Business interruption insurance and the FCA test case: FAQs

Business interruption insurance and the FCA test case: FAQs

The Supreme Court's judgment concludes a complex legal test case brought by the Financial Conduct Authority (FCA) in 2020, in which the FCA sought urgent clarification on key issues of contract uncertainty in some insurance providers’ policy wordings.

What were the objectives of the FCA test case?

The FCA's test case originally involved a sample of eight insurers’ business interruption (BI) policy wordings. It sought to establish whether those wordings should pay BI claims for the consequences of COVID-19. 

Why did the FCA's test case focus on the interpretation of certain policy wordings?

The language and construction of policy wordings can vary significantly from insurer to insurer. However, most policy wordings are clear about not providing cover for the impact of the COVID-19 pandemic and associated restrictions such as national or regional lockdowns. 

After reviewing numerous submissions, the FCA selected 21 policy wordings from eight insurers to be considered by the High Court. During its review, the FCA established that over 700 policies from 60 insurers could potentially be affected as they may contain materially similar clauses. Nevertheless, in terms of the insurance market's size, this only represents a small proportion of UK businesses' BI policies, and most would be unaffected by the case.

What were the outcomes of the Supreme Court ruling for policyholders?

The Court ruled mostly in favour of the FCA in nearly all respects. Consequently, some insurers will now need to potentially pay valid claims under the terms of some of their policies. This outcome will only apply where the Court ruled on the specific policy terms, conditions and limits, or where the policy in question is materially similar to one examined in the court case. These policies are termed 'in scope' and will need to be assessed.

The reality is that no insurer we are aware of expressly intended to cover COVID-19 as a specific contingency. Until the pandemic took hold, it had not been considered a significant risk for the vast majority of UK businesses. Hence cover for COVID-19 specifically, or broader general pandemic cover has not featured historically as one of the principal requirements in insurance purchase. Regrettably, that means that there will be no cover in place for these losses for most of our clients.  

What about Landlords and Loss of Rent Insurance?

Whilst there were Property Owners policy wordings included in the representative sample reviewed by the Courts, the test case itself did not specifically consider loss of rent by landlords. The courts only focussed on business interruption coverage involving loss of gross profits or increased cost of working, and on a limited number of areas of uncertainty such as interpretation of disease clauses or prevention of access.
One of the challenges for Property Owners is that many loss of rent wordings might only provide cover for prevention of access, but the pandemic restrictions were not structured this way. They may have restricted the way tenants can use the premises (such as nightclubs remaining shut), but access was not limited (work from home if you can).

The result is that claims for loss of rent remain complex, with no centralised directive on which policies we should expect to respond. Individual circumstances will need to be reviewed against the policy wording, with a ‘sideways glance’ at the issues that have been resolved by the Courts.
If you haven’t already made a claim for loss of rental income but wish to do so, or if you would like to discuss the matter further, please contact your account executive for assistance.

What is Pi-Property Insurance doing to follow up on the Court’s ruling?

In those instances where a policy appears to contain a wording related to the judgment, we are making contact with our clients to provide specific guidance on what happens next.

Similarly, insurers must contact all affected policyholders who have submitted claims, and who should already have been advised that the claim decision could be affected by the Court's ruling. We are chasing these up and sharing them as we receive them.

When will insurers start paying out on COVID-related business interruption claims?

The Supreme Court, the FCA and those insurers involved in the test case are working together to issue a set of declarations very soon. The timeline and process for assessment (and ultimately payment) of those claims will follow this set of declarations. We do not anticipate insurers will settle any claims before the end of February. However, this is just speculation on our part, pending the Supreme Court's announcement.

Naturally, we want insurers to pay valid claims as soon as possible and will push to ensure that this happens. That said, insurers are inundated right now, so we will handle all enquiries as promptly as we can in the circumstances.   

What do I do next as a policyholder?

If you have already submitted a claim, we will be in touch to advise you on the next steps in the process. 

If you have already received a payment from your insurer, we will revisit your claim in due course. The FCA's decision and forthcoming guidance will further clarify when a valid claim can be said to have occurred and the extent to which some businesses are affected. This development could mean that some claimants may have received less than they are entitled to, and if so, we will approach their insurer to re-open the claim.

If you haven't already made a claim for business interruption but wish to do so now or if you would like to discuss the matter further, please contact your account executive for assistance. 

Remember that most policies will not provide cover for business interruption caused by the effects of COVID-19. This is because the disease has not historically been a significant risk for the vast majority of UK businesses before the onset of the pandemic and so did not feature as one of the principal requirements in insurance purchase. Nevertheless, we can give you our opinion regarding your policy and advise you on how to submit a claim if you wish to do so. 

The pandemic has affected my business and my employees, what can I do?

The consequences of COVID-19 have brought unprecedented challenges to businesses large and small, but we're here to help you however we can. 

Talk to us about your business needs

We can assist you with changes to your policies, including altering cover to reflect changing operational patterns and business activities. Bear in mind that policies often contain requirements you need to fulfil if your property becomes unoccupied. Speak to your usual account executive if you are in any doubt. 

Consider your employees’ wellbeing

We all agree that the wellbeing of employees is paramount. So, to help your business implement effective programmes and manage your employees' mental health and wellbeing through this difficult period, we offer a complete range of innovative products and services through our Employee Benefits team. 

How will Brexit affect my insurance?

If the challenges of COVID-19 weren't enough, we now find ourselves at the onset of a new trading era with the European Union. This transition has added complexity to the process of UK-domiciled insurers continuing to provide cover for risks located within the European Economic Area (EEA). If you need assistance concerning the insurance of an EEA-domiciled risk, or you'd like to discuss the general implications of the UK's exit from the EU, then please contact your usual account executive.

We can also arrange an International Motor Insurance Card (green card) for you, which is now a legal requirement if you're planning to drive in the EU or EEA.

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