On 1 May 2020, one of the UK’s insurance regulators, the Financial Conduct Authority (the “FCA”), issued a statement that it intended to seek legal clarity on business interruption (“BI”) insurance in order to resolve doubt for policyholders facing uncertainty on their claims (the “Statement”). The FCA says that it will achieve this clarity by seeking court determinations in relation to currently disputed policy issues.
The Statement followed discussions between the FCA and UK insurers and their industry body, the Association of British Insurers (the “ABI”), which do not appear to have involved any policyholder representatives. There are as yet no details regarding the procedure that the FCA intends to use. However, this alert examines the FCA’s statement against the background of publicly known facts and identifies potential concerns for policyholders as well as possible action that they could take to protect their position.
It is important to note that while the FCA’s statement is directed at insurance provided to small and medium-sized enterprises (“SMEs”), its proposals affect potentially all policyholders with Covid-19 related claims under relevant London market BI policies, whatever their size.
Background
The FCA regulates the conduct of insurers. Its operational objectives include protecting consumers, and protecting and enhancing the integrity of the UK financial system. Pursuant to these objectives, the FCA has taken a close interest in the escalating disputes between policyholders and London market insurers with regard to the payment of claims under BI policies, which have seen collections of businesses forming action groups to mount legal challenges against insurers.
The FCA had already, before 1 May, published material setting out its expectations of insurers’ treatment of the claims of SMEs, starting with the document “Insurance and coronavirus (Covid-19): our expectations of firms” first published on the FCA website on 19 March. A 15 April letter, focussing on BI insurance policies sold to SMEs, noted the importance of ensuring that claims are assessed and settled quickly, and stated that the FCA would like insurers to make interim payments where there are reasonable grounds to pay part of a claim but not make the payment of such claims in full. In its letter, the FCA acknowledged that some insurers are already adopting this approach, but requested that any firms that are not doing so explain to the FCA the grounds for reaching that decision, and how the decision represents a fair outcome for customers. The letter also highlighted that SMEs may have the option to refer their disputes individually to the Financial Ombudsman Service (the “FOS”), which was said to be gearing up to deal with such claims. Only complaints under £355,000 made by SMEs or individuals are eligible for referral to the FOS.
In addition, the letter noted the FCA’s “estimate […] 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”. For that reason, the FCA saw at that stage no reasonable grounds to intervene on behalf of policyholders. However, the “estimate” informing the FCA’s approach appears to have been based entirely upon discussions with the insurance industry, without policyholder input or an independent assessment of common BI policy wordings, extensions, and exclusions.
In parallel with the FCA’s communications, on 25 March 2020, Mel Stride, MP, the Chair of the House of Commons Treasury Select Committee, wrote to the Director General of the ABI, asking, among other things, for details of the approach that members of the ABI are taking in respect of coverage for Covid-19-related claims under BI policies. The ABI provided a detailed response on 23 April that was published on 25 April, but this did not fully satisfy the Treasury Committee. Therefore, on 25 April, Mr Stride noted that the Committee continued to receive evidence concerning the difficulties that firms were facing in making a successful claim — including evidence that 71 per cent of the members of UK Hospitality, a trade body, have had claims rejected. He recorded that the Committee was concerned that the insurance sector should go the extra mile in meeting claims wherever possible, such as “where there may be grey areas within policies”. The Treasury Committee also echoed the FCA’s expectation that insurers should be clear and not misleading whenever they communicate, and fair and professional in how they deal with their customers.
It is against this background that the FCA issued its somewhat surprising and unprecedented Statement on “insuring SMEs: business interruption” on the morning of 1 May.
The Statement - Contents
Principles Underlying the FCA’s Action
The Statement starts by making clear that the action that the FCA proposes to take is in the public interest to advance the FCA’s consumer protection and market integrity objectives, as the circumstances of the Covid-19 emergency and its effect on businesses holding BI policies mean that any uncertainty needs to be resolved as quickly as possible.
The Statement also makes clear that:
- the proposed action by the FCA is not intended to encompass all possible disputes, but only to resolve some key contractual uncertainties. In particular, it will not determine how much is payable under individual policies, but will provide the basis for doing so; and
- the action will not prevent individual policyholders from pursuing issues through the courts or arbitration, or from taking eligible complaints to the FOS (although, as discussed further below, insurers may seek to delay such individual proceedings while the FCA’s action is pending). The FCA anticipates, however, that the FOS will be able to take any declaratory judgment that it obtains into account in considering relevant complaints.
