Business interruption judgment delayed – but insurers shouldn’t pause for breath

The UK Supreme Court’s much-anticipated judgment, following the appeals of the FCA’s business interruption test case, is now to be expected in January.

It is a judgment that will impact UK insurers of all sizes and hundreds of thousands of policyholders. At the heart of the case is a dispute over whether certain policy wording in relation to disease and prevention of access provides cover for losses incurred by businesses as a result of the COVID-19 pandemic.

Although a definitive ruling on all aspects of the case will not be issued until the New Year, insurers will have to continue to strengthen their systems and processes, scaling their resources to be ready for the complex set of challenges that lie ahead.

Even if the insurers involved in the test case are successful in their appeal against the earlier High Court ruling that largely found in favour of policyholders (particularly with regards to disease clauses), the impact on the insurance industry will likely be felt for the long-term, with the potential for further legal disputes, increased regulatory scrutiny and reputational fallout.

The FCA has described the impending Supreme Court judgment as “probably the most important insurance decision of the last decade”. Should the judgment rule against the insurers, there will be a wave of immediate issues that they will have to contend with.

Claims volume will require rapid response

Insurers are already under the microscope for what some have criticised as delaying tactics designed to avoid making payments. Many businesses are facing severe distress and are frustrated at the time it is taking the courts to clarify whether losses should be covered and their need for cash will guarantee political interest in the ruling and its implications. This - along with the sheer volume of potential claims - will put insurers under intense pressure to move at pace once the judgment arrives.

In addition, the potential for high value claims is likely to attract attention from third parties incentivised to maximise payouts. While some insurers will feel the process of quantifying losses should not be unduly complex, legal challenges are likely if calculations appear over-simplified to policyholders’ disadvantage. Although policy wording often includes clauses that restrict coverage to certain time periods and caps that restrict payouts, there is likely to be scope for dispute over how these caps should be applied or “stacked”.

A forensic level of defensibility will be critical, as insurers must be mindful of the significant risk of legal challenges over the methodology used to calculate the final value of claims. Econometric modelling can balance policyholder, regulator and insurer needs, and provide the solid rationale for calculations that policyholders and regulators will demand. Insurer activity will also be contextualised from an ESG (Environmental, Social and corporate Governance) perspective against a ravaged economic backdrop due to COVID-19, where the suffering or closure of small businesses could be directly linked to the action of much larger entities.

Errors and inconsistencies will be amplified

For insurers, it may soon feel like the eyes of every stakeholder group are watching their every step. Government, regulators, the media, complaints management companies, and of course businesses and the general public will be paying close attention to how they respond to the judgment and how quickly and efficiently they move to settle claims. Minor errors or inconsistencies in how claims are handled could pave the way to carrying a heavy cost at a later date.

The rapid deployment of waves of additional staff members may not fully solve the problem of such a huge and complex volume of claims to handle. The pressure to make interim payments quickly will only increase the risk of human error and a potential lack of consistency in decision-making, which could lead to expensive downstream corrective activity, as well as reputational impact.

Technology and data analytics can play a critical role in mitigating these risks and driving consistency, helping to simplify, scale and speed up decision-making. Data analytics could also help to flag potentially fraudulent claims and inform the resolution of other disputes further down the line, but time is fast evaporating to effectively assess and implement this level of robust digital support.

In it for the long-haul

Insured events on this scale are almost unheard of and it seems likely that the consequences will be felt for significantly longer than ever seemed possible at the outset, as case law and regulatory guidelines evolve.

For example, should the Supreme Court uphold the High Court’s judgment on how critical ‘trends clauses’ should be interpreted, insurers will have to consider carefully what this could mean for future insured events where there are arguably competing causes of a loss. This episode will also no doubt compel insurers to review their approach to providing future coverage for situations that are likely to have widespread impacts.

COVID-19 has already catalysed the need for greater digital acceleration in many aspects of our lives and those transformation efforts may be even more critical for insurers now, in preparation for what the New Year may bring.

In the short-term, there could be significant hurdles to clear within a mere matter of weeks and insurers should be strapping themselves in for a bumpy ride, taking positive action wherever they can.