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Law360, London (January 22, 2021, 3:28 PM GMT ) Insurers should consider the impact of last week's Supreme Court judgment on business interruption insurance for other types of claims, particularly those from flooding and storms, the Financial Conduct Authority said on Friday.
The watchdog said that insurers might have to change the way they handle claims that do not directly arise from the COVID-19 pandemic after a controversial legal test on causation was overturned on Jan. 15.
The Supreme Court in London overturned a ruling from 2010, which reduced the amount of money that businesses could claim if the surrounding area had been devastated by natural catastrophes.
"The Supreme Court and High Court judgments may provide guidance for interpreting types of policies and their response to perils outside the scope of the test case," Sheldon Mills, executive director of the FCA, said in a "Dear CEO" letter.
The causation test was established in the case of Orient-Express Hotels Ltd. v. Assicurazioni Generali SpA.
"Insurers should be aware of the impact of the Supreme Court overturning of the Orient Express case on the handling of their other claims in respect of other perils that result in wide area damage, such as flooding and hurricane risks," Mills added.
Mills said insurers should quickly pay out on claims that had been held up pending the Supreme Court judgment and "promptly reassess" those that had been rejected or not fully paid out on.
The FCA brought a test case against eight insurers with 21 policy wordings last June. The regulator was seeking legal clarity for small companies denied cover under their business interruption policies after being forced to close in the first U.K. lockdown.
Insurers relied overwhelmingly in their defense on the Orient Express decision.
In that 2010 case, a New Orleans-based hotel operated by the Orient Express chain was making a claim against its business interruption policy after storm damage arising from Hurricane Katrina closed it for two months in 2005.
But the initial arbitration hearing and the High Court at the time ruled that the hotel would have suffered business losses even if it had not been damaged, because New Orleans was effectively forced to shut down after the hurricane. It was therefore allowed to claim only a limited amount on its policy — as if it had been an undamaged hotel in a damaged city.
Many insurance companies argued that businesses would have suffered losses even had they been allowed to remain open during the COVID-19 pandemic, as people would have stayed at home. But the Supreme Court said Orient Express was "wrongly decided" and overruled it.
Fitch Ratings said on Monday that the decision to overturn the judgment, meant insurers could face a "substantial increase" in the cost of business interruption claims in future.
"Insurers have relied on this decision for the past 10 years to reduce payouts for business interruption claims claims," Fitch said.
--Editing by Ed Harris.
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