On 15 April 2020, the FCA published a "Dear CEO" letter to insurers on the impact of the coronavirus pandemic (COVID-19) on business interruption policies. The FCA stated that most policies with basic cover would not cover COVID-19 and insurers' obligations to pay claims would not arise which it understood would "disappoint" policyholders. On that basis, the FCA outlined that it saw "no reasonable grounds to intervene in such circumstances". Its letter did not address the complexities and issues with policy response that have been well-publicised in recent days.
Today, the FCA released further announcements detailing the “decisive action” it is taking to provide certainty in respect of policy wording and to ease the concerns of businesses whose claims have been rejected or remain unpaid.
The FCA states that it is now seeking "legal clarity" on business interruption insurance to provide certainty for businesses (and insurers). However, it is unclear whether this step will help or hinder businesses given the breadth of policy wording and additional permutations of cover together with the variable impact of COVID-19 on different sectors of the economy. The regulator's approach is to seek the court's urgent assistance on "a representative sample of the most frequently used policy wordings that are giving rise to uncertainty." This suggests the court's decision will be used as the basis for insurers' decisions for claims.
The FCA has stated that the sample of cases put before the court is intended to be on an agreed basis with insurers and that it is simultaneously writing to some insurers to clarify their approach to business insurance claims, with a view to asking other insurers to join the court process. The window for insurers' responses (no later than 15 May 2020) suggests businesses cannot expect final decisions on payouts under affected policies for many more weeks (even using expedited court procedure), during which period costs and cash flow issues will continue to escalate for SMEs and beyond. The FCA has outlined that businesses are still able to refer matters to the Financial Ombudsman Service (FOS) or pursue court action although this is unlikely to provide short term relief, especially without an acknowledgment of the delays that go hand-in-hand with such complaints.
Aside from the FCA's application to the court, it has restated that insurers should still consider whether their products offer "value" and whether they can be "doing more" under Principle 6 and ICOBS. For example, the FCA has invited insurers to consider refunding premiums or suspending monthly payments for a period of time. Furthermore, the FCA proposes to give insurers up to six months to assess this so that it can take into account effects of coronavirus in a more rounded manner. It must be questioned whether this intervention will even the touch the sides of the real pressure business owners are operating under.
A Cash Crisis
The FCA's "Dear CEO" letter of 15 April 2020 expressed that most policies do not trigger insurers' obligations to pay claims. In the two weeks that have followed, businesses have reported claims being denied despite favorable policy wording indicating that some insurers have interpreted policies over-strictly. That has led to the launch of numerous class action groups that have instructed law firms to review policies ahead of potential litigation. Whilst court process remains an option, we must question whether it will be effective in light of the cash crisis that COVID-19 has become. Many will consider that the regulator could and should have done more.
An Urgent Need for Representation and Clarification
The FCA's intervention is no doubt well-intended but in a business and legal environment moving at break-neck speed, it is vital that insured businesses are adequately represented. We consider that urgent resolution and leadership on the following questions is now needed:
- Businesses need certainty more than ever. What is the longstop by which businesses will get final answers from insurers? What is the FCA's position on groups of businesses seeking to negotiate directly with insurers in an attempt to bypass time consuming litigation and/or to narrow the issues between them?
- Will the FCA intervene to improve the speed and efficiency for the FOS to consider groups of complainants supported by their trade bodies? Is there