We wrote in April 2020 about the potential impact of COVID-19 business interruption insurance claims on the reinsurance market. We were then still in the calm before the storm. The Mishcon de Reya Insurance Disputes team had received our first few instructions from policyholders wishing to challenge the position being adopted by insurers – that even non-property damage business interruption insurance did not cover pandemics such as COVID-19. We had commenced a spattering of arbitration and Court proceedings on behalf of individual policyholders. Other policyholders were organising action groups to work out what they could do about their positions. We were in discussion with some of these groups and with funders about what could be done to seek collective redress, but much was still up in the air.
Whilst it was clearly going to be a significant issue, no one at the time could have foreseen quite how the next 10 months would play out. Within days of writing we had commenced arbitration proceedings on behalf of approximately 400 Hiscox policyholders and were helping to establish a further action group for the hospitality industry (the Hospitality Industry Group Action). A few weeks later the Financial Conduct Authority declared its intention to become involved and we were quickly drawn in. What followed over the next seven months was entirely unprecedented for the Court system and for us as lawyers participating in the process. It broke new ground in terms of what the legal process can accomplish. The Supreme Court's judgment on 15 January 2021 stated that in very many cases insurers had been wrong to deny claims on the basis these policies did not cover pandemics, unusually adding particularly damning commentary as to the fact that certain insurers had ever sought to argue otherwise.
So what does this mean for reinsurers? Clearly, more valid claims mean more losses although we are aware of at least one reinsurer that had already reserved for full policy limits following the High Court decision, if not before.
We posed the following questions back in April:
- Will reinsurers be liable to indemnify reinsureds that have been compelled by local legislation to pay claims for which they otherwise denied liability?
- Does COVID-19 have the potential to give rise to multiple losses for the same insured?
- How might COVID-19 losses be aggregated across different lines of business and within longer chains of reinsurance?
At the time we noted:
"All of these questions will of course turn on a number of factors including the facts, the governing law and terms of the contracts in question. Understandably, the focus of Governments is presently on managing the immediate crisis and the extent to which insurers should be contributing towards those costs. Whilst we all hope to emerge once again into a more 'normal' world, it seems clear that the full ramifications of decisions taken now by both Governments and insurers are likely to impact both the insurance and reinsurance market for many years to come."
Ten months on, these issues are now upon us:
- The issue of insurers obtaining the benefit of emergency taxpayer funded assistance provided to businesses by the government when adjusting claims has not been settled, but has been the subject of exchanges between the Treasury, the Association of British Insurers and the FCA.
- The number of national lockdowns (and intervening localised ones) has given rise to multiple claims.
- Depending on how claims are presented, aggregation issues seem likely to arise.
There is now also a further question: could liability for any additional damages insurers may be required to make pursuant to S13A of the Insurance Act 2015 as a result of an unreasonable delay in paying claims be passed on to reinsurers?
Additional damages will not be universal. There seems a clear case for them against insurers that have been found to have denied claims on a wrong (and obviously wrong) basis, to the extent that they refused to accept a High Court ruling on them and forced the issue to be addressed again by the Supreme Court. Many businesses have suffered additional damage or even been forced into liquidation as a result of what is already a 10 month delay in payment based on an unreasonable refusal to pay their claims when they were presented.
The extent to which insurers will be prepared to admit or be held liable for such liabilities remains to be seen but additional losses could be significant. In the case of a business forced into liquidation or a restaurant forced to give up its prime location as it could not afford to keep up the rent, they could potentially amount to more than the original claims.
Following the Supreme Court decision insurers are now reviewing claims and starting to make payments. Reinsurance claims are also now starting to be presented. Although not yet reported publicly, we are aware of examples in England and elsewhere in which reinsurers are questioning the basis on which claims are being presented.
It remains an interesting time to be an insurance lawyer and COVID-19 seems destined to ensure that will be the case for some time to come.