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The fanfare announcement of the long-awaited Business Interruption COVID test case from certain sections of the media gave the impression that all policies would now pay out...

…However, the reality is that while a significant number of businesses will receive pay outs, the number is still a very small proportion of the businesses affected by the pandemic in the UK.

Whilst the decision will be welcomed by these firms, the truth is that insurers affected by the ruling never intended to provide cover for national or even regional lockdowns, although are now (rightly) paying the price of poorly drafted policy wordings.

The intention of the infectious disease and non-damage extensions of cover that have been the subject of the court case was to compensate a business following an event at or in the locality of their premises. The intention was to provide cover for the likes of a TB (tuberculosis) outbreak, which although serious could be contained and would only affect a small area.

Insurers provided this cover because their exposure to losses was limited, could be quantified and reinsured if necessary. Policies for smaller businesses were not priced to cover risks with such widespread exposure as a new pandemic. These risks are simply too big for mainstream insurance and cover has been the preserve of the large corporate world where risks are individually assessed and underwritten. The most high-profile example has been the Wimbledon Tennis Championship who reportedly bought pandemic cover and have received a large pay-out, but that was on the strength of paying annual premiums of circa £1m. However, unsurprisingly they have announced that they have been unable to obtain COVID cover for the 2021 tournament.

And that highlights the challenge of how and if cover can be offered for future pandemics. Annually UK insurers pay out around £55 billion in claims, a figure that is dwarfed by the Government’s bailout packages that are currently estimated to have exceeded £300 billion and rising rapidly with no end in sight, even with the vaccine programme.

There has been talk of a pooling scheme along the lines of PoolRe for terrorism and FloodRe for flood where insurers share the risk but with Government backing in case claims occur before sufficient reserves are built up.

However, having seen such a risk adverse reaction to the COVID crisis and the resulting economic damage caused by lockdowns would an insurer want to be involved, particularly as the existence of an insurance scheme (and someone else to pick up the tab) may in itself encourage an even more risk adverse reaction?

But in the meantime, the fast tracking of the test case through the Supreme Court will provide a degree of certainty in relation to the vast majority of outstanding COVID business interruption claims. The intention was to resolve most of the key issues involved with the claims and whilst only eight insurers were the subject of the proceedings, the Financial Conduct Authority have instructed all insurers to review their policy wordings and claims in the light of the court findings. 

Most claims should now be settled, although there will still be some issues which could require further court action.

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