The FCA’s View of the Current BI Position
The FCA repeats the view expressed in its 15 April letter that most SME insurance policies are focused on property damage and only have basic cover for BI as a consequence of property damage so, at least in the majority of cases, insurers are unlikely to be obliged to pay out in relation to the coronavirus pandemic. As we have noted above, this view appears to be derived purely from the FCA’s discussions with insurers.
The FCA acknowledges that some policyholders’ policies also provide cover for BI losses arising from other causes, such as infectious/notifiable diseases, non-damage denial of access, and public authority closures/restrictions. The FCA identifies two categories of such wordings.
The first category includes wordings in respect of which insurers have determined that they will pay on a policy. For these policies, the Statement says that it is important that claims are assessed and settled quickly, and notes the FCA’s belief that insurers still need to do more work to agree, process and pay these claims as promptly as possible in all cases, including using interim payments where appropriate. The FCA observes that this approach is consistent with insurers’ regulatory obligations, including Principle 6 in the FCA Handbook, which requires insurers to pay due regard to the interests of their policyholders and treat them fairly, and the FCA’s Insurance Conduct of Business Sourcebook (“ICOBS”), the overall aim of which is also to ensure that insurers treat their policyholders fairly.
The second category includes wordings in respect of which insurers may consider there is no doubt about the lack of coverage and therefore decline to pay a claim, but in relation to which policyholders may still consider there is genuine uncertainty about whether their policy provides cover. These are the policies that the FCA is targeting for clarification.
The FCA’s Proposed Action
Having noted that there are significant differences in BI wordings between policies and across insurers, the Statement asserts that the FCA will work actively and promptly to seek to resolve issues causing uncertainty over BI coverage, to provide greater clarity for parties and help ensure there is not undue delay to payments where there are valid claims.
The FCA’s plan is to bring relevant cases to court as soon as possible for an authoritative declaratory judgment regarding the meaning and effect of some BI insurance policy wordings where there remains unresolved uncertainty. The FCA is therefore working to identify a sample of cases that are representative of all the most frequently used policy wordings that are giving rise to uncertainty.
To this end, the FCA has outlined its proposals to the ABI and a small number of relevant insurers that have already made decisions about the application of their policies, as well as others that are considering similar questions around policy coverage that could also give rise to genuine uncertainty. The FCA has asked these insurers to clarify by no later than 15 May 2020 whether they believe that their policy wordings for BI losses arising from causes other than from property damage provide cover in these circumstances. If the FCA becomes aware of further relevant insurers that are not already included in this initial group, the FCA will ask those insurers to clarify their position and may ask them to join any action.
The FCA’s General Expectations of Insurers
The Statement also reiterates the FCA’s expectation of insurers. In summary, where policies do not respond to the current situation, the FCA nevertheless expects all general insurers to meet their obligations under Principle 6, ICOBS and the FCA’s complaints handling rules when handling claims and any complaints arising from them, and to communicate clearly and sympathetically to their policyholders at all times.
The FCA acknowledges that, in some cases, the BI cover provided may not be consistent with what the policyholder requested or instructed, or with what the policyholder was informed was being provided, in which case policyholders may raise these concerns as a complaint with their insurer or broker, and if they remain unsatisfied they can complain to the FOS.
The FCA notes that its expectations under Principle 6 and ICOBS also apply to insurers’ work to establish the amount due to be paid to customers where there are valid claims to be made under the policy. The FCA therefore expects that it will be possible in some cases for insurers to make interim or partial payments.
The Statement - Analysis
Important points to note with regard to the Statement include the following:
- While the Statement refers only to SMEs, it is clear that all policyholders (including large corporates) with similar wordings to those in SMEs’ policies and faced with similar legal issues, could be affected by the proposed procedure. For example, insurers are likely to seek to delay coverage decisions or any requested re-consideration of their coverage positions pending the outcome of the FCA procedure, or to seek to defer any proceedings concerning disputed coverage decisions until after the outcome of the FCA’s action is known.
