Liz Booth examines what action insurers and brokers need to take following the High Court ruling on the FCA business interruption insurance test case
With thousands of UK businesses’ very existence threatened by the fallout from the Covid-19 pandemic, it was no surprise they turned to their insurance policies for support. And equally, there was no surprise when there was a public outcry as thousands also discovered their insurers would not be paying out on their business interruption (BI) policies.
Now, the consequential court case led by the Financial Conduct Authority (FCA) to resolve the lack of clarity and certainty that existed for many policyholders, has ruled that six of the eight insurers involved should pay out on certain wordings – with Ecclesiastical and Zurich not ruled against as the High Court found in their favour.
Of itself, the case is not expected to impact insurers’ sustainability. Dominic Simpson, vice-president and senior credit officer at Moody’s Investors Service, explains: “Despite the outcome, the financial impact on individual insurers should be manageable, net of reinsurance.”
Mohammad Khan, UK general insurance leader at PwC UK, adds: “Insurers with affected portfolios should have a clear view of what policies are affected by each clause by now. For those not defending the test case, they should also have a mapping of their own clauses to the ‘equivalent’ clauses subject to the test case.
“The judgment presents some nuances of interpretation, which means further analysis to identify those policies where the court found in favour of insurers and where claims will not be paid up. These relate to a potential narrow definition of prevention of access and inability to use premises.
“This means that the same type of business might find itself covered or not depending on whether it was still selling or whether it was mandated to close by the government rulings rather than its advice.”
However, while the consequences of the ruling are still playing out – and quite possibly at the Supreme Court later this year – one of the questions to be asked is what damage this case has done to the reputation of insurance as a mitigation tool.
Mr Khan points out: “There are 370,000 affected policyholders, so acting fast is an operational challenge and insurers need to consider their ability to handle large volumes of claims and complaints promptly and accurately.”
He also believes: “The judgment might also lead to more claims being made in the coming weeks and, in the longer term, these rulings will have an impact on how insurance policies are worded and potentially sold.
“There will be a renewed focus on policy wording standardisation, which may impact the freedom of brokers to set slightly different wordings for their clients. Insurers and brokers will need to consider the use of technology to ensure that different wordings are provided to customers to meet their insurance needs, while also ensuring they meet the requirements arising from the ruling.”
The judgment might also lead to more claims being made and, in the long term, these rulings will have an impact on how insurance policies are worded and potentially sold
Beyond that, the market has generally welcomed the clarity given by the court. Michael Frisby, dispute resolution partner at Stevens & Bolton LLP, says: “It is a crucial first step towards bringing clarity to Covid-19 BI insurance. For insurers, the importance of this case is clear when you look at the numbers: it’s been estimated that members of the Association of British Insurers will pay out £1.2bn in the wake of Covid-19, and 75% of this will be for BI.
“For the insureds, without the FCA, they would have been left to fight an expensive, lengthy and complex dispute on their own to obtain resolution of the issues raised by the FCA. Small enterprises with little funds or litigation experience were pitted against deep-pocketed and experienced insurers. It really was a case of David against Goliath.”
370,000 policyholders were identified as holding policies possibly affected by the outcome of the FCA test case
Christopher Woolard, interim chief executive of the FCA, adds: “We brought the test case to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market.
“Insurers should reflect on the clarity provided here and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgment says should be paid. They should also communicate directly and quickly with policyholders who have made claims affected by the judgment, to explain next steps.”
His words are echoed by Christopher Croft, CEO of the London & International Insurance Brokers Association, who says: “Clients deserve clarity and the fact that this case had to take place at all is a rebuke to our industry and the often obscure language we use. Customers deserve to understand exactly what it is they are getting, in language they recognise.
“The industry’s reputation has been damaged by the debate over exactly what is or is not insured and we need to think hard about how we redress that and introduce absolute clarity into the product our customers buy. This will include challenging the principles at the heart of these cases – principles that insurers have held dear but which we have seen make no sense to the general public.”
The CII has been swift to react, urging insurance professionals and government to act now to reduce the need for legal proceedings like the FCA’s BI test case in future.
The professional body has urged the profession to focus on three areas of activity:
- Product governance processes, including gaining greater clarity on product wordings. Where the same words and phrases are used in different contracts, there should be a consensus among professionals about what those terms mean, so that consumers can be reassured that two policies that look the same on paper cover the same risks.
- Improve advice processes (and non-advised buying processes) to help clients understand both the insurable and non-insurable risks they face, and what they can do about each one.
- Establish an approach to pandemics and other systemic risks that clearly sets out the scope of government intervention. If the government clarifies the risks it is prepared to cover, the market can be clear on how it will cover the risks that it is capable of covering.
Sian Fisher, CEO of the CII, says: “As the professional body for insurance, our key concern is to build trust in the profession. For this reason, we welcomed the test case when it was launched, as it will create greater certainly around the legal basis of business interruption contracts.
“Looking to the future, insurers, brokers and government must act now to reduce the need for court cases such as this one in future.”
The CII has created a Chartered transparency forum to examine ways the profession can best meet the expectations of consumers. The forum will bring together consumer representatives, legal experts and leading practitioners from across the insurance profession to:
- Calculate the insurance expectation gap in policy coverage versus customer understanding – with indications of how it can be addressed.
- Publish and promote guidance, outlining the principles by which all professionals should take accountability for improving transparency, engagement and comprehension of communications relating to policy coverage.
- Identify existing learning materials and prioritise the development of future learning materials to improve the profession’s broad expertise in how policy wordings work, and how their drafting can better match brand promises, marketing messaging and consumer expectations.
- Lead a campaign to promote the above standards and learning with the objective of collectively improving public trust by reducing the expectation gap.
Ms Fisher concludes: “When people buy insurance, they are buying a promise of help when things go wrong. But too often, there is an expectation gap between what customers thought that promise was and what the provider intended. To improve trust, we must understand exactly what leads to that gap and how we can reduce it together.”
- Many policyholders whose businesses were affected by the Covid-19 pandemic suffered significant losses, resulting in large numbers of claims under BI policies.
- Most SME policies are focused on property damage but some also cover for BI from other causes, in particular infectious or notifiable diseases and non-damage denial of access and public authority closures or restrictions.
- The FCA selected representative policy wordings issued by eight insurers. Some 370,000 policyholders were identified as holding policies possibly affected by the outcome of the test case.
- The judgment did not say that the eight defendant insurers are liable across all of the 21 different types of policy wording in the representative sample. Each policy needs to be considered against the detailed judgment to work out what it means for that policy.
Source: Financial Conduct Authority
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