Insurers could face a bill of up to £18bn if a case testing the validity of business interruption insurance goes against providers.
UBS reckons 37,000 policies could be affected by an action being led by the Financial Conduct Authority around the wording of these contracts with regard to the impact of the pandemic.
A ruling by the High Court is expected by the middle of September.
If the insurers lose on all policy wordings, then the liabilities, estimated by UBS at £30-£50,000 per policy, would result in what the bank calls a “negative delta” of £11bn-£18bn.
To put this into context, total insurance claims in the first half were £19bn.
A win for the insurers on all points would likely result in a 5-10% price rise for RSA Insurance Group PLC (LON:RSA) and a “10%-plus” increase in value for Hiscox Ltd (LON:HSX), the two general insurance stocks covered by UBS.
Of course, the story probably won’t end at the High Court, with the losing party likely to appeal.
In May, the FCA turned to the courts to sort out the growing controversy over whether the coronavirus lockdown is covered by business interruption insurance.
Thousands of policyholders had their claims turned down by insurers that said losses incurred because of the pandemic were not covered.
Normally, policyholders band together to seek a what’s called a declaratory judgment to resolve such disputes.
But the FCA decided to take the lead amid concerns a group action could take too long and harm vulnerable businesses.