Following an incredibly accelerated judicial process, the UK Supreme Court found in favour of policyholders, substantially allowing the appeals made by the FCA on their behalf and dismissing insurers' appeals to the original September High Court judgment.
Insurance Insider gave a detailed account of the findings on Friday, although of course there is no substitute for reading the 112-page judgment itself.
Like any catastrophe, it is difficult to quantify the size of the insured loss on Day 1. But it is clear given the numbers of policies involved that it will be substantial, running well into the billions.
The judgment said that it would potentially affect outcomes for 370,000 policyholders, covered by over 60 insurers.
The earlier judgment from the High Court had increased the chances that UK commercial insurers would have to pay out many billions in claims, including crucially finding against insurers on the trends clause issue. That outcome has now been locked in by this verdict, which cannot be appealed.
But by extending coverage to a broader array of policyholders, including those that were able to partially mitigate their loss, and those that were instructed to close but without the full force of law, the insured loss has been inflated significantly.
The resounding defeat for insurers may also inflate ultimate payouts by encouraging insureds that have had their claims declined to revisit them, and by encouraging the development of an industry to farm claims.
The public markets seem to have shrugged at the outcome, with Aviva, Axa, Allianz, Swiss Re and Munich Re all outperforming market indices on Friday.
And Hiscox, which shed more than 6% in the minutes after the verdict, roared back to end the day up 3% after issuing a statement in which it said that its deterioration on 2020 claims from the verdict would be only $48mn net of reinsurance.
In its statement, the company said that fewer than a third of its 34,000 BI policies would pay because the ruling still required mandatory closing – something which the company believes does not apply to white collar companies where it has a concentration of customers.
But I think that a read-across from this very manageable $48mn to give the broader sector a clean bill of health misses a lot.
The implications can be divided into four:
First, the coverage dispute will now move up the value chain to reinsurance, with battle lines already drawn and some of the conclusions in the Supreme Court case giving reinsurers a fresh weapon to deploy.
Hiscox clearly stated that its revised loss estimate is net of reinsurance, and has previously made clear that it expects to make recoveries on its reinsurance programme. While RSA – which has a dead stock price due to its pending takeover – said that it does not expect its net loss to change materially.
"Reinsurance protection is expected to apply," it said baldly.
This may be RSA's expectation – but at the minimum there is risk around the outcome.
As previously reported in detail by this publication, major reinsurers including Munich Re and Swiss Re have taken a robust stance with clients around coverage for Covid-19 BI losses under excess-of-loss policies. (See Munich Re, Swiss Re and the multi-billion Covid-19 BI question – all of which still applied.)
The can was effectively kicked down the road at 1b January to allow reinsurance renewals to proceed, but a major fight is coming and there is a broad expectation that cedants trying to recover significant sums under cat treaties will have to go to arbitration – opening themselves up to binary outcomes.
The Supreme Court ruling includes a view on causation which reinsurers are likely to try to weaponise in negotiations, and which will inform the views of arbitrators.
The Court found that as a matter of causation, each single case of Covid within the relevant radius – and not the outbreak of the disease generally – was an effective occurrence and policy trigger.
"Still less could it be said that all the cases of Covid-19 in England (or in the United Kingdom or throughout the world) which had arisen by any given date in March 2020 constituted one occurrence," the ruling said.
"On any reasonable or realistic view, those cases comprised thousands of separate occurrences of Covid-19… The interpretation which makes best sense of the clause, in our view, is to regard each case of illness sustained by an individual as a separate occurrence."
Although some market sources pushed back on the suggestion that reinsurers would be able to use this finding to prevent any aggregation of claims under cat treaties, it now seems certain that this will feature heavily in the armoury of arguments deployed by reinsurers.
And if this is tightly applied, it would also imperil recoveries for cedants under aggregate treaties because any one occurrence would likely fall short of franchise deductibles designed to protect reinsurers from paying attritional claims.
Comments yesterday that the case gives insurers "certainty" around their exposure are deeply flawed given the scope for reinsurance disputes, which could mean in the worst-case scenario that insurers ultimately have to run a major cat loss net (except for any quota share cover they may have in place).
Second, this verdict increases the chance of further adverse legal judgments for insurers, directly in certain jurisdictions and indirectly in others.
A number of market and legal sources pointed out that the impact of the pro-policyholder judgment could extend beyond the UK.
The UK case has already been cited in Australia and South Africa, and there could be a clear read-across in countries with legal systems that parallel those in the UK – such as other Commonwealth countries.
And while influence will be diluted elsewhere, including in Continental Europe, the UK case will at least be a frame of reference and inform the approach taken by claimants.
Third, the verdict increases expected BI losses resulting from a major UK cat event, depressing returns.
The overruling of the Orient Express judgment will mean that in instances of a major cat, insureds will be able to assess lost income by reference to the last clean year, affording them higher indemnities.
At this stage, sources have not quantified the impact, but the new approach to business trends means that commercial property BI and cat treaties that pick up these exposures are now somewhat less profitable than they were.
Fourth, the success of the Hiscox Action Group could prompt further collective action backed by litigation funding, driving loss-cost inflation higher.
The Hiscox Action Group – the brash policyholder group that dogged the London-listed insurer – could be the model for future collective action despite the absence of a class action regime in the UK as such.
With the action group backed by Harbour, one of the best-established litigation funding groups in the UK, it also represents a fresh proof point for this route to pursuing redress.
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