FCA: 'most' business interruption policies will not cover Covid-19

The regulator has, however, told BI insurance providers to settle claims made by small businesses that are within policy as quickly as possible. Prompt payment should include the use of interim payments where there are reasonable grounds to pay part of a claim but not the claim in full.

BI insurance providers will be expected to justify any deviations from this policy to the regulator, which will use this correspondence as part of its assessment of firm culture, the FCA said, in a 'dear CEO' letter issued to the heads of these firms (2-page / 111KB PDF).

Insurance law expert Rebecca Carrera of Pinsent Masons, the law firm behind Out-Law, said: "Insurers are likely to welcome the FCA's acknowledgement that most business interruption policies will not cover pandemics as well as the fact that the FCA does not propose to intervene in those cases".

"This is no doubt based on the fundamental nature of BI insurance which normally requires property damage, which will be absent in the vast majority of Covid-19 related cases," she said.

"The prompt to assess and settle claims quickly where there is cover is to be welcomed, given the imperative for cash flow in order to keep SME businesses afloat," she said.

BI insurance policies traditionally cover loss of revenue or profit experienced by a business following damage to property and the cost of mitigating that disruption. Property damage, for example due to a storm or fire, is usually what acts as the trigger for the coverage.

Businesses can take out extensions to BI cover, including cover for non-physical damage such as closure of premises or denial of access, or cover which explicitly related to infectious or contagious diseases. However, few businesses are likely to have done so. The FCA, in its letter, said that based on its conversations with the industry, it expected that most policies "have basic cover, do not cover pandemics, and therefore would have no obligation to pay out in relation to the Covid-19 pandemic".

"While this may be disappointing for the policyholder we see no reasonable grounds to intervene in such circumstances," the FCA said.

The FCA went on to say that, where insurers did have obligations to pay out, claims should be "assessed and settled quickly". Firms should ensure "clear, timely and accurate communication" with all customers, and the regulator is also collecting information from them about how they are interpreting policies, according to the letter.

Ransome-Lewis said: "It is interesting that the FCA considers that there are some policies where 'it is clear the firm has an obligation to pay out' as most wording we have seen present significant coverage challenges".

"One particularly difficult area for the insured will be proving that the business losses were caused by the specific policy trigger for notifiable diseases and the strict legal rules around causation," she said.

The FCA has now established an internal 'small business unit', headed by senior official Andrew Wigston, which will coordinate its activities around regulatory matters affecting small businesses, according to the letter. Firms with annual turnover below £6.5 million, and fewer than 50 employees or an annual balance sheet below £5m, may be able to refer complaints about their insurers and other financial providers to the Financial Ombudsman Service (FOS), for faster decisions and compensation on claims of up to £355,000 than are generally available through the courts.

The FOS will publish details of its approach to handling complaints around BI insurance shortly, the FCA said.

Contentious insurance expert Jonathan Cavill of Pinsent Masons said that the FCA's position on BI coverage "contrasts with the current FOS position, which expects any insurer to think beyond a strict interpretation of the policy terms and consider carefully what's fair and reasonable in each case, taking into account the unprecedented situation created by Covid-19".

"Firms will need to be aware of the potential for BI FOS exposures which are material, particularly as the FOS fee has just been increased to £650 and the FOS award cap has been increased to £355,000," he said.

"The SME BI market will be waiting eagerly for the FOS' upcoming approach to BI, as alluded to by the FCA," he said.