A fight over pandemic insurance in the United Kingdom could go global. Some 1,200 British companies are awaiting a court case that will determine whether they are entitled to compensation for losses caused by Covid-19. Insurers can easily absorb even the worst-case payout. But similar rulings in other countries would keep the pandemic claims piling up.
Eight UK insurers are guinea pigs in the battle over so-called business interruption insurance, which compensates companies that are forced to close because of fire or natural disasters. Although most policies explicitly excluded pandemics, some contained more ambiguous wording. In an attempt to short-circuit legal battles, the UK’s Financial Conduct Authority has sent the case to court. It contacted 56 insurers, reviewed 500 policies and narrowed down the contentious issues to 17 contracts. The outcome of the July High Court case will affect 16 insurers including Hiscox, Zurich and RSA.
Even if judges decide all the insurers must pay up, the hit looks manageable. Payouts on UK business interruption claims tend to be capped at between 100,000 pounds and 500,000 pounds. At the middle of that range, the 1,200 cases would result in an extra 300 million pound bill. The Association of British Insurers previously estimated the UK industry would be on the hook for around 900 million pounds as a result of the pandemic. That’s manageable for firms like Aviva, which had over 12 billion pounds of excess capital in 2019.
Bigger troubles are brewing in other countries. In France, Axa lost a court case last month against a restaurant that was claiming two months’ lost revenue. The 47 billion euro insurer said it will pay the “bulk” of business interruption claims from French restaurants whose contracts were ambiguous. Politicians are also taking matters into their own hands. Lawmakers in New York and Ohio have introduced bills that would force insurers to pay out on pandemic-related claims.
Insurance stocks are so far shrugging off the risk. Shares in $3.5 billion Hiscox are up by a fifth since the FCA announced the test case. But if courts side with policyholders and a second wave of coronavirus infections breaks out, businesses will have a legal precedent to force fast payouts. That would present insurers with their own form of business interruption.