Supreme Court Decision: FCA Business Interruption (“BI”) insurance test case

The Court found that some BI policies that provided cover for infectious or notifiable diseases, denial of access and public authority closures or restrictions, did apply to the Covid-19 pandemic and its effects.

The Financial Conduct Authority (“FCA”) initially urged insurers to take action in its Dear CEO Letter dated 22 January 2021 and, has recently issued final guidance which came into effect on 3 March 2021. The next steps for insurers are as follows:

Communication and timings

Each policy needs to be considered against the detailed judgment to understand the implications for that policy. This means previously declined claims or complaints, may now be valid or of a different value. Insurers are encouraged to communicate directly with relevant policyholders to alert them to the recently issued guidance.

The FCA’s guidance is effective until 31 January 2022, when all relevant claims should be resolved. Whilst it is important to get these claims settled, insurers should be careful to fully resolve the issues and avoid any future re-work or remediation.

The period between 17 June 2020 and the Court’s declarations should not be included in time limits related to any claims or complaints for policyholders.

Claims handling

The regulator is encouraging insurers to adopt approaches that streamline and expediate claims handling. The FCA expects insurers to make interim payments where appropriate.

Coordinating an approach which helps policyholders to prove the presence of Covid-19 by particular dates could save both the insurer and the policyholder effort. Examples suggested by the FCA are for insurers to publish records of dates when Covid-19 was established within the ‘relevant policy area’. This does however lead to the risk that alternative dates are published by different insurers and this will need to be monitored.

The involvement of claims management companies is likely to add another layer of complexity around the validation of claims and, the potential for excessive costs. This needs to be balanced against the drive for speed and ease of settlements. It is likely to require greater scrutiny by insurers over policyholder evidence.

Even where full and final settlements were agreed before the judgment, insurers should review the information they provided and, whether they informed policyholders of the implications of the test case.

Likewise, insurers will need to consider the run of events since the original lockdown including subsequent rules, restrictions, guidance and the second/third lockdown in determining multiple claims. In the meantime, cover may have ended, changed or renewed.

Evidence

The FCA guidance sets out evidence that can be used to prove the presence of Covid-19 for ‘disease’ coverage clauses. This is focused on proving causation and, insurers will still need evidence to assess the monetary value of the claim as they would usually.

Complaints

Insurers should reassess all potentially affected complaints. The insurer (or recipient of the complaint) will not only need to consider the claim settlement, but also wider issues around quality of service and client communications. A revised final response is permitted for reassessed complaints and must allow a further six months for the Financial Ombudsman Service referral.

What is “fair and reasonable” in the circumstances may include interest on any delayed claims and also compensation. This type of compensation can include consequential loss and non-financial loss (distress and inconvenience) and, could be more costly than simply settling the claims.

Data reporting

The FCA will request new data on the affected BI policies, followed by regular requests on the progress of these claims and complaints. Management Information (MI) systems need to be capable of extracting and bringing together such data in a way that can be reported accurately.

Other considerations

There will be significant pressure on insurers to process these claims on a timely basis. They will need to ensure their claim functions are appropriately resourced together with those of their advisors including, loss adjusters and forensic accountants.

From the insurers’ point of view, the wording of these business interruption policies was simply not designed to cover pandemics in this way. There should really be a drive to reconsider policy wording for business interruption insurance.

But there is a lesson to be learnt across other insurance policies too. The FCA points out that the Court’s interpretation may apply to other types of policies that include similar clauses, such as wedding and landlord insurance. For legacy products, more detailed “Unfair Contract Terms” reviews, may be required to understand this type of exposure.

There is a risk that policyholders who paid additional premiums for business interruption cover extensions feel that they paid more unnecessarily. Wider communications with such policyholders may be required to explain the difference between the policies and extent of cover.

If further legal proceedings are required for any remaining areas of uncertainty, the FCA asks firms to be mindful of the significant costs faced by policyholders. Any subsequent judgment that may have a wider impact on policy interpretation should be considered in claims and complaints handling.