Government scheme means, please see our update.
Regulator advice to insurers
Throughout the crisis, the Government and the regulator have issued specific advice to insurers about how to handle COVID-19 claims and how to treat customers who may be impacted. On 19 March 2020, the FCA warned insurers against blanket denials of cover and issued guidance to insurance firms confirming firms are required to carefully consider the needs of their customers and show flexibility in their treatment of them. On 15 April, the regulator published a 'Dear CEO' letter warning insurers to support their customers, communicate in an accurate and timely fashion with them, to make interim payments where possible and to assess claims. At the beginning of May, the FCA announced it would be launching the FCA Test Case to resolve the persistent uncertainty and it invited information and arguments from insurers and policyholders. In June, the FCA also issued guidance, which sets out the regulator's expectations for insurers and insurance intermediaries when handling claims and complaints for BI policies during the test case. Insurers are required to identify the potential implications of the test case on their decisions regarding claims and complaints, keep policyholders informed about the test case and its implications and treat policyholders fairly.
Regardless of the extent to which COVID-19 losses are eventually found to be covered, COVID-19 has increased scrutiny of the insurance industry and arguably forever changed the expectations regulators and policyholders place on insurance firms.
Case law and government moves in the US
Generally speaking, the US is considered to be a more policyholder friendly jurisdiction than the UK. As to be expected, hundreds of lawsuits have been filed (we believe approximately 700 at the time of writing) but most are in a preliminary stage. Of the few judgments concluded to date, there have been mixed results, so not simply a series of wins for policyholders.
In April, in the context of deciding whether local shutdown orders were legitimate, a US court ruled that the pandemic was a natural disaster (Friends of Danny de Vito and others v Tom Wolf & Anor.). That led some to think claims would be coming under policies covering natural disasters. However, we have not seen this materialise in this jurisdiction. To read further commentary, please see this article by Sonia Campbell.
In May, a judge in the South District of New York denied a policyholder’s request for an injunction to require immediate payment under a BI policy not subject to a virus exclusion (Social Life Magazine v. Sentinel Ins. Co). We understand that the court found the policyholder failed to show a sufficient likelihood of its ultimate case succeeding on the merits, based principally on the lack of evidence of property damage at the plaintiff’s business premises. In July, a Michigan judge granted the equivalent of summary judgment to the insurer in Gavrilides Mgmt. Co. v. Mich. Ins. Co. The claimant policyholders in that case were small businesses in the food & beverage industry. The judge held that, in the absence of any allegations of direct physical loss of or damage to property, the claimants had failed to make out a cause of action under the policy, which expressly required such loss or damage. The court emphasized that there was no allegation that the virus was even on the property. In August in the case of Studio 417, Inc. v. The Cincinnati Ins. Co., a Missouri judged denied an insurer’s application to dismiss the coverage claims of a proposed class of restaurants and hair salons, rejecting Cincinnati Insurance’s arguments that plaintiffs had not adequately stated a claim for “direct physical loss” or for “civil authority,” “ingress/egress,” “dependent property,” and “sue and labor” coverage under their “all risk” policies. In so ruling, the court acknowledged that “physical loss” and “physical damage”—both undefined in the policy—are distinct and not synonymous, and that “loss” includes “the act of losing possession” and “deprivation,” as well as property being in a condition that is “unusable for its intended purpose.” However, also in August, in Rose’s 1, LLC v. Erie Ins. Exch., a judge in DC rejected a policyholder argument that the mayor’s restaurant closure orders themselves constitute “direct physical loss” under the plaintiffs’ commercial property policies.
As in this jurisdiction, there have been attempts to launch consolidated or class action claims against insurers. This was resisted by insurance industry representatives. On 12 August, the same day the English courts agreed the HAG claims could proceed as one arbitration, the Judicial Panel on Multidistrict Litigation denied similar consolidation applications in the US, stating that “industry-wide centralization … will not serve the convenience of the parties and witnesses or further the just and efficient conduct of this litigation,” because the core issues “share only a superficial commonality” and because there were “very few common questions of fact, which are outweighed by the substantial convenience and efficiency challenges posed by managing a litigation involving the entire insurance industry.” (In re COVID-19 Bus. Interruption Ins. Coverage Litig., No. 2942 (J.P.M.L. Aug. 12, 2020), ECF No. 772) We understand from US commentary that the JPML may look more favourably on group actions against specific insurers and has directed the relevant parties to show cause why actions against four insurer groups (Lloyd’s, Cincinnati, Hartford, and Society Insurance) should not be centralized, with arguments on that to be considered late September.
As set out above, we also understand US Congress and several state legislatures have been considering, but are yet to implement, legislation to compel payments by insurers to small businesses and provide a “reinsurance backstop” for insurers.
Other jurisdictions
There have been some coverage decisions recently in France, Germany, and South Africa, in favour of policyholders. A Paris court recently ordered AXA to pay a restaurant's BI losses after French government closure orders. The relevant French court rejected AXA’s argument that general events like a pandemic cannot be insured. A regional German court held that local regulations prohibiting hotels from providing accommodation to tourists was tantamount to a closure and that the losses were covered within the "notifiable disease" provision of the policy. Further, a Cape Town court held an insurer of a café liable in similar circumstances. Therefore, not all courts accept the overwhelming view of the global insurance industry that COVID-19 losses were not meant to be covered. Interestingly, the South African Prudential Authority said in July that it does not think COVID-19 losses pose a systemic risk to the insurance industry.
