Business Interruption Insurance: FCA sets out how insurers should be handling Coronavirus claims and complaints

Policyholders with business interruption insurance (“BII”) policies and their brokers and other insurance intermediaries should be aware of how insurers are to be required to handle their COVID-19 related claims. Although it is not currently in force and is in a consultation stage, we anticipate that the final guidance is likely to be fairly close to this consultation version.

The FCA Test Case

The FCA has brought a test case in the High Court in relation to a representative sample of policy wordings to create a binding judgment on the interpretation of the wordings. The interim chief executive of the FCA, Christopher Woolard has stated: “The court action we are taking is aimed at providing clarity and certainty for everyone involved in these BI disputes, policyholder and insurer alike”.

The Draft Guidance

The FCA has published draft guidance asking for consultation responses by 5 June 2020. The draft guidance will come into effect when the FCA issues its claim form. The guidance is relevant to any actual or potential claim or complaint that relates to business interruption losses resulting from the Coronavirus pandemic, where there has been no physical damage to insured property. This includes BII policies that cover non-damage denial of access, closure by a public authority or notifiable diseases. In order to be defined as a “relevant BII policy”, the insurer must have both:

1. received a claim for losses arising from COVID-19 which the insurer has rejected, made an adjustment or deduction for general causation, or not decided whether a claim is covered; and
2. informed policyholders or announced publicly that their BII policies with non-damage cover will not respond to COVID-19 losses.

We have seen copies of such letters mentioned in 2 above, which it could be argued appear to have the aim of discouraging policyholders from claiming.  Policyholders and their brokers will need to consider carefully whether a policy is a relevant BII policy and take legal advice on this if they are unsure.

Reviewing whether claims are test case claims 

Firstly, insurers should be reviewing claims and complaints to check if the test case applies and recording their conclusions. Essentially, claims are then split into three categories:

1. Test case claims: claims where the insurer's decisions on the claim may be affected by the court's final decision in the test case (whether at first instance or on appeal).
2. Guidance claims: claims where the test case may provide guidance on the interpretation or effect of a relevant policy wording but will not affect the decision on claims.
3. Unaffected claims: claims where the interpretation or effect of the policy wording will not be affected by the test case.

Insurers must have completed this review within two weeks of the guidance coming into effect. Within three weeks of the guidance coming into effect, insurers should inform policyholders that have made claims whether their claim is a test case claim. Policyholders should consider carefully the information received from insurers and challenge the insurer's categorisation of their claim if necessary. The FCA may also be publishing the overall figures provided by each insurer on the proportion of claims in each category.

Timings

Insurers are required to relax time limits in their policies, for instance, notification obligations. The FCA has stated that, when relying on time limits in the policy for policyholders to make claims or take any other steps under the terms of the policy insurers should not include the period between the date the guidance comes into effect and the final resolution of the test case. Insurers should also not limit any payment that may be due to a policyholder because of the time that has elapsed before the test case claim was made.

Communicating with policyholders

Insurers should be updating policyholders with relevant BII policies on the test case and its implications for potential claims. Insurers should also make sure their comments about the test case are balanced. This is likely to lead to very generic updates from insurers, balancing the need to update the policyholder with ensuring it does not prejudice the insurer's position in the test case or in respect of any specific claims.Where insurers have made statements to policyholders on whether COVID-19 losses are covered by their relevant BII policies, the insurers will be under a continuing duty to “promptly” amend or supplement any statements or communications and ensure policyholders and their brokers are made aware of the content of these communications.Communications should also be made with policyholders with test case claims:

1. when the test case starts;
2. when any judgments on substantive issues are handed down;
3. when the test case reaches its final resolution (either at first instance or appeal); and
4. any significant developments that may be relevant to the policyholder's claim.

Policyholders and their brokers will need to read and consider all communications carefully and ensure that, where appropriate they push back on insurers' interpretations of events and/or set out a basis on which their particular claim should be distinguished.

Handling claims

Insurers should be handling claims promptly and fairly and, where any settlement is to be paid, it should be paid without waiting for the final resolution of the test case. If only part of the claim is affected by the test case, the part that is not should be dealt with in the normal way. Insurers also need to communicate clearly which parts of the claim have been addressed, which are covered by any offer to settle or redress and which elements the insurer will assess after the final resolution of the test case.

Offers to settle

Insurers can still make offers to settle on a full and final settlement basis in relation to test case claims. However, insurers must make sure to explain how the final resolution of the test case will affect any offer of settlement and, in particular, the implication of accepting an offer on a full and final settlement basis.If an insurer has made an offer to settle to the policyholder before the guidance comes into effect that remains open for acceptance, the insurer must provide the information regarding the test case to the policyholder. If the offer is less than 14 days from expiring at the date the guidance comes into effect, the insurer should extend the time for the policyholder to accept the offer by two weeks from the date when the policyholder receives the information regarding the impact of the test case. Unless the insurer is increasing the offer to settle, the insurer should not withdraw the offer in the timeframe that has been given to the policyholder. Policyholders will need to consider carefully the probability of receiving a better recovery after the test case. Policyholders should also take advice from their broker and obtain legal advice on the merits of the settlement offer at this stage.

Test case complaints

The FCA's guidance applies equally to 'test case complaints'. These are essentially policyholder complaints about an insurer's decision on COVID-19 business interruption cover where the outcome of the complaint may be affected by the court's final decision in the test case (whether at first instance or on appeal).In addition, if the final resolution of the test case is necessary before providing a final response to a test case complaint, the insurer should provide a written response to the policyholder including the implications of the test case on the complaint and that a final response will be provided on the final resolution of the test case.

After the test case

Insurers should review all outstanding and rejected test case claims and complaints applying the test case judgment and inform policyholders of the outcome. In relation to complaints to the Financial Ombudsman Service, the insurer should consider the time limits for the policyholder to complain to FOS (which is usually 6 months from the final response of the insurer to the complaint). At the minimum, the insurer should discount the time between the guidance coming into force and the final resolution of the test case.

How We Can Help

Our Financial Services Regulatory team can assist you with your BII policy claims and complaints at the following stages:

1. advising you on the insurer's categorisation of your claim as a test case claim, guidance claim or unrelated claim;
2. advising you on points of distinction between your claim and the test case;
3. challenging final decisions made by the insurer in relation to your claim;
4. advising you on any offers to settle that you receive; and
5. advising you on the potential impact of the test case on your claim.

If you need any advice on business interruption insurance, please contact Adam Edwards in our Financial Services Regulatory team.

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If you would like to talk through the consequences for your business, please email us and one of our team will get in touch.