How the UK pandemic business interruption test case could play out

The industry will likely learn next month the outcome of a business interruption coverage test case arising from the COVID-19 pandemic, but the verdict is likely to be appealed, a Bermuda insurance CEO suggests.

The British Financial Conduct Authority filed this past June a claim with the High Court of England and Wales to resolve uncertainty around the validity of many business interruption claims arising from COVID-19. The trial wrapped up July 31.

“We will probably get a response some time in September and that will probably go to appeal, and [we have] no idea when those appeals will be resolved,” said Albert Benmichol, CEO of Axis Capital Holdings Ltd., during a conference call announcing the financial results of Axis for the three months ending June 30.

The British trial is over 17 policy wordings from eight insurers that provide business interruption related to government orders or advice to shut down a workplace. It will have an impact in the Canadian commercial P&C market, Eric Charleston, a Toronto-based associate with Miller Thomson LLP, predicted in an earlier interview. This is because the outcome is likely to create a precedent for Canadian courts in similar BI coverage disputes here, Charleston said at the time, commenting in general on BI coverage and not on the impact on Axis or any other specific insurer.

That said, the outcome is only legally binding in Britain on the insurers that are parties to the test case; and only with respect to the specific policy wordings considered by the court. The case is not intended to encompass all possible disputes, nor is it intended to figure out how much is actually payable on those policies.

What the 17 wordings in the FCA test case have in common is that they do not require actual property damage to trigger coverage. Business interruption coverage depends on the policy wording. In many cases (but not those under consideration in the UK test case), the policy wording does in fact require something along the lines of physical damage to the property or a peril that would be covered in the property policy.

Although only eight insurers are named defendants in the FCA test case, it could still have an impact on dozens of other insurers, including Axis Capital. FCA canvassed the industry and published a list of policies where an insurer concluded that the test case may affect the outcome of that insurer’s claims generally. That list is comprised of more than 600 products – including seven by AXIS Managing Agency Limited and 10 by AXIS Specialty Europe SE.

There are different possible financial impacts on Axis Capital, depending on the court decision, Benmichol said July 31 during the earnings call. “Ultimately, it would have a limited impact on us if it went against us,” Benmichol said in reply to a question from an investment banking analyst.

During the first quarter of 2020, Axis Capital recorded a charge of US$235 million to cover possible losses due to COVID-19, which the World Health Organization declared a pandemic on Mar. 11.

That charge is related to property, event cancellation, accident and health and pandemic coverages, said Peter Vogt, chief financial officer of Axis Capital, which writes both commercial primary and reinsurance worldwide, including in Canada.

The “vast majority” of that $235 million in COVID-19 provision is for losses incurred but not reported, said Vogt. “So far, we have seen no surprises and this estimate continues to hold,” Benmichol said July 31.

One analyst asked what Axis could potentially pay out in the third quarter on event cancellation policies.

“We are not big in the event cancellation business at all,” replied Vogt. “We literally have two contracts. Both are associated with the [2020] Olympics, so that it the only event we are looking at.”

In the FCA test case, disputed policy wordings include  “access to or use of the premises being prevented or hindered by … any action of government police or a local authority due to an emergency which could endanger human life or neighbouring property.”

Another is “interruption of or interference with the business arising from  … any human infectious or human contagious disease (excluding Acquired Immune Deficiency Syndrome (AIDS) or an AIDS related condition) an outbreak of which the local authority has stipulated shall be notified to them manifested by any person whilst in the premises or within a twenty five (25) mile radius of it.”

Similar policy wording covers “occurrence of a notifiable disease within a radius of one mile of the premises.”

One of the insurers in the test case says its notifiable disease wording did not create coverage for many of the British businesses that had to shut down due to COVID-19, even if there were outbreaks of COVID-19 near their business location. The key question is: If it was not for the manifestation or occurrence of COVID-19 within the relevant geographical area, would the client still have suffered an interruption or interference?

The Financial Conduct Authority argues that nothing in the policy wording at issue denies coverage if the loss was caused by COVID-19 more generally – such as other public authority action, or public reactions to the pandemic – and not just by a case of COVID within a certain distance of the insured property.

Feature image via iStock.com/isayildiz