The UK Supreme Court’s ruling on business interruption (BI) insurance is likely to be a boon to captives, according to Seth Rachlin, global insurance industry leader at Capgemini.
The Supreme Court gave its final judgement in the appeal of the UK insurance industry test case on BI wordings in UK property insurance policies on January 18, 2021. The case was designed to settle the issue of whether BI policies should cover losses that arose as a result of COVID-19 and the resulting economic shutdowns.
Rachlin said: “The decision is likely to create further upward rate pressure in an already hard commercial insurance market. In this rate environment, captives become an attractive alternative to traditional markets.”
The business interruption coverage provided in standard commercial property policies is designed to reimburse businesses for lost revenue due to their inability to use the premises subsequent to a loss event.
“It is meant to cover a factory forced to close as a result of storm damage or a store recovering from a fire,” explained Rachlin. While COVID-19 also forced many businesses to close, it caused no physical damage to a property, rendering this coverage unusable.
“Such questions force insurers, policyholders and their attorneys to resort to the subtle examination of policy language and ultimately to the courts,” Rachlin noted.
While commercial insurance carriers have the balance sheets to make the required payout, the long-term implications on the sector are significant, Rachlin said.
“Business interruption coverage of the type ordained by the court is not priced into commercial property coverage,” he said. This will lead to “significant increase in rates for such insurance, as well as a profound tightening of policy language.”
This creates an opportunity for captives, Rachlin said, which “may be able to better tailor coverage to the needs of the businesses they are set up to insure.”
Captives are also “more likely to pay out claims when losses occur,” he added.