FCA to put BI wordings before the courts to determine coronavirus cover

Coronavirus

The Financial Conduct Authority will ask the courts to rule on whether a “representative sample of the most frequently used” business interruption policy wordings provide cover for Covid-19-related losses.

The regulator has given firms until 15 May to clarify their position on whether their policy wordings for business interruption losses arising from causes other than property damage provide cover in the current crisis.

These responses will then be used as the basis for deciding which firms will be asked to join the court process.

Policies that come under scrutiny will likely be those with covers for infectious or notifiable disease, non-damage denial of access or closures and restrictions by a public authority.

The FCA has previously urged firms to settle valid business interruption claims quickly and to make interim payments in instances where there is reasonable grounds to pay part of a claim.

Christopher Woolard, the FCA’s interim CEO, 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.”

The regulator hopes that bringing cases to court will resolve the uncertainty over policies, which has given rise to the formation of group legal challenges by small and medium-sized businesses disputing insurers’ rejection of claims in recent weeks.

Simon Sloane, a partner at law firm Fieldfisher advising a number of such group actions against insurers Hiscox, RSA, QBE and Ecclesiastical, said: “This belated action should be cautiously welcomed by UK businesses.

“However, it is critical for the credibility of both the FCA and the insurance industry that all appropriate legal issues are included in any test actions and that this does not merely become a tool for insurers to deny further claims.

“The form of the declarations sought must not be too broadly drafted as, for example, a general declaration as to whether pandemics are covered, will only harm policyholders’ claims.

“We hope the FCA will work with us and our clients to ensure that all relevant legal issues are properly considered and argued before the courts, to ensure all coverage triggers and quantum principles are properly dealt with.”

Welcome intervention

Huw Evans, director general of the Association of British Insurers, said: “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.”

The British Insurance Brokers’ Association said: “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.”

Further complaints

The FCA also signalled that policyholders may have further recourse to complain, even after the question of whether or not their policy wording provides cover has been settled.

“In some cases where there is no cover provided under the policy, there is a gap between firms’ and customers’ understanding of what they thought was covered by the policy,” it said.

“If the BI cover provided is not consistent with what the customer requested or instructed, or with what the customer was informed was being provided, then customers may raise these concerns as a complaint with their insurer or intermediary.”

Branko Bjelobaba, an insurance compliance consultant, said of this suggestion: “This will impose a lot of stress on brokers who will need to ensure that the sales that have been made included a proper assessment of a client’s demands and needs and a detailed explanation as to why the proposed policy met those.

“I seriously doubt many clients would have expressed a wish for pandemic cover and whether brokers would have ordinarily have even considered this on behalf of their clients assuming cover was available.

“Now is the time to pull out those files and assure yourself what did happen as this could be the next PPI for insurance brokers.

“In addition, if professional indemnity insurers exclude Covid-19 advice cover post-renewal, and the policy is written on a claims made basis, brokers financial viability will be at risk as the policy won’t cover them.”

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