- Although the FCA indicates that its proposed action will not prevent individual policyholders from pursuing issues through the courts, arbitration or, in the case of SMEs, from taking eligible claims to the FOS, it is likely that insurers may seek to stay any such separate determination that involves issues arising in the FCA action, pending the outcome of the FCA action.
- At present, the FCA action only appears to encompass so-called non-damage extensions to normal BI policies. The FCA currently seems to have no plans to seek declaratory judgments regarding the meaning of damage under BI wordings that require property damage, and the anticipated FCA action does not appear to contemplate addressing any issues arising under event cancellation policies, even though there may be some similar disputes of principle under those policies. It is also unclear whether common issues of causation and damages will be covered: for example, the much-criticised first instance Orient-Express Hotels decision concerning the effect of wide area damage, on which it appears that insurers may seek to rely, may merit re-consideration by the courts.
- It is currently unclear from the Statement exactly what procedure the FCA will employ to seek the court determination that it envisages. There is no procedure to allow a regulator to bring civil proceedings seeking a determination concerning the meaning of private contracts between regulated parties and others. It seems possible that the FCA may require each of the insurers involved to bring the declaratory proceedings in respect of issues arising under its policies, with a representative policyholder as defendant.
- There may also be no guarantee that the first instance determination by the trial judge will be the final outcome in the matter. There is no mechanism to allow proceedings of this nature to be commenced directly at the Supreme Court level in the first instance, in order to eliminate the possibility of further appeal. As the points for determination are all likely to be technical points of law, a decision by a first instance judge could be appealed to the Court of Appeal and then to the Supreme Court. In limited circumstances, it is possible for a High Court decision to be appealed directly to the Supreme Court, bypassing the Court of Appeal (sometimes referred to as a ‘leapfrog’ appeal). Another first instance judge in a separate action would also not be bound by a first instance decision in the FCA action, and could reach a different decision, although High Court judges are generally inclined to follow previous High Court decisions in the interests of legal certainty
- While the FCA is aiming for a speedy resolution to the issues currently in dispute, it seems likely that agreement on the procedure may take some time. Once the insurers who will be involved in the procedure have been identified as a result of the responses that the FCA has required by 15 May, the relevant wordings and issues need to be identified and agreed. At this time, if not before, it must be expected that policyholders who are prepared to engage in the process will want to have their say about the insurers, wordings and issues to be involved and the details of the procedure itself.
- The part of the Statement that deals with the FCA’s expectations may encourage policyholders to take action against insurers for misrepresentation of the coverage provided and/or against brokers for negligent advice, or at least to reserve their rights against those entities, which could give rise to satellite disputes. The FCA appears to hope that SMEs at least would refer any such disputes to the FOS, rather than commencing litigation or arbitration claims.
Six Recommendations for Policyholders
In light of the developments summarized above, any policyholder that has not secured confirmations of coverage from its BI and event cancellation insurers under English law policies would be well advised to do the following:
- As a threshold issue, the policyholder should ensure that it has provided comprehensive and timely notification to the insurer that complies with the policy wording, since the insurer may be able to contend that this is an absolute precondition of the insurer’s liability (for example, if the policy makes compliant notification a condition precedent of the insurer’s liability).
- The policyholder should consider, ideally with its legal advisers, whether it would be in its interests to take separate action against the insurer rather than awaiting the outcome of the FCA action. It may be that a decision on the appropriate strategy cannot be made until further information about the FCA action is revealed.
- The policyholder should consider whether to inform the FCA of its dispute, so that the FCA is aware at the outset of the relevant insurer(s), policies and issues involved in the policyholder’s case.
- The policyholder or its advisors should monitor carefully the details that will be emerging of the procedure that the FCA will be employing, including the insurers, wordings and issues involved.
- If the policyholder is considering awaiting and/or relying on the FCA action, it should consider communicating with the FCA to try to ensure that the insurer(s), wording and issues with which it is dealing are included in the FCA action and/or to protect its right to seek a separate resolution in the future, if appropriate.
- In the meantime, the policyholder should be careful to reserve all rights against the insurer(s) and the FCA in all respects, including specifically the right to take separate action.
If you have any questions concerning the material discussed in this client alert, please contact the following members of our Insurance Recovery practice.
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