Imprecise Policy Wording Could Lead to Costly Insurance Claims Litigation and Regulatory Intervention

DBRS Morningstar released a commentary titled “Imprecise Policy Wording Could Lead to Costly Insurance Claims Litigation and Regulatory Intervention,” which discusses the importance of having clear, unambiguous insurance policy wording to protect both policyholders and insurers. The strength of policy wording continues to be tested in courts globally. To date, U.S. state and federal court rulings on coronavirus-related business interruption (BI) claims have been overwhelmingly in favour of insurers, but outcomes have been less favourable for insurers in other jurisdictions.

The commentary highlights the following:

-- BI losses from the coronavirus pandemic could have been catastrophic had insurance contract policy wording not been clear enough to prevent massive payouts in some jurisdictions.

-- Insurers have benefitted from their experience dealing with claims made as a result of the severe acute respiratory syndrome (SARS) outbreak in the early 2000s.

-- Government intervention could compel insurers to pay claims in situations where interpretation is vague or not current.

-- Disputes between insureds and insurers are not limited to BI losses alone. There are other instances where coverage has been denied in costly legal disputes stemming from ambiguous policy wording.

“The select cases discussed in the commentary show that it is imperative that insurance companies review and update policy wording regularly. Losses from coronavirus-related BI claims could have been catastrophic for the industry had policy wording not been precise enough to withstand court challenges in most cases. Some small players in the industry could have found themselves facing liquidation, or significant capital depletion at the very least, while some companies' credit ratings could have been adversely affected,” said Victor Adesanya, Vice President, Insurance. “We expect that insurers that faced adverse court decisions, or test cases as observed in the UK and Australia, will move quickly to tighten their policy wording. Insurers in general should review their policy wording regularly to avoid ambiguity, costly litigation, and regulatory intervention.”