Canadian Underwriter

Will the U.K. decision in a test BI case matter to Canada? Intact and ratings agencies weigh in.

September 17, 2020   by Greg Meckbach

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The verdict in the British Financial Conduct Authority’s business interruption test case could have an impact outside of Britain, one credit rating agency warns, but Canada’s largest carrier appears to be largely unaffected.

The vast majority of Intact Financial Corp.’s business interruption policies are significantly different from the wordings at issues in The Financial Conduct Authority v Arch and Others, released Sept. 15.

“For Intact, in 99.5% of our policies, there needs to be physical damage to trigger business interruption coverage – for instance water, fire, wind, hail – and our policy language is very clear in that regard,” a company spokesperson told Canadian Underwriter. “Intact’s business interruption coverage does not cover pandemic and this particular U.K. case and others in the U.S. reinforce this.”

The FCA ruling is binding only in Britain in respect of the 21 policy wordings at issue. Insurers in the U.K. case argued that none of their 21 policy wordings cover the specific circumstances of the business closures in Britain related to the COVID-19 pandemic. Eight defendants were named.

The policies at the centre of the U.K. court proceedings are extensions that provide BI coverage in the absence of physical damage to the insured premises, DBRS Morningstar noted in a paper released Wednesday. The title of the paper is Initial Implications of the UK High Court Business Interruption Insurance Test Case Ruling.

Related: Mixed result in British court ruling in business interruption coverage dispute

“BI policies were designed to protect against the loss of income caused by a peril covered under the property insurance policy, such as a fire, earthquake, or flood,” wrote Marcos Alvarez, DBRS Morningstar’s Toronto-based senior vice president and head of insurance, and Elisabeth Rudman, London, England-based managing director and head of the European financial institutions group for DBRS Morningstar. “However, over time, BI coverage has extended to cover the loss of income even in the absence of physical damage to the insured premises, including BI losses caused by the actions of a civil authority.”

Alvarez and Rudman believe the impact of the decision “could extend beyond the British insurance industry given the level of integration between insurers and reinsurers on a global scale, the relevance of the London Market, and the common-law precedent that could be used in other jurisdictions. The FCA expects that British insurers will begin to settle claims as soon as possible, with any legal appeal being initiated promptly to avoid further delays for policyholders,” Alvarez and Rudman wrote in their paper.

Some policies in question provided coverage for clients suffering interruption or interference with their business either following, arising from, or as a result of a disease “manifested by any person” within either 25 miles or one mile of the location. The court ruled against the insurers in some particular instances, and in favour of insurers in others, depending on the specific policy wording.

Insurers argued that because there were national restrictions across Britain, a client’s business would have been interrupted even if no COVID-19 cases had occurred within 25 miles.

But the court held that cover was not limited to outbreaks wholly within the relevant policy area, noted Herbert Smith Freehills LLP, a law firm representing the FCA. This is partly because those particular policies did not expressly state that the disease should only occur within the relevant policy area.

“Human infectious and contagious disease by its nature may spread in a highly complicated and fluid pattern,” Herbert Smith Freehills noted. “Cases within the relevant policy area are not therefore independent of, and a separate cause from, cases outside the relevant policy area.”

A.M. Best Company Inc. commented on the outcome of the U.K. case in a report released Sept. 15. “Some uncertainty remains around the volume and severity of valid claims,” A.M. Best said in its report. “Either side may appeal the court’s decision, subject to procedural rules; additionally, the test case does not directly address how resulting claims payments will be calculated.”

But the ruling does give clients better clarity as to whether their claims will be covered, added A.M. Best.

Feature image via Eidelman