How insurers narrowly avoided ‘catastrophic’ business interruption claims

Business interruption (BI) and related losses from the coronavirus pandemic could have been ‘catastrophic’ for insurers had policy wordings not been precise enough to prevent massive payouts following court challenges, credit rating agency DBRS Morningstar says in a new commentary. 

A majority of insurers narrowly avoided catastrophic COVID-19 BI losses thanks to lessons learned about tighter underwriting wording following the early 2000s SARS outbreak. But not all insurers got off scot-free.  

For example, a class action lawsuit against one Canadian insurance company saw the insurer paying out millions in compensation to policyholders after it declined to pay travel insurance claims following pandemic trip cancellations. 

In the U.S., legal disputes have largely fallen in favour of insurers, but courts in other jurisdictions such as the United Kingdom and Australia, have largely decided in favour of insureds where insurance policies are vague, outdated and don’t reflect existing rules and regulations. 

Many insurers learned the importance of having clear, unambiguous insurance policy wordings following the severe acute respiratory syndrome (SARS) outbreak in the early 2000s, the credit rating agency said. 

“After the SARS outbreak, many BI policies contained an exclusion for ‘loss due to virus or bacteria.’ These exclusions were instrumental to the position taken by insurers that coronavirus losses are not covered by the standard BI insurance policy,” DBRS wrote.  

“Insurers have argued that the disruptions caused by government lockdowns did not cause physical damage to the insured properties. The revised policy wording has allowed insurance companies to avoid massive payouts to settle BI claims resulting from the coronavirus pandemic.

“Nonetheless, the strength of the policy wording continues to be tested in courts globally.” 

In one Canadian example, two Toronto-based law firms initiated a class-action lawsuit in Sept. 2020 on behalf of their client after TD Insurance declined to pay travel insurance claims following trip cancellations caused by the coronavirus pandemic. 

As a result of the lawsuit, TD Insurance consented to pay $4.8 million in compensation to Canadians that had a TD travel insurance policy between March 16, 2018 and October 15, 2021. The insurer also agreed to pay an additional $300,000 in administration costs as part of the settlement. 

“Disputes between insureds and insurers are not limited to BI cases alone,” DBRS said of the above case. “[Both] the insured and the insurer would have benefitted from clear, precise policy wording.” 

However, while many insurers have seen favourable results from these court challenges, policyholders are nevertheless likely to see tighter policy wordings and greater certainty around their contract exclusions, according to DBRS Morningstar. 

 

Feature image by iStock.com/vchal