The FCA Supreme Court verdict: what does it mean for reinsurers?

The Covid-19 BI disputes pendulum will now swing from insurers to the reinsurance market, following today’s FCA Supreme Court judgement which largely sided with policyholder arguments at the expense of the industry.

Speaking to The Insurer TV shortly after the UK Supreme Court handed down its pro-policyholder decision, London market lawyer Damian Cleary predicted reinsurers now face a “wave of indemnity” from their cedants, who themselves are now facing the prospect of higher than hoped for BI losses. 

“There is a very large part of the market, the reinsurance market, who are now going to be reaching for their coverage adjusters and lawyers to ascertain the impact of all of this. In light of today’s judgment and the much greater indemnity that is going to have to be paid, that wave of indemnity will now crash upon the shores of the reinsurance side of the market,” he said.

According to Cleary, the consequence will be further legal disputes as reinsurers and their clients seek to interpret clauses in the relevant reinsurance contracts. The meaning of loss occurrences within reinsurance contracts and catastrophe clauses will all need to come under the microscope, he said.

“There is going to have to be a very clear line drawn between the peril insured and the consequential losses as a result of this peril. There is some tension in the Supreme Court judgment for the purposes of measuring loss,” he explained.

Commenting on the Supreme Court’s ruling, Cleary said  the “big takeaway” for the market is the Court’s decision on causation which saw the pro-insurer Orient Express ruling marginalised by the Supreme Court.

In a complex judgment extending to 112 pages, the UK’s highest court sided with the High Court’s September ruling that found Orient-Express Hotels Ltd. v. Assicurazioni Generali SpA had no relevance to the pandemic and would be found to have been “wrongly decided” if it did apply.

The eight defendant insurers involved in the regulator’s test case relied heavily on the Orient Express decision to support their arguments on causation of loss and the effect of the trends clauses in Covid-19 BI claims.

Cleary - who acted for Generali in the Orient-Express dispute - said today’s ruling will have “far reaching consequences”. But he also criticised the arguments made by some of the insurers which included Hiscox, QIC and RSA (see table).

“The arguments should not have been argued as they were,” he said. “As a matter of logic, they [the Supreme Court] obviously found the FCA’s submissions in argument much more enlightening and thorough and therefore correct as compared to the arguments put to them by Orient Express. 

“They were not persuaded by any of the arguments put forward by insurers in the test case and the market will now look quite carefully at that,” he added.

Cleary says there are concerns mounting in the wider market that the industry is effectively “bound” by the failed arguments of some of the UK insurers.

“We have to live it. The arguments were put forward and the Supreme Court were not satisfied by those arguments. The insurance market is going to have to dig deeper into their pockets in order to respond to the hundreds of thousands of claims.”

He said the immediate consequences of the ruling for the market is that it will have to “look very carefully” at the way BI policies are underwritten and worded going forward.

“One thing that the market has already done – certainly at renewal – is to insert wholesale exclusions for epidemics and pandemics so that there can be no question that any unintended coverage is expanded to include cover for situations like this,” he added. 

Damian Cleary is an insurance lawyer who has been advising the London Market on predominantly property, engineering, business interruption and associated reinsurance matters for 25 years. Having been a partner in some well-known insurance law firms over the years, he now practices as an independent solicitor through DCThree Services.