On 1 May 2020, the Financial Conduct Authority (FCA) released a statement that it intended to obtain a court declaration in order to resolve contractual uncertainty in business interruption insurance cover. The FCA is taking this action to resolve uncertainty surrounding business interruption claims in the context of business closures in the light of coronavirus (Covid-19). The FCA is taking this step in order to advance its consumer protection and market integrity objectives.
As the FCA has already stated in its ‘Dear CEO’ letter (dated 15 April) most business interruption policies cover physical damage and therefore do not extend to losses connected to Covid-19. Some policies do have extensions relating to infectious/notifiable diseases or closure by a public authority but coverage will always depend upon the policy wording.
The FCA states that as the issues around coverage are complex and wordings differ in the market there is a potential for there to be ongoing uncertainty around what is, or is not, covered. The FCA plans to work promptly to resolve issues causing uncertainty and provide greater clarity to ensure that there are not undue delays in paying valid claims to policyholders.
The FCA will bring relevant cases to court as soon as possible for a declaratory judgment regarding the meaning and effect of some business interruption wordings where there is uncertainty. The FCA is working to identify representative cases that use policy wordings that give rise to uncertainty.
The FCA has written to a number of insurance companies (and the Association of British Insurers) about the proposal for a declaratory judgment. These firms should clarify whether their business interruption policy wordings provide cover for losses other than property damage. This must be done by 15 May 2020.
All insurance firms are reminded of their obligations under Principle 6 (A firm must pay due regard to its customers and treat them fairly) and the requirements of ICOBS and DISP when handling claims and complaints. The FCA states that where no cover is provided under business interruption policies there may be a gap in customers’ expectations as cover might not be what was expected when the policy was bought. There are likely to be complaints made against intermediaries and/or insurance companies and firms should communicate their approach to coverage clearly and promptly.
What should firms do next?
- Firms that have received the letter from the FCA should respond by 15 May, clarifying whether wordings cover losses that have arisen under business interruption policies beyond physical damage.
- Other firms that write business interruption cover should ensure that they are complying with both the FCA Principles for Businesses (namely Principle 6 and Principle 7) and rules in ICOBS and DISP.
- Communication is likely to be the key to managing business interruption claims. Most policies will not cover Covid-19 and this is recognised by the FCA. The risk of regulatory action will be where firms fail to communicate their coverage clearly and promptly.