Housed in futuristic “inside out” glass and steel, Lloyd’s of London’s humming underwriting room, where brokers file in and queue to haggle over insurance contracts, remains one of the City’s enduring anachronisms.
The Covid-19 lockdown has left the home of the world’s biggest insurance market silent for eight weeks, but the tumult engulfing the industry is reaching a crescendo.
Cash-strapped dentists, holiday-home owners, hotels, cinemas and bars are clamouring in vain for payouts under insurance policies they believed would cover lost profits if they were forced to shut down.
Banks were criticised for being slow to hand out government-backed loans in the early weeks of the crisis but money is flowing at last. Now insurers risk becoming the villains.
“The insurance industry has so damaged its brand and its reputation,” says Mark Killick, a director at PR firm Media Zoo, which is part of the Hiscox Action Group. This is a coalition of almost 600 small businesses preparing to take legal action over Hiscox’s refusal to pay out for coronavirus-related losses under their business interruption policies.
“What is the point in going to an insurance company if its position is, ‘We’re interested in your premium but we’re not interested in paying you when you need it’?” says Killick.
Insurers dug themselves an even deeper hole with the tone of their public response. Gone were the platitudes rolled out after the severe flooding in January and February, when chief executives said that customers were seeing the value of insurance.
Instead, many firms stayed quiet and left the Association of British Insurers to do their bidding. The ABI was accused of being brazenly unsympathetic and infuriated customers by stating flatly that most policies would not cover losses arising from the pandemic.
“There have been some clumsy remarks made by the industry or its representatives to the press, which I think is extremely unfortunate. It has not done the reputation any good at all,” admits Stephen Catlin, chairman and chief executive of commercial insurer Convex, who is chairing an industry group aiming to devise a government-backed solution to covering rare, “black swan” events.
Hiscox and other insurers protest that their business interruption policies were never intended to cover a pandemic or nationwide lockdown and that paying out on every claim would bankrupt the industry.
“Where people have misunderstood business interruption cover in the UK is that it is related to property damage, and it’s an extension of property damage [insurance],” says Bruce Carnegie-Brown, chairman of Lloyd’s.
“So where there is no property damage, these claims theoretically don’t pay. But of course, it is labelled ‘business interruption’ and most people would argue they’ve had business interruption [due to coronavirus], so we’ve got to do some testing of this in the courts.”
The City regulator has sided with insurers by acknowledging that the vast majority of business interruption policies will not pay out, but much of the confusion has been caused by sloppily worded contracts.
As insurance prices fell over the course of almost two decades, so did standards of care in underwriting as insurers scrambled to compete to win business at all costs, insiders say.
“The industry works in cycles,” says Catlin. “Broadly speaking, when you’re in a hard cycle [with prices increasing], contracts are tighter and then the market softens so they loosen up. There’s always a price to pay for loosening up, and it’s often an unintended price.”
Insurers are to blame for the appalling quality of policy wordings, says Bruce Hepburn, chief executive of Mactavish, which advises businesses purchasing insurance. Hospitality companies are being offered cover that excludes catering, he says. “The bottom line is, insurers have been caught with their pants down. They don’t do their job.”
Insurers have belatedly launched a rearguard action to close the expectation gap between them and their customers by explaining how much they are paying out, not just under business interruption policies but other lines such as event cancellation, travel and trade credit insurance used in supply chains.
Lloyd’s estimates that Covid-19 will be the second most-expensive event ever for insurers as they face $107bn (£88bn) in claims, eclipsed only by Hurricanes Katrina, Rita and Wilma in North America in 2005. Taking into account insurers’ losses on the investments they hold to make sure they can pay out on claims, the losses will reach a record $203bn, it says.
The ABI expects its members to pay £1.2bn for Covid claims, including £900m for business interruption, on top of the $4.3bn Lloyd’s expects its members to fork out.
To solve the furore over business interruption claims more quickly, the Financial Conduct Authority is collecting a sample of business interruption policies and will ask High Court judges to give a declaratory ruling on whether they should trigger payouts for the pandemic.
Insurers have welcomed the move but launching the legal action was naive as settlement negotiations between businesses and insurers are likely to hit a brick wall until the High Court issues its ruling on the test cases, says Ravi Nayer, a partner at Brown Rudnick, a law firm, who is advising the British Dental Association on whether its members are entitled to receive payments.
The watchdog failed to consider that insurers would stop negotiating settlements until the court gives its judgment, leaving businesses facing a liquidity crunch, he says. The Financial Ombudsman may similarly halt its deliberations on complaints.
The FCA is aiming to have the policies reviewed by judges before the court’s summer holidays and has already hired lawyers from Herbert Smith Freehills, one of they City’s top litigation firms.
Even when the claim does get to court, there are plenty of possible obstacles. Insurers will hire their own legal team but the FCA will be advocating on behalf of all customers.
The watchdog is asking policyholders to send it arguments and examples to bolster its case, but if policyholders are not directly represented, this could make it difficult for the court to properly interpret the contracts.
Some of the business action groups threatening to bring their own lawsuits may ask to join the proceedings to have their say, but lawyers fear insurers will use any favourable catch-all judgment to bludgeon customers who are not represented into agreeing settlements.
“It means a court can make a decision that affects a policyholder without considering their individual circumstances,” says Nayer. “If an insurer thinks [the ruling] applies, individual policyholders may not have the resources to challenge or appeal it.”
The Hiscox Action Group is not going to wait for the FCA process to finish up before launching its own claim, says Killick. “The FCA is not going to get in the way,” says. “We are going to do this independently.”