We have all followed the high profile test case, brought by the FCA, to clarify how Business Interruption policies should respond to pandemic related claims. The Supreme Court judgment in The Financial Conduct Authority v Arch and Others has provided much needed guidance on the law is this area. Not least, it has overturned the egregious decision in the Orient Express Hotels case which left a hotel policyholder without cover from the impact of Hurricane Katrina. The court had decided in the now discredited case that a policy holder can’t claim for a BI loss if the event which caused it damage also led to wider area damage which would have affected its business even if it had suffered no direct loss!
Although the recent test case went against insurers on all the main issues-much to the relief of policy holders and brokers – it is by no means the end of the saga. Policyholders will still have to prove their specific BI claims. This is a notoriously difficult area with insureds having to gaze into a crystal ball in order to estimate what their turnover and profitability would have been, absent the pandemic.
The FCA has written a Dear CEO letter to all insurers setting what it expects to happen now following the Supreme Court decision but there remain areas of uncertainty and the risk of satellite litigation or arbitration.
On the day of the judgment the FCA said:
“The test case was not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and “causation” issues to provide clarity for policyholders and insurers. Today’s judgment does not determine how much is payable under individual policies…”
BI policies are, of course, not the only insurance policies impacted by Covid. Event Cancellation, General Liability, Professional Indemnity, Property, even D&O and E&O policies, will give rise to claims and possible liability or quantum disputes.
There will probably not be the appetite for more test cases but insurers are nevertheless faced with yet more reputational damage if they are thought to be dragging their feet over the agreement of individual claims.
No doubt claims handlers and brokers will engage in negotiations and many claims will be resolved sensibly and commercially. There will however be many claims which prove more intractable. Insurers may press for levels of information and documentation in support of claims for financial loss.
Insureds whose business have been closed or materially disrupted will understandably expect claims to be resolved quickly and insurers need to be mindful of additional liability for the late payment of claims.
Reinsurers may also have serious concerns as to how claims will flow through to reinsurance treaties. There are likely to be issues as to number of events, the aggregation of claims, and which layers of reinsurance must respond.
We should not forget the potential exposure of brokers when policy holders find that their cover is deficient due to the vagaries of particular wordings.
How should claims be handled by insurers?
The FCA has also said, in relation to BI claims but equally applicable to other classes of insurance, that insurers should provide interim payments where possible. That however begs the question as to how to resolve genuine disputes without recourse to courts or arbitrators and without prompting insureds to make complaints to the Financial Services Ombudsman.
How can mediators and mediation organisations assist this process? At the individual claims level a mediator can establish a process for narrowing any gap in information between the parties, helping them to understand the other party’s position and moving away from confrontation towards a collaborative process.
However, where insurers are faced with many thousands of claims with aggregate values in hundreds of millions, they need a process capable of managing those claims without the luxury and expense of bespoke mediation for individual claims. There is increasing interest in the use of more structured dispute resolution mechanisms, involving mediators much earlier in the process.
Their role would be to independently assist policy holders, insurers, brokers and even reinsurers to resolve Covid claims. The mediator could both assist the parties to come to their own solution and provide a recommended settlement option. The whole process would be protected by privilege and confidentiality and would no doubt be conducted virtually in most cases.
In an era where action groups are a growing phenomenon, and with the ready availability of litigation funding, the insurance industry needs to urgently review its approach to disputed claims handling. Insurers want to pay genuine claims but we perhaps need new mechanisms to achieve this admirable goal.