COMMENT: Business interruption battle is no-win situation for insurers

Published in: Risk management, Conduct risk, Corporate strategy, Regulation, Associations, UK, Rest of Europe, US - Canada - Bermuda, ROW, People, Covid-19

Companies: Association of British Insurers

In UK and US courtrooms, insurers and the customers whose business interruption (BI) claims they denied are discovering the painful truth that ‘talk is cheap, until you talk to a lawyer’.

If insurers lose the cases, an extrapolation of the latest estimates finds the worldwide pandemic BI bill could total $1trn.

The Association of British Insurers says UK members expect to pay out £900m – and that’s just for claims insurers agree are valid.

UK and US insurers could do worse than consider the voluntary compensation some underwriters in Germany, Switzerland and France are paying. It has cost those insurers more than €500m, and German politicians even had to ‘persuade’ underwriters there to compromise. But it has defused the situation and averted litigation.

Meanwhile, the BI timebomb ticks down in the US and UK. It may tick on for some time yet – and the BI test-case is likely to be only the start of the saga.

That’s because the loser will probably appeal to the UK Supreme Court, and if the court finds even limited cover is available, any policyholders still denied payouts might return to court for larger claims.

Business owners may also end up filing negligence claims against brokers who sold them BI cover in the first place.

Future of BI

In the post-Covid-19 world, insurers’ lawyers will be busy drafting explicit BI pandemic exclusions to avoid a legal battle in future about what policies do and do not cover.

BI cover will survive – SMEs need it too badly - but not in its current form.

In the insurance community it’s been said lawyers are exploiting the situation, but insurers signed off on BI policy wordings, so the mire they are now steeped in is partly of their own design.

When I covered Bernie Madoff’s $17bn fraud in 2008, I witnessed those duped rush to sue whoever they could try to pin blame on. Parties won, parties lost, but only the lawyers were guaranteed a win.

The BI legal battles being played out around the world will do the insurance sector no favours financially. The level of trust in insurers is likely to be badly damaged too, and probably irreparably for some.

David Walker