Hospitality insurance specialist Steven Swift of Sector Associates, which works with trade bodies including UKHospitality, gives his view on what the Supreme Court ruling means for businesses and how insurance policies could change in future.
Why is there still so much confusion about whether policies pay out after the Supreme Court ruling?
Last year the Financial Conduct Authority (FCA) reviewed several hundred policy wordings and produced a list of those they felt were unclear. This included those which covered any diseases, including ones we don't know about, within a specified radius or the vicinity of the premises that causes closure.
This affected 370,000 policyholders, which is estimated to be less than 10% of impacted businesses in the UK. In the majority of cases the FCA felt policies were clear and did not list Covid-19 as a possible disease. Those policies were not included in the test case that went to the courts. The FCA also didn't challenge policies which stated the disease had to be at the premises.
There has been some misrepresentation in the media about what the judgement means. If you turned on the news two weeks ago it sounded like everyone was going to get paid. People are only getting claims paid on policies which the court case affected.
What about the policies included in the Supreme Court ruling?
Insurance companies need to move quickly to get payment to people that are covered. They've dragged it to appeal and lost so now need to pay out, because otherwise some businesses won't come through this.
Why do so many insurers require Covid-19 to be specifically named in the policy?
Business interruption insurance was originally about localised disease at a premises, so often a list of 30 diseases such as anthrax, yellow fever or cholera, which could close a restaurant. For each item on that list there is data on how frequently it has been reported in the past 20 years to estimate pricing and potential cost. How do you do that for a disease you don't know exists yet? However, some insurers such as Hiscox did list cover for ‘any notifiable diseases', and it got caught out by the courts.
How likely is it business owners whose policies were not in the FCA case will be able to get insurers to pay out by taking further legal action?
The FCA and their barristers will have looked at these wordings and said they aren't winnable. If there's a chance they could get insurance companies to pay on certain wordings they would have included them in the case and they didn't. It would be a brave and expensive move for someone else to take it on. The FCA moved fast but it was almost a year from Covid becoming a notifiable disease until they reached a judgement, and it hasn't declared the cost of the trial and appeal. You would need deep pockets to take on insurance companies.
I understand the sentiment but am being pragmatic. If someone takes insurance companies to court and wins on a technicality that would be great for the hospitality industry, but I question how likely it is, how long it would take and how much it will cost.
Are there other issues the court ruling didn't cover?
There is an issue of aggregation that the case didn't get involved in. If you had a limit on a policy, say £50,000 for business interruption through Covid-19, does that limit apply per premises if you had multiple sites? And does each lockdown count as a separate incident? If so, you could get paid two or three times. The courts didn't get involved on this so we're waiting to see what insurers do, as there's still some confusion.
Are insurance policies likely to change as a result of the pandemic?
I don't see there being any cover for Covid-19 in the short-term. In the past there have been similar issues with terrorism and flooding, which you can now insure against. We have data on how many floods there have been in the last 100 years and the cost, but we don't have all the data yet on coronavirus and the overall impact, so it's difficult to start building a pricing model. There is scope to look at some kind of pandemic cover, but I think it will be a couple of years down the line.
What will be the impact of this on the insurance industry?
We do need clearer and simpler policies. There's a lot of information to give clients at renewal and business interruption normally has about 15 clauses. Is enough being done to talk clients through each section and what is and isn't covered? And, playing devil's advocate, do clients really give that much time to their insurance policy?
It's difficult for customers because they've paid the premium and the one time they've come to rely on insurers they let them down. I think there's a trust issue and, as an industry, there will be question marks over credibility. But there will be other disasters in future and insurers will come through. In the short term there's a bitter taste in the mouth.
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