Revisiting the Impact of the COVID-19 Pandemic on the Insurance and Legal Industries
Market Insight 17 April 2023 17 April 2023
UK & Europe
In our introductory chapter to the 2021 edition of this guide, we referenced the 1993 film “Groundhog Day”. Two years on, we are grateful to say that, in the UK at least, we have finally escaped the seemingly endless loop of pandemic-related news, and life is almost “back to normal”.
The article was released as part of the International Comparative Legal Guide - Insurance & Reinsurance 2023.
In our introductory chapter to the 2021 edition of this guide, we referenced the 1993 film “Groundhog Day”. Two years on, we are grateful to say that, in the UK at least, we have finally escaped the seemingly endless loop of pandemic-related news, and life is almost “back to normal”. We have swapped our dressing gowns and staycations in favour of holidays abroad and “proper office attire” (although often still more casual than pre-pandemic), and lockdowns now feel something like a bad dream.
The same cannot be said for the insurance or legal industries, which are, in a number of ways, hardly recognisable from the position pre-pandemic. However, that is not necessarily a bad thing. Although the COVID-19 pandemic continues to have a significant impact on economies around the world, and is likely to do so for many years to come, the agility of the insurance industry and adaptability of the legal world have prompted positive change which was unthinkable in 2019.
2. Impact on insurers and reinsurers
The COVID-19 pandemic put immense pressure on many sectors of the global insurance industry, with an unprecedented upsurge in claims at a time of real uncertainty, prompted by novel challenges to wordings, and the involvement of national regulators and lawmakers on a scale which has never been seen before.
However, it also saw the insurance industry engaging with regulators and industry trade bodies, albeit often via an adversarial process, to provide legal guidance quickly and at lower overall cost to policyholders. In Australia, for example, two test cases were commenced by agreement between certain insurers, the industry body (the Insurance Council of Australia), and the complaints authority (the AFCA), to clarify coverage under business interruption policies.
For many insurers and reinsurers, their wordings had not been drafted with the pandemic in mind, and so were not underwritten on the basis that they might provide, or would exclude, such cover. The pandemic also affected multiple sectors at once, rather than being focused on one particular market. The scale of the losses the insurance industry has experienced is, therefore, not only startling, as might be the case for a particularly bad event in the catastrophe market, but also almost completely unexpected. By January 2022, insurance broker Howden estimated that COVID-19 had cost insurers $44bn so far, making it the third-largest cost to insurers of any catastrophe, behind Hurricane Katrina and the 9/11 attacks. Indeed, even in cases where insurers chose to provide cover for COVID-19, it was sometimes without a full appreciation of the scale of the situation. In Thailand, for example, the sale of low-cost policies providing cover for COVID-19 in early 2020 ultimately put 16 insurers at risk of collapse.
However, the ensuing losses are unlikely to stop any time soon. As decisions are handed down in the first wave of litigation between insurers and policyholders, this will generate a second wave of litigation, as parties seek to resolve gaps and ambiguities. For example, in England and Wales, the business interruption insurance test case brought by the UK financial regulator, the FCA, has been followed by further litigation by private companies on points of law which were not specifically addressed by the test case, including, for example, the treatment of furlough payments when calculating any indemnity due to the insured.
In addition, as losses mount, reinsurers will likely bear a higher proportion of claims as insurers exceed their retentions. This will, in turn, generate further litigation on complex legal issues. For example, reinsureds and reinsurers can be expected to test definitions of “event” and “occurrence” in the context of the pandemic when aggregating losses under a reinsurance policy.
3. Response of the courts
In the 2021 edition of this guide, we asked our contributors whether COVID-19 was having a significant effect on the operation of the courts, and litigation in general. We then asked for an update in the 2022 edition, and again in the current 2023 edition, to see how courts worldwide have adapted to new ways of working.
What is clear from the answers we received is that 2020 was, unsurprisingly, an extremely challenging year for courts around the world, much as it was for businesses in general. The upheaval caused by the pandemic led to delays, which were then compounded by the significant amount of litigation generated in response to the pandemic.
Nevertheless, although there are still backlogs in several jurisdictions (for example, in parts of the USA), by the end of 2022 the position almost everywhere had improved immeasurably.
One obvious reason for this is the significant acceleration of the acceptance, and use, of technology. In almost all cases, courts adapted quickly to allow remote hearings, the electronic filing of documents, and the use of technology for the provision of evidence. Although the preference in many jurisdictions remains to have in-person hearings, particularly for longer hearings or trials, there is now generally much more flexibility in courts worldwide to hold shorter hearings remotely, or even to deal with issues on paper where appropriate.
Arbitration tribunals have similarly adapted well. Although the rules of most of the major arbitral institutions already provided for hearings to be held remotely prior to the pandemic, there has been a marked shift away from hearings in person over the last three years. The ICC, for example, published guidance on virtual hearings on 9 April 2020, which now forms part of the ICC’s Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration dated 1 January 2021. The ICC’s Note suggests that virtual or hybrid hearings may be particularly appropriate for case management conferences, and obliges the arbitral tribunal to consider a number of factors when deciding whether to hold an evidentiary hearing, including the nature of the hearing, possible travel constraints, and the planned duration of the hearing. This should help the international arbitration community to improve its “green” credentials.
The pandemic did not put a hold on parties engaging in settlement discussions either, and so mediations also had to move online when it became obvious that they could no longer be safely held in person and in compliance with local laws. This has prompted some mediators to offer more flexible options, such as a series of shorter mediations, spread over multiple days, to assist professionals juggling their busy schedules at short notice. It has also meant that mediations are more likely to be “hybrid”, with each team gathering separately in person to strategise, whilst discussions with the mediator and between the parties take place via an online platform. However, there are undoubtedly benefits to holding settlement negotiations in person which cannot be replicated over a screen, and there will still be cases where an in-person meeting is the best way to assist the parties to reach a negotiated settlement.
6. Looking ahead
The past three years have demonstrated that both the insurance and legal industries around the world are more resilient and able to adapt than we may have previously given them credit for. The huge leaps and bounds which have been made in a short space of time have undoubtedly improved efficiency in many ways, and will often help parties save future costs by reducing travel fees for in-person meetings or hearings. The adoption of technology should also help futureproof the industries against a multitude of possible scenarios, including extreme weather events and, in the worst-case, another pandemic.
However, before we put ourselves completely at the mercy of our screens, it is worth heeding the words of the late Australian broadcaster and journalist, Clive James:
“It is only when they go wrong that machines remind you how powerful they are.”
We wish all readers of this guide a safe and healthy 2023.