How insurers narrowly avoided ‘catastrophic’ business interruption claims

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

Most insurers narrowly avoided catastrophic COVID-19 BI losses thanks to the lessons learned about tighter underwriting following the SARS outbreak of the early 2000s. But not all insurers got off without a hitch.

For example, a class action lawsuit against one Canadian insurance company cost the insurer millions Compensation to policyholders after it refused to pay travel insurance claims following pandemic travel cancellations.

In the US, legal disputes fell mainly in favor of insurers, but courts in other jurisdictions such as Great Britain and Australia decided mainly in favor of insureds where the insurance policies are vague, outdated and do not reflect existing rules and regulations.

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Many insurance companies learned the importance of clear and unambiguous policy wording following the outbreak of severe respiratory syndrome (SARS) in the early 2000s, the credit rating agency said.

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

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“Insurers claimed that the disruptions caused by government shutdowns did not cause physical damage to the insured assets. The amended policy wording allowed the insurance companies to avoid massive payments to settle BI claims as a result of the corona epidemic.

“However, the strength of the policy text continues to be tested in courts around the world.”

In one Canadian example, two Toronto law firms initiated a class action lawsuit in September 2020 on behalf of their client after TD Insurance refused to pay travel insurance claims following Travel cancellations caused by the Corona epidemic.

As a result of the lawsuit, TD Insurance agreed to pay $4.8 million in compensation to Canadians who 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 administrative costs as part of the settlement.

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“Disputes between insureds and insurers are not limited to BI cases only,” DBRS said of the aforementioned case.[Both] The insured and the insurer would benefit from a clear and precise policy formulation.”

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

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