Wide area damage principle is key to quantifying BI claims

The High Court’s test case decision regarding the wide area damage principle, initially seen within the 2010 Orient Express Hotels v Assicurazioni Generali case, is “one of the most important take aways” for calculating the quantum of Covid-19-related business interruption (BI) claims, according to sister publication Insurance Times.

According to Sareena Bamrah, director at UK independent claims preparation firm Accuracy, how the wide area damage test will “play a part in the quantification of these claims” is the “question on everybody’s lips”.

In the Orient Express case, the hotel submitted a claim after its premises was damaged during Hurricane Katrina in 2005, however the insurer involved rejected this, stating that regardless of whether the hotel was damaged or not, it would still have been unable to trade because of the large scale evacuation of the area and the state-wide decimation.

The court agreed with the insurer, but in the end the parties made an out-of-court settlement.

This ‘but for’ methodology was cited by a number of insurers during the FCA’s test case, yet the presiding High Court judges disagreed with their colleagues’ initial judgment.

Bamrah explained: “It’s very interesting to learn that if that case was heard again now, that it would have been ruled in an opposite way, where wide area damage would not have played a part in the claim calculation.

“That’s been very important because I think where policyholders will be penalised will be around that issue and whether or not they would have still generated revenue or profit ‘but for’ the pandemic, with all the government restrictions in place and the movement of people, closure orders, etc.

”I think that’s been perhaps one of the most important take aways from a quantification perspective.”

Bamrah added that quantifying claims could, therefore, be “very subjective” and that insurers have “got a difficult job” ahead of them.

“I think everybody involved will have a view on how the quantification should be undertaken to reflect some of those adjustments,” she said.

The FCA and a number of the insurers involved in the test case have confirmed that they are appealing the High Court judgment – it was agreed on 2 October that the appeals process will leapfrog straight to the Supreme Court.

Claims spike

Bamrah noted that her firm has “seen a spike in claims – obviously as a result of Covid”.

Furthermore, she believes that there will now be an uptick in BI claims linked to the pandemic “because there was a number of insureds that perhaps had no idea that they could put forward a claim resulting from Covid and so I think there will be a lot more insureds who are now perhaps going to try and make a claim”.

Primarily, claims will centre on the hospitality industry, she added.

“The hospitality [sector] has taken the hardest hit with closure and the movement of people. In fact, the cases that we’re working on at present are within the hospitality industry,” she said.

Unanswered questions

For Peter Diskin, chief client officer for the UK at Gallagher Bassett, there are still a number of “unanswered questions” when it comes to quantifying BI claims linked to the pandemic.

He said: “There’s still some unanswered questions around what applies and what doesn’t and there’s no blanket answer on it. The judge basically says that.”

For example, Diskin explained that identifying the policy trigger itself can still prove difficult following the High Court’s ruling. “Do insurers need to amend their wordings – I think the answer is yes, but it still remains unanswered as to what that wording should be,” he added.

Furthermore, Diskin asked whether insurers will need to agree on a standardised definition of pandemics to be used across the industry, such as has been done for floods and terrorism, “to ensure we’re not in this ambiguous situation again”.