FCA seeking legal clarity on business interruption insurance amid coronavirus pandemic

The FCA said it would bring to court what it believes are the key relevant cases which provide the greatest clarity on specific policy clauses as soon as possible, with the aim of getting an authoritative declaratory judgment on these disputed policies if there remains unresolved uncertainty.

The cases would be a representative sample of the most frequently used policy wordings that are giving rise to uncertainty, and the action is aimed at addressing key contractual uncertainties rather than resolving all disputes.

The announcement was welcomed by the British Insurance Brokers’ Association and the Association of British Insurers (ABI), and the latter agreed with the FCA's assessment that most policies do not cover losses in the pandemic.

Insurance law expert Rebecca Carrera of Pinsent Masons, the law firm behind Out-Law, said the move was a welcome development for policyholders.

“It may be less welcome for those insurers who have already taken a stance on whether or not their policies respond, although – as the ABI has said – insurers have said they see this as a welcome step and will look to work closely with the regulator to ‘make the process a success’,” Carrera said.

Carrera said the FCA’s move was likely to have been prompted by the growing pressure mounted by groups of policyholders threatening collective action, as well as the difficulty which small and medium companies have had in accessing the government-backed business interruption loan scheme.

The FCA said it was writing to a small number of relevant insurers asking them to clarify their position, by 15 May, as to whether they believe that their policy wordings for BI losses arising other than from property damage provide cover.

Carrera said the sample of cases identified would include examples of policy wordings that cover for infections or notifiable diseases and non-damage denial of access.

“The notifiable disease wording is certainly an area where has been a significant amount of unresolved uncertainty for many policyholders. The problem with this type of cover in many policies is that loss of revenue is only covered where the business has to close due to an incident of disease at or near the premises and not due to global lock-down. It will be interesting to see whether the courts will be prepared to accept those arguments by claimants which seek to get around the strict legal rules on causation,” Carrera said.

“The FCA also recognises that that there are significant differences in policy wordings. This could make it challenging for the FCA to achieve the industry-wide certainty it is seeking to achieve from a declaratory judgement,” Carrera said.

Insurance law expert Jonathan Cavill of Pinsent Masons said: “The FCA has an objective of ensuring the stability and resilience of the financial markets. The European Insurance and Occupational Pensions Authority has also commented that if insurers are expected to cover BI where they had not intended to, this could result in real existential problems for them.

“The FCA has clearly recognised that the current state of play gives rise to significant risk of both uncertainty and litigation for insurers and policyholders. The FCA’s approach will go some way to addressing these and meeting its stability objective,” Cavill said.

Cavill said the FCA wanted to show it was being proactive in order to avoid being subject to the kind of negative comments aimed at its predecessor, the Financial Services Authority, and banks during the 2008 financial crisis.

“The greatest concern for insurers will be any declaration by the court being applied too widely. This could have a real impact on insurers where they had not underwritten for the types of losses arising due to the Covid-19 pandemic,” Cavill said.

Individuals will still be able bring their own actions to court or to the Financial Ombudsman Service (FOS), but courts and the FOS will be able to take account of the declaration in the FCA action to decide those cases.

Cavill said any court declaration may not be binding on the FOS, which had jurisdiction to consider what is fair and reasonable in the circumstances, and was not obliged to follow the law.

The FCA said its view remained consistent with the letter sent to CEOs on 15 April that most BI policies do not provide cover for losses related to the Covid-19 pandemic. It said the range of BI wordings and differences between them meant that the continued uncertainty could delay the payment of claims.

The regulator said there could be a gap between what customers thought or expected was covered and what the policy actually covered, and in these circumstances customers could consider making a mis-selling complaint.

The FCA also set out draft guidance for insurers, setting out its expectations on what firms should be doing to identify any material issues that affect the value of their products, and their ability to deliver good customer outcomes, during the pandemic.

It said where firms identified something which could materially affect the value of a product it should consider appropriate action, such as delivering benefits in a different way, the provision of alternative, comparable benefits, reducing premiums for the duration of the change in value, or partial refunding premiums already paid.

The FCA said firms should have reviewed their product lines and decided on any actions no later than six months after the finalisation of the guidance.

Comments on the guidance should be sent by 15 May and if confirmed, the measures would come into force by the end of the month.