Fairfax predicts court’s reaction to legislated retroactive BI policy changes

If laws get passed retroactively changing business interruption policy wording so that pandemic losses now get covered, insurers will likely launch legal challenges that will be looked at by high court judges, Fairfax Financial CEO Prem Watsa suggests.

During Fairfax’s annual general meeting April 16, a shareholder asked company officials what impact the COVID-19 pandemic will have on specific commercial lines such as business interruption.

“A big headline issue I would say with the insurance industry today is how is business interruption is going to impact our losses,” Fairfax insurance group president Andrew Barnard said, adding there are some “isolated” exceptions in a few policies. “In general, it’s our view – and the view of the industry – that business interruption requires there to be physical damage to property in order to be triggered. That is standard coverage in the industry for business interruption and that is coverage our companies in general provide.

“It would therefore require an overturning of the contract in order to open that up to provide broad-based business interruption coverage for losses arising from COVID-19,” added Barnard.

Watsa said “in the United States, lawyers and governors are trying to overturn this and say ‘you have to pay,’” despite what the policies actually say. He was alluding to legislation in the works in some states.

“We feel very comfortable saying to you that it is highly unlikely we would have to pay any significant amount of money,” said Watsa. “But if governors try to change this retroactively – some of them are  – we think this will eventually go to the [United States] Supreme Court. Contract law is very specific. Contracts in the United States are very sacred. And we think just like it is in the U.K., it’s highly unlikely they will be broken. But it is an item that is being discussed in the property and casualty industry.”

Watsa did not specifically cite any particular bill.

In Ohio, a bill before the state legislature proposes that any BI policy “shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic during the state of emergency.” That bill has plenty of ifs, ands, and buts. For example, the Ohio bill would only apply to clients with a staff of less than 100 and only to insurers licenced in Ohio. Similar legislation is in the works in New Jersey and other states.

Thursday was the first time in Fairfax Financial’s 34-year history that it held an AGM by webcast rather than in person. Fairfax cancelled all in-person events associated with the AGM as a precaution against COVID-19.

In addition to Toronto-based commercial insurer Northbridge Financial, Fairfax also owns, among other entities, several large non-Canadian property & casualty insurers, including Stamford, Conn.-based Odyssey Group, Zug, Switzerland-based Allied World, London-based Brit and New Jersey-based Crum & Forster, which does not have a Canadian branch.

The formal portion of Thursday’s AGM included election of the board of directors, a shareholders’ vote in favour of appointing PwC as independent auditor, and highlighting results from 2019. Fairfax’s insurers reported a combined ratio of 96.9% in 2019, Watsa noted.

Fairfax has yet to officially release its exact financial results for the three months ending Mar. 31. But Watsa did say Thursday its combined ratio will be less than 100% in 2020 Q1.

COVID-19 is an extraordinary event and the overall impact on underwriting performance is “very unclear at this point,” Barnard said.