Over recent months our world seems to have turned upside down, and many sectors of the economy have witnessed wholesale changes that were unimaginable as recently as January or February.
Some sectors have fared better than others, whether because they were well-suited to the disruption or because they managed their reputations in such a way that they could be said to have had ‘a good pandemic’.
But the insurance industry is certainly not among them.
Indeed, the damage done to insurers’ reputations may have long lasting effects on the way in which companies and individuals approach risk transfer.
According to a McKinsey report, 60 per cent of small to medium-sized enterprises surveyed feel their insurers were not transparent over how Covid-19 would affect their policies.
One third say they are likely to stop buying business interruption cover altogether.
Ultimately, if policyholders do not believe that claims will be settled, they will not be willing to pay the premiums that keep insurers in business.
What is the current situation?
Put simply a great many businesses bought cover for issues such as business interruption - that they believed would cover them for pandemic related losses – only to find that insurers took a very different view.
Even before the lockdown took effect, the Association of British Insurers asserted: “Irrespective of whether or not the government orders the closure of a business, the vast majority of firms won’t have purchased cover that will enable them to claim on their insurance to compensate for their business being closed down by the coronavirus.”
Before long, pressure groups of small business owners were established to help pursue what they saw, and still see, as valid claims. It was at this point that the FCA got involved and published a plan to seek High Court declarations on a number of policy wordings.
The idea being that the declarations, while not binding, would help bring an early conclusion to disputes between insurers and policyholders.
Are these claims valid?
Broadly speaking there are three groups of claimants.
Firstly, there are those who believe they explicitly bought cover (under business interruption and other classes of insurance) with the intention of insuring losses accruing from widespread outbreaks of infectious diseases such as Covid-19.
Secondly, there are many companies who did not intend to buy any such cover and were not given it.
But there remains a sizeable number who bought related cover extensions where the intention to cover pandemics may not have been explicit and where the insurer did not necessarily intend to include it, but the policy does not clearly exclude it.
The detail of these extension wordings and each client’s circumstances vary widely. The picture is clearly not as simple as the ABI suggested.