Yahoo Finance Courtroom fights leave Britain’s insurers in crisis
In the early hours of 18 April 1906, an earthquake measuring eight on the Richter scale decimated San Francisco, killing thousands and triggering fires that raged for days.
At the time, governments tended not to provide relief funds to regions affected by natural disasters like they do today, meaning much of the responsibility fell on insurers.
Despite the huge costs associated with paying out claims, Cuthbert Heath, an underwriter at Lloyd’s of London, demanded that his San Francisco agent “pay all of our policyholders in full, irrespective of the terms of their policies”.
The decision cost Lloyd’s $50m (£44.6m) – more than $1bn in today’s money – but its show of goodwill resulted in it dominating the US insurance market for nearly half a century until the outbreak of the Second World War.
The 1906 earthquake is now known in the industry as the “San Francisco moment”, but observers fear the industry has today forgotten the lessons learned from that pivotal event more than a century ago.
A recent report from insurance adviser Mactavish reveals that British companies are now three times more likely to sue their insurers than they were five years ago to get their claims paid.
The research, which looks at every legal insurance claim filed at the High Court over the last decade, shows that legal cases against the top 20 insurers in the UK have increased from an average of 19 between 2012 and 2017 to 69 in 2020 and 71 last year.
Mactavish says this is just the “tip of the iceberg” as an unknown number of cases will have been settled privately without going to court.
While legal claims were already rising steadily before 2020, the pandemic acted as a trigger for a new wave of litigation.
Business interruption insurance became a huge source of controversy after Covid lockdowns began in March 2020, with many companies accusing firms of unfairly refusing to pay out claims on their policies.
The list of companies refused payouts was vast, ranging from restaurants and hotel operators to health clinics, dentists, private schools, kennels and nurseries. Some of the bigger names included bakery chain Greggs, which took action against Zurich, and Corbin & King, the high-end restaurant chain, which took on AXA. Greggs won its £150m legal battle last week.
The extent of complaints caused the City watchdog to launch a legal test case against insurers over pandemic-related claims. The case went to the Supreme Court and was ultimately successful.
“The market missed its ‘San Francisco moment’ with business interruption claims and Covid,” says David Hertzell, chairman of Mactavish and former managing partner of City law firm DAC.
“Rather than copying what happened after the 1906 earthquake and paying reasonable losses without major investigation or argument, many insurers looked to challenge all Covid claims arguing that in effect, they never intended to insure such a loss.”
He adds: “The decision generated terrible publicity and near-unanimous unfavourable decisions in the High Court and the Supreme Court, yet even then, despite some large total payout sums, a relatively small proportion of all affected policyholders got paid given the scope of the [Financial Conduct Authority] action… This was not a good outcome for anyone.”
Earlier this month, the FCA once again hit out at insurers, warning that they face a crackdown after finding "significant issues" in the way they handled Covid-era claims.
The regulator pointed to poor record keeping, a lack of initiative in identifying vulnerable customers, untailored communications, and unsuitable quality assurance reviews, which were often too focused on the financial outcome of a claim rather than the overall customer experience.
It said it would use "all regulatory tools" available to address the problems uncovered.
Yet the Mactavish report shows that legal battles against insurers are not consigned to Covid-related claims and stem from all parts of the market, including marine, technology, property, finance, manufacturing, as well as claims stemming from road traffic accidents and asbestos.
The report says the rise in legal cases has occurred due to a prolonged “hard market” for the industry – a sustained period of rising insurance prices.
Bruce Hepburn, chief executive of Mactavish, says the clamp down is being used as a device by insurers to protect their balance sheets as market conditions deteriorate.
He says: “In today’s prolonged hard market, insurers don’t care about market share, they care about protecting their balance sheets. This is why premiums go up and insurers start to look for ways to reject claims.”
Mactavish cites a breach of policy conditions, lack of coverage, misrepresentation, non-disclosure of facts and claims alleged to be outside the scope of cover as the main reasons why insurers are rejecting claims.
It adds that firms are giving multiple reasons for rejecting claims, or drastically reducing the level of payout. Yet it adds that it was not uncommon for many of those reasons to “fade away as the case approached judicial scrutiny, perhaps indicating they were not reasonable objections in the first place”.
Mactivish warns that not only is the industry further damaging its reputation and eroding its relationship with customers, but the jump in legal battles could harm the wider economy.
“If businesses do not have confidence in the insurance market, they are less likely to take the kind of business risks that are required to maintain economic growth,” the report says. “They will be less likely to expand into new markets, geographies, products or services.”
The difficult market conditions also show no sign of abating. A combination of the war in Ukraine, global inflation and the risk of recession will continue to drive up premiums rates and drive down claim payouts, the report says.
“The insurance industry is committed to supporting its customers and paying out all valid claims as quickly and efficiently as possible, with £22m paid out through business insurance policies every single day,” according to a spokesman for the Association of British Insurers.
“Given the unprecedented circumstances arising from a global pandemic, insurers supported the fast-track legal process to bring clarity to a number of complex issues for the sake of their business customers and we have worked closely with our members to ensure best practice in claims handling.”
But Hepburn is blunt in his assessment about what the spike in legal cases against insurers is doing to their standing: “It’s terrible, absolutely terrible for the reputation of the industry.”