Impact beyond policyholder versus insurer claims
As set out above, the judgment in the FCA Test Case is intended to provide clarity on the extent of coverage afforded to thousands of policyholders who have non-damage business interruption insurance policies. Whatever the outcome, it is expected that insurers and/or policyholders, may seek further redress. For policyholders who may have purchased insurance at significant cost, and which could be the lifeline for their businesses at this time, claims against their brokers could be explored. Similarly, insurers may seek to take action against brokers and other intermediaries if those intermediaries issued policies which may be found to provide cover in circumstances where the insurer did not consider it authorised the intermediary to provide that cover. Intermediaries who face legal action will of course turn to their Errors & Omissions (E&O) insurers for coverage. At this time, we consider it will be difficult to show broker negligence generally, particularly in circumstances where the entire insurance industry has essentially denied coverage for Covid-19 business interruption losses.
Even if the judgment in the FCA Test Case largely finds in favour of policyholders, there will be many for whom any pay-out is too little, too late. The Enterprise Act 2016 permits policyholders to claim for damages suffered as a result of late payment of claims by insurers. Whatever the ultimate outcome, economic commentators already predict mass insolvencies across the country. In the unfortunate event that a policyholder becomes insolvent, a claim against insurers can still be made (or continued) by the relevant insolvency practitioner, administrator, liquidator etc.
The reinsurance market
Insurers themselves will also be turning to their own insurers, who have reinsured the risks that they have underwritten. COVID-19 coverage could lead to some interesting disputes on that front. Commonly, a reinsurance contract provides the reinsurer must "follow the fortunes" of the insurer, written on a back-to-back basis with the primary cover, so reinsurance in principle pays out to the primary insurer when that insurer must pay out to its policyholder. However, we envisage reinsurers may well deny claims by insurers (their insureds) by asserting claims have been settled by the primary insurers due, for example, to political pressure or retrospective legislation – in essence on the basis that the losses do not properly fall for recovery under the insurance or reinsurance. In addition, issues such as whether and how the underlying claims can be aggregated by insurers may result in disputes at the reinsurance level. It is worth recalling that any catastrophic losses for the insurance industry would also impact their reinsurers. It is notable that Munich Re issued a profit warning on 19 June 2020.
For more detail on the possible implications for the reinsurance market, please see our update.
Insurance industry response
How much are insurers setting aside to cover potentially valid COVID-19 claims? In the first part of the year, Axis Capital recorded a charge of US$235 million to cover possible losses due to COVID-19 through property, event cancellation, accident and health and pandemic policies, says Peter Vogt, CFO of Axis Capital. In June, Zurich indicated it may face up to $200 million in BI claims in a worst-case scenario, depending on the outcome of the FCA Test Case. Previously, Hiscox had estimated that it faced roughly US$150 million in claims from COVID-19 but it has now revised its COVID-19 reserves upwards to US$232 million across the group. Aviva, which is facing a further class action from hotel chains in Canada, reported claims losses arising from COVID-19 in its general insurance business of £441 million. Aviva expects £276 million to be taken by its reinsurers leaving it with a net loss of £165 million.
Insurers will have tightened their policy wordings as a result of the claims arising out of the pandemic. In addition, COVID-19 and related losses are being excluded from cover on renewal or available as additional extensions to cover.
However, Insurers have seen an increase in the premiums payable for commercial insurance. Marsh's Global Insurance Market Index reported that the second quarter of this year saw commercial insurance prices increase by 19%. While that is consistent with a steady increase of over the last year or so, it is notable that this is the largest increase since the Index began. The Index reported that global property insurance increased by 19%, global financial and professional lines by 37%. Although it was D&O insurance that saw the largest price increases with US public company D&O up 59% and in the UK pricing reportedly increased by over 100%. That perhaps provides some indication of where companies and insurers see further claims emanating as the actions taken by companies in response to the pandemic come under scrutiny.
In addition, many insurers have sought to raise capital following the COVID-19 pandemic. QBE raised $750 million, Beazley £247 million and Hiscox £375 million. In July 2020 Willis Re estimated COVID-19 related capital raising at $16 billion. The ability to raise money in spite of the COVID-19 pandemic suggests the financial markets are confident insurers will be able to weather the pandemic.
Conclusions
The regulator regarded it as necessary to warn insurers not to issue blanket coverage denials and to assess claims properly. Even where coverage can be validly denied under a BI policy (for example where there are requirements to evidence physical damage to trigger the business interruption cover), we consider it likely that losses will still fall at the door of the insurance industry and the impact of COVID-19 is certain to be felt for a long time to come.
It is clear that the Court's much awaited Judgment in the FCA Test Case will be central to the ability of policyholders to recover losses from their insurers. Mishcon will be examining the Judgment as soon as it is handed down, and will thereafter be in a position to advise policyholders and intermediaries further.
In the meantime, any questions regarding Covid-19 business interruption insurance coverage should be directed to Sonia Campbell or Richard Leedham.