Ahead of the handing down of the FCA's BI test case verdict, we said that the judgment was likely to be complex rather than all-or-nothing, with scope for a different picture to emerge on individual wordings, as well as on the key legal principles. And we stressed that this was just a milestone on the path to certainty, with appeals highly likely.
Broadly, we think that view remains intact today. It is too simple to say that one side has won, and even were that possible, this would represent only an interim victory.
In the round, insurers have got the worse of the judgment, particularly on the key legal principles at stake, although in certain cases they are saved by aspects of their wordings with some insurers (Ecclesiastic, Zurich) not judged to have provided any coverage. That increases the likelihood of substantial UK BI losses – running to many billions – resulting from Covid.
But it is difficult to call a major defeat for insurers on a day when Hiscox's share price surged by 17%, and RSA's advanced by 5%.
Both companies were in a position to disclose the likely financial implications of the judgment (subject to any party pursuing an appeal), and should they prove accurate, they are highly manageable.
Hiscox has been the biggest casualty in the PR wars ahead of this case, but this was not the crushing verdict some may have expected.
More broadly, it is difficult to assess the impact on different insurers, with a lack of clarity around the mix each player has between the different types of wording. And at policyholder level, judgement will also have to be exercised around the particulars of different cases.
We will offer a few points on key areas covered in the judgment, but we would point readers towards some of the excellent work put together by the (non-retained) law firms, including this from Herbert Smith Freehills, and this from DAC Beachcroft. Ultimately, there is no replacement for spending time with the 160-page judgment (downloaded here) given that much of it is structured around industry policy wordings.
- Disease wordings – In most cases, coverage under these wordings seemed to be established, with the court ruling that disease cover was not generally confined to a local occurrence of a notifiable disease. It also ruled that the insured peril was a composite of Covid-19 and the government action. Two QBE wordings required an "event" trigger and were judged not to extend cover.
- Prevention of access/public authority wordings – The judgment was more favourable to insurers on these wordings, stressing that this protection was typically narrower and more local in scope.
- Business trends – The court further found against insurers here. Reflecting its view that the insured peril compounded both the pandemic and the government action, the court judged that the correct counterfactual was one in which Covid-19 did not exist rather than one in which the virus had occurred but no restrictions were enforced by authorities.
A crucial point for Hiscox was the ruling in the section covering its public authority wordings that for cover to be triggered, action had to be taken which has "the force of law".
"Guidance, exhortation and advice given by the government, including by the Prime Minister, including as to social distancing, do not count as 'restrictions imposed' by a public authority," the court found.
This finding drove Hiscox's disclosure that fewer than one third of 34,000 in-scope policies would respond, with the remainder operating in white collar industries or other areas like manufacturing where businesses were allowed to continue operating on premises, although many chose not to.
As such, Hiscox was able to report projected property BI losses of only £100mn, net of reinsurance – below the mid-point of the £10mn-£250mn range it had previously issued based upon a range of possible scenarios. Alongside the indication of strong mid-year growth (19% in July and August), this drove the stock significantly higher.
Given the stakes involved, it seems highly likely that some elements of the judgment will be appealed, with scope for a leapfrog appeal to go to the Supreme Court. This creates opportunity not only for delay, but for a material revision to the High Court's decision – and one which could come late this year or early next.
There are two crucial additional issues downstream.
It is very difficult to estimate the likely loss quantum, but the chances that claims run well into the billions has escalated and the differential wordings create scope for an asymmetric loss.
As such, we are clearly in the territory of a potential excess-of-loss reinsurance loss, and Hiscox's estimate clearly benefits from substantial presumed reinsurance recoveries (with RSA explicitly confirming it will make recoveries including on an aggregate deal).
Privately, reinsurers have been making some strong statements to trading parties about how they will view excess-of-loss claims with a whole series of potential issues around event definitions, aggregating claims and hours clauses that could hamper recoveries.
It is impossible to place a probability on some of these insurers failing to recover in full from reinsurers, but there is enough chance of this outcome that it should be taken seriously.
2. Ongoing exposure
The (interim) confirmation of coverage in cases and the ongoing status of the pandemic flags up the significant ongoing exposure of the UK insurance industry.
A second nationwide lockdown is possible and some regional and local action could also trigger further losses.
It is not clear if insurers have fully re-underwritten their books since March to exclude Covid-19. And even if that had uniformly happened, there will still be a major in-force book on existing policy forms, some which may have unexhausted BI coverage.
All of this is to say that the Covid-19 BI loss in the UK is not necessarily historic – there could still be further losses to come.