26 May 2020

The FCA's bid to resolve pandemic insurance coverage uncertainty

Benjamin Lyon and Katie Power analyse the steps being taken by the FCA to seek guidance from the courts on Covid-19 cover

Benjamin Lyon

Benjamin Lyon

The UK’s Financial Conduct Authority (FCA) announced on 1 May that it will seek a court declaration in order to assist with the potential and ongoing disputes over business interruption insurance written by FCA-regulated UK insurers.

This is part of an ongoing attempt by insurance regulators around the world to assist in resolving the uncertainty faced by businesses at this time, as a result of questions over insurance policy coverage for the current coronavirus pandemic. 

The announcement was welcomed by the Treasury Select Committee, the British Insurance Brokers’ Association and the Association of British Insurers. 

The FCA plans to seek a court declaration on an urgent basis on whether common policy wordings should apply to business interruption claims resulting from coronavirus, in order to address concerns about lack of clarity and certainty.

A member of the Hiscox Action Group has said that the FCA plans to get the cases heard as soon as July. The FCA has emphasised that the proposed action is not intended to cover all potential coronavirus-related insurance coverage disputes and that it will not go into the amounts payable under individual policies. 

Example policy wordings

The FCA proposes to put the example policy wordings before the English courts on an agreed basis with the relevant insurers. However, customers will still be able to access the Financial Ombudsman Service (FOS) or the courts if they qualify and choose to do so. The FOS has said that it will consider the effect of the FCA’s approach on its own work.

The FCA is working to identify a sample of the most frequently used policy wordings that are giving rise to uncertainty.  The FCA has already identified certain UK insurers which have made decisions about the application of their policies or who are considering questions around their policy wordings that could give rise to uncertainty.

The FCA wrote to those insurers to ask for clarity. Responses were expected no later than 15 May. The FCA is now considering which firms it will ask to join the process. 

The FCA has indicated that it may approach other firms where relevant. While it is expected that only English-law governed insurance contracts will be included at this stage, whatever the English courts determine is expected to also be relevant for other common law jurisdictions as a matter of insurance contract interpretation, especially other Commonwealth jurisdictions such as Bermuda, Ireland, Canada, Australia and New Zealand.

The FCA announced in mid-April that it saw no 'reasonable grounds' to intervene in business interruption claims for coronavirus losses where policies do not cover pandemics.

The FCA’s view is that most policies do not cover pandemics on the basis of coverage language or because of broad pandemic exclusions, and therefore most insurers will have no obligation pay out in relation to coronavirus unless specifically covered.

The interim chief executive of the FCA, Christopher Woolard, has reiterated this, while noting that there are some policies where there is “genuine uncertainty”. As such, the FCA’s 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 FCA also published a statement on business interruption insurance, particularly in relation to small and medium enterprises, in which it restated its expectation that where insurers have determined that there is an obligation to pay out under a business interruption policy, they do so quickly, using interim payments were appropriate.

The FCA expects firms to be able to demonstrate that they continue to comply with their regulatory and contractual obligations in relation to customers. 

This FCA-initiated court process seems targeted to alleviate fears that disputes between insurers and policyholders could stretch into lengthy court claims, extending the uncertainty experienced in the economy.  

Insurance Guidance

The FCA also proposed a series of additional guidance measures to support consumers and businesses. The proposed measures expect that insurance firms will consider whether:

• their products still offer value to customers; and

• insurers can be doing more for those suffering a financial impact.   

The FCA has indicated that, in relation to the first bullet point, insurers should assess the value of their products and consider appropriate actions, which might include changing how benefits are delivered, refunding some premiums or temporarily suspending monthly payments. The FCA is giving insurers six months to complete their assessments. 

The FCA also expects insurers to take steps to help their customers maintain appropriate insurance cover. It proposes a range of options that might be appropriate including giving customers premium payment holidays or partially refunding up front premium payments, waiving administration and cancellation fees or extending cooling-off periods.

The FCA is asking for comments on its proposed guidance and expects to implement measures shortly after the response dates. The measures will be reviewed after three months. 

Benjamin Lyon is an international counsel and Katie Power is an associate in Debevoise & Plimpton’s London office. More information on the coronavirus can be found at the Debevoise Coronavirus Resource Center