Why the QBE (ASX: QBE) share price has tanked 5% today

The QBE Insurance Group Ltd (ASX: QBE) share price has fallen more than 5% in early trade after a key court ruling in the UK.

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The QBE Insurance Group Ltd (ASX: QBE) share price is under pressure in early trade after an update from the Aussie insurer.

Shares in the $12 billion insurer are down 5.6% to $8.09 in early trade following this morning’s announcement.

Why is the QBE share price under pressure?

The latest share price move comes after a business interruption update from QBE. The company provided an update on the test case before the UK Supreme Court. The appeal is against the UK High Court’s September 2020 ruling in the UK Financial Conduct Authority (FCA) case.

The FCA case was undertaken to resolve legal issues concerning the interpretation of common business interruption policy wordings. That includes some wordings in QBE’s UK operations, particularly around COVID-19 and the government-mandated lockdowns.

The High Court initially ruled in favour of QBE on two out of three notifiable disease policy (NDP) wordings examined. The Supreme Court has today upheld the High Court’s ruling in favour of the insureds with respect to one NDP wording.

The FCA was ultimately successful on its grounds of appeal while all other insurers were unsuccessful.

The QBE share price has dropped more than 5% this morning following the update. QBE announced that the gross cost of UK insurance business interruption claims will increase as a result of the ruling.

However, the UK Supreme Court ruling does not directly impact QBE’s net profit. The increased gross claims will reduce downside protection with respect to potential Australian business interruption claims.

To protect against that downside, QBE will now include an additional $185 million risk margin to strengthen its position against those potential Australian claims.

That would bring the total ultimate COVID-19 allowance to $785 million. FY2020 COVID-19 related costs are now expected to be $655 million after the latest increase.

Foolish takeaway

The UK Supreme Court ruling means insurers could face higher claims due to COVID-19. That has sent the QBE share price plummeting lower as investors re-price the insurer based on the latest forecasts.

The S&P/ASX 200 Index (ASX: XJO) has fallen 0.6% to 6,674.20 points at the time of writing.

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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