BI test case decision is ‘conclusive judgment in favour of policyholders’

Yesterday’s ruling on the FCA’s test case into the interpretation of non-damage business interruption (BI) policy wordings in relation to claims caused by the Covid-19 pandemic is “a conclusive judgment in favour of policyholders” that does not need “further filleting” according to Branko Bjelobaba, principal at general insurance FCA compliance consultancy Branko.

Deeming the verdict “no surprise”, Bjelobaba continued to discuss his reaction to the High Court judgment with Insurance Times. He said: “Insurers were overinterpreting words that had a very basic meaning and, at the outset, what this shows to me is that clarity in wordings is crucial, especially with insurance policies because the basic tenant of a business interruption insurance policy is to protect the business against interruptions to the business. This has happened and what insurers have done or have not done is use the right combination of words to limit what they were prepared to pay out on.

“So, because some of their wordings were as wide as barn doors, it would appear that the Court has told them that they have an exposure, but all of this – obviously – is predicated by an appeal, either to the Court of Appeal or Supreme Court for further clarification.

“I would hope, in view of the two justices that have sat in on this, a Court of Appeal judge and an experienced commercial High Court judge, that this does not need further filleting. For me, this is a conclusive judgement in favour of policyholders.”

Onerous work ahead

For Bjelobaba, insurers have a lot of hard work ahead. In part, this is because of how varied the scope of BI policy wordings are, meaning that a blanket judgment was in no way possible.

For example, he noted that some of QBE’s wordings were “a lot tighter” because they demonstrated that the insurer had considered specific and localised events. This means that policyholders would only be able to claim if they could prove that a case of Covid-19 was within the policy radius as opposed to elsewhere; this may be particularly pertinent considering the localised city and regional lockdowns that have been coming into force.

“Underwriters understood what the business wanted and delivered a tighter wording. So straightaway this gives me issues of we’re nowhere near the finishing line on this,” Bjelobaba said.

“This means that insurers have now seven days to go back to insureds and tell them what they’re doing, but in effect the Court has said you need to re-analyse your wordings. We’ve given you some clarity on what we expect, so there’s going to be even further analysis as to how this judgment now fits particular wordings.”

This kind of analysis “imposes even further onerous work on insurers to fillet out the policy wordings under which their clients are insured”.

Bjelobaba explained: “You now have to examine the type of business and put it against this judgment matrix to work out what should spit out at the end, whether it’s a full payment, partial payment or do we carry on with no payment, which I don’t think for many will be the case.”

He gives the example of restaurant owners here, adding that business interruption does not have to mean a complete cessation of operations.

“If the restaurant only offered ’sit down’ [meals], then clearly it’s ceasing to trade. But if the restaurant, a typical Indian restaurant [for example], they offer takeaway, so that can carry on. [It is then] what the balance is of the business interruption. If half your business is takeaway, then theoretically you’ve only lost half the business because half the business is not able to happen, the ’sit down’ bit.

“Insurers are now going to have to analyse all the types of policies held by the type of insured and check against the advice and the regulations as to what had to close when and was it a mandatory closure. If it was a mandatory closure, I would say that’s when the policy kicks in, but if it was just advice, which I don’t think it was advice, then perhaps they can still say you could have traded. This is going to take so long to sort out.”

In effect, then, two restaurants with the same insurance policy that both offer a sit down service, yet one also offers takeaway, could receive different results for their BI claims, especially when factoring in how closure dates correlate with government advice, given on the 16, 20 and 23 of March, versus mandatory regulations delivered on 21 and 26 March. The judgment decreed that it is only these second dates that trigger cover.

“Yes, it is a clear win for the FCA, but at the same time it creates a lot more work,” Bjelobaba added.

On the other hand, many policies did not specify that an outbreak of disease could only occur within the policy radius. Bjelobaba explained: “If [it was insurers’ intention to] close down the occurrence within a localised area, well they should have used the word ‘only’.”

Clarity

Despite the increase in workload, the additional clarity granted by the ruling is welcome.

“Before this started, there was a lot of ambiguity, but now there is less ambiguity and there are clear principles to follow in order to accept a claim, or – in a limited number of instances – continue to reject the claim,” Bjelobaba said.

“If there’s clarity, pay the claims as quickly as you can.”

He further predicted that the fallout from the test case ruling could run well into next year, especially if insurers appeal the judges’ decision.

The broker position

With regards to broker scheme wordings, Bjelobaba said this “causes further concerns”.

He continued: “If the broker wording may have been defective, the insurer would still have signed off on it and I would want evidence that it’s the broker’s interpretation that has denied the claim.

“I would simply suggest that it’s the insurer’s interpretation of the wording that is at fault here rather than the originally construed wording.

“They have taken upon themselves to over interpret the wording and you’re splitting hairs as to who put the wording together, be it insurer or broker. Ultimately, the insurer would have signed off on this.”

‘Seismic lesson’

Bjelobaba concluded by calling this unfolding of events “really momentous”.

“You’ve got to be clear with your wordings,” he emphasised. “Express in simple language what’s your intention and then put that intention together in some clearly constructed sentences.

“Those insurers, albeit the minimum, who have used tighter wordings, the Court has reflected on that and now is putting it to the insured to say you now need to evidence your claim further, whereas the vast majority of insurers haven’t given thought to closing down on what it is that they want to cover.

“That will be a seismic lesson, not just in business interruption commercial insurances, for all sorts of insurances.

“Going back to when this all started, insurers were all on the same page – our policies were never intended to cover pandemics. Great, but then it’s your wording that either agrees to that or disagrees with that and clearly some insurers have got it right but most of them got it wrong.”