As we continue to watch business interruption lawsuits develop domestically, we were surprised by the UK Supreme Court’s ruling on January 15th, ordering UK insurers to cover losses sustained by businesses due to emergency shutdowns.
With new claims still being reported and thousands already filed, Lloyd’s of London estimated overall losses for the global industry in 2020 to be over $100 billion. Is this estimate too small? Too big? Right on point? Let’s take a look at happenings in courtrooms across the world and domestically to get an idea. We will start with the United Kingdom and its most recent Supreme Court decision.
Bad News for Insurers in the United Kingdom
Background. Similar to the US, starting last spring, as a result of regulations, guidelines and mandates imposed by the UK government, at least 6 UK insurers in some capacity, denied coverage (in whole or in part) for business interruption claims allegedly sustained by business owners or premises that were closed during the emergency. This caught the eye of Britain’s Financial Conduct Authority (FCA), whose primary responsibility is to ensure expectations of policyholders are met by protecting consumer rights, enhancing the integrity of the financial system and promoting effective competition in the consumers’ interest. As such, being a watchdog for the industry, FCA commenced initial proceedings against these carriers in the Commercial Court in June of last year in a test case.
Trial and Ruling. The trial lasted for about eight days and was presided by two judges, both with extensive knowledge insurance law experience. A joint judgment was given on September 15, 2020, in favor of the FCA and the business owners. The ruling was appealed but dismissed by the UK Supreme Court, allowing thousands of policyholders to proceed with the claims. The insurers argued that business interruption policies contained pandemic exclusions and should not be covered. The UK Supreme Court rejected the argument, and no further appeals were allowed from insurers. The decision by the UK Supreme Court has paved the way for approximately 370,000 UK policyholders and 60 insurers for an estimated $1.6 billion dollars in business interruption related claims. This figure is anticipated to be higher should the pandemic continue into 2021.
Mixed News in the US
With thousands of claims still in litigation, both policyholders and insurers have each had wins and losses in various jurisdictions in the past six months. The latest ruling of which we are aware was issued last week by a federal district court in Cleveland, Ohio, in favor of a restaurant chain that sued its carrier, Zurich Insurance Group. The ruling was based on the policy language, exclusions and definitions of direct physical loss or damage. The court found that the language was unclear, and the virus exclusion did not apply.
Interestingly enough, one day later, after this ruling was announced, a federal district court judge, Judge Benita Y. Pearson, requested the Ohio Supreme Court to rule whether COVID-19’s presence can be considered an insured direct physical loss or damage to property under state law. In her request, Judge Person explained that various interpretations of Ohio contract law by different courts threaten to undermine the law’s uniform application in similar cases.
We are yet to see how these developments will affect the cases still moving through the legal system domestically, but with no guidance from the federal government, it appears states might be forced to take matters into their own hands, which makes it even more challenging to predict the overall impact on the US insurance industry.