Following a landmark pandemic business interruption (BI) ruling by an Ohio judge against Zurich American, analysts at KBW and Credit Suisse have warned that the case could have wider ramifications for the insurance and reinsurance industries.
In the recent Ohio case, the federal judge ruled that Zurich must pay out on losses suffered by more than a dozen local restaurants that were subject to government shutdown orders.
Several important verdicts were reached regarding the policy language of the BI policies in question, including the ruling that BI coverage does not require structural damage to a property.
Instead, the judge decided that coverage can reasonably extend to instances where a policyholder is unable to use an insured property for its intended purpose.
Additionally, a popular defence by re/insurers has rested on a microorganism exclusion, which would void coverage directly caused by the COVID-19 virus.
But this was found to be inapplicable given that the restaurants’ losses were caused by governmental measures, rather than the virus itself.
Judge Polster, who presided over the case, noted that Zurich could have included language to explicitly exclude losses resulting from government-mandated closures but did not do so.
Furthermore, the court decided that the ‘loss of use’ exclusion did not apply after policyholders argued that such an interpretation would “void business income coverage in its entirety.”
But despite siding with policyholders overall, the judge also concluded that Zurich did not act in bad faith by denying coverage, due to uncertain status of BI claims linked to the pandemic at both a national and international level.
Analysts at Credit Suisse note that the outcome of the Ohio case could have ramifications for other re/insurers, in particular for those companies who focus more on large employers.
“Our understanding is that policy forms/wording can deviate from the more “standard ISO” forms amongst insurers that cater to larger employers, which to us implies that AIG, Chubb, and Everest Re hold more risk to outcomes such as Zurich’s since they are overweight middle-to-large sized employers,” they stated.
“This is likely one of the reasons each of the aforementioned insurers’ has taken (and/or is expected to continue taking) material COVID-19 related charges. Link to details about the 2006 memorandum about adding virus exclusion language to policy forms.”
Credit Suisse further compared the case to the ruling against Cincinnati Financial last year, which is currently being appealed. However, analysts pointed out that Cincinnati’s policy wording differs from the vast majority of competitors’ policies in that it does not contain a virus exclusion.
But for Zurich, analysts believe that the policy wording is much more comparable to wider industry practices, meaning the case against it could have implications for other US re/insurers relying on similar language.
“Based on a sampling of policy wording across additional insurers, we conclude that Zurich’s policy language appears similar to other insurance carriers, implying a negative read-through for all insurers, not just insurers who focus on medium-to-large sized businesses,” Credit Suisse warned.
That said, the firm added a caveat that its sample size is “small” and “may be biased given all the below mentioned policies have been or continue to be litigated, implying they could be policies with outlier policy wording.”