FCA to obtain legal clarity on BI insurance following influx of coronavirus-related claims

The FCA today announced that it plans to obtain legal clarity on business interruption (BI) insurance following the recent plight of business owners who have had their BI claims linked to the Covid-19 pandemic rejected over policy wording squabbles.

The regulator confirmed that it intends to seek a court declaration, on an agreed and urgent basis, to resolve uncertainty for policyholders making BI claims, as well as clarify the basis on which insurance firms are making decisions to accept claims.

This will involve the FCA bringing to court key relevant cases that provide clarity on specific policy clauses in order to gain an independent view on disputed BI policy wordings – these cases, chosen on an agreed basis with affected insurers, will showcase a representative sample of the most frequently used policy wordings that are leading to confusion and uncertainty.

In addition, the FCA is writing to a small number of firms to ask whether they are declining or intend to decline BI claims – responses to this enquiry are due by 15 May. This information will help determine which firms will be asked to join the court process.

Christopher Woolard, interim chief executive of the FCA, said: “We have been clear that we believe, in the majority of cases, business interruption insurance was not purchased to, and is unlikely to, cover the current emergency. However, there remain a number of policies where it is clear that the firm has an obligation to pay out on a policy.

“For these policies, it is important that claims are assessed and settled quickly. There are also some other policies where firms may consider there is no doubt about wording and decline to pay a claim, but customers may still consider there is genuine uncertainty about whether their policy provides cover.

“Our intended court action is designed to resolve a selected number of key issues causing uncertainty as promptly as possible and to provide greater clarity for all parties, both insured and insurers.

“It is clear that decisive action is appropriate given the severity of the potential consequences for customers.”

Offering value

Alongside this action, the FCA has also issued a package of measures for both insurers and consumers that tackles other coronavirus-related issues that have arisen from the ongoing crisis.

These measures have been designed to provide consumers with temporary support in the light of the exceptional circumstances arising from the Covid-19 pandemic and follow steps the FCA has taken in other markets, such as credit cards, overdrafts and personal loans.

For example, insurers are recommended to ensure that the products they offer continue to add value and are appropriate for customers, taking into account the impact of coronavirus and, therefore, the insurer’s ability to deliver on promised benefits.

To demonstrate this, the FCA said, for example, that boiler cover insurers may not be able to offer an annual service, which is part of many policies. Similarly, liability insurance may temporarily not be relevant for some businesses, such as hairdressers, bars and restaurants, that are closed as a result of government interventions linked to Covid-19.

To tackle these temporary implications, the FCA added that insurers should consider changing how benefits are delivered, refunding some premiums or suspending monthly payments for a certain period of time – the FCA proposes to give insurers up to six months to assess this so that it can take into account the effects of coronavirus in a more rounded manner.

Financial hardship

The FCA further asks that insurers help individual customers who may be finding it difficult to pay their insurance premiums or meet their premium finance payments as a result of the pandemic, while still maintaining appropriate cover.

Insurers could consider giving customers premium payment holidays, waiving administration and cancelation fees, relaxing charges or interest incurred for missed payments, extending cooling off periods and partly refunding premium payments where the whole amount has been paid up front.

The regulator has set a 5 May deadline for seeking comments on this proposal to help customers in temporary financial distress. If the measures are confirmed, they will be effective from shortly after this date. Value assessments will apply shortly after 15 May, if confirmed.

Once implemented, this guidance will be reviewed in three months’ time to ensure it is still relevant in light of any developments surrounding coronavirus.

Woolard added: “In addition to this court action, the current emergency has altered the value of some insurance products and we believe that insurers should be looking at both whether their products still offer value.

”Firms should also look at how they can help customers who may be experiencing financial difficulties as a result of the virus. Many insurers are already taking some kind of action to assist their customers and we want to see a degree of consistency for consumers.

“Today’s proposed guidance and statement aims to make our expectations clear to all firms in the insurance market and provide future certainty.”

’Unprecedented action’

Branko Bjelobaba, principle at general insurance FCA compliance consultancy Branko, said that the FCA’s announcement presented “unprecedented action for commercial customers”.

A spokesperson at Biba added: ”Biba welcomes this morning’s statement from the FCA confirming that they intend to seek an authoritative declaratory judgment to resolve some of the contractual uncertainty around business interruption insurance.

”Our members have serious concerns for their clients and their ability to recover from this situation and we have been working to help members resolve these issues. This intervention from the regulator to create certainty for many customers making BI claims, and the basis on which firms are making decisions on claims is a step in the right direction

”The FCA has indicated that customers may still access the Financial Ombudsman or the courts if they qualify and wish to do so.

”It is our view that this action by the FCA will help to resolve issues for businesses and we urge the market to engage with this resolution activity.”

The Chartered Insurance Institute (CII) further backed the FCA’s actions.

Matt Connell, director of policy and public affairs at the CII, said: “The FCA’s decision to test the wording of certain business interruption contracts in court is preferable to a disorderly and potentially lengthy series of test cases that are less likely to reach a comprehensive and definitive solution.

“As a result, we welcome this move to reduce uncertainly for both insurers and the public. The process which the FCA will use to select test cases will be very important, and we anticipate that the FCA will consult widely with both consumer groups and the insurance sector to maximise the chances of reaching a decision that is fair, comprehensive and definitive.”

Huw Evans, director general at the ABI, added: ”This is a welcome step from the FCA and insurers will look to work closely with the regulator to make this process a success. Although the vast majority of business interruption policies do not cover pandemics, and the government has confirmed it will not seek to retrospectively amend contracts, we support any process that will provide clarity and certainty for the minority of customers who are disputing whether they should be covered.

”For valid claims, leading ABI members have agreed a set of claims handling principles to ensure speedy processing, including interim payments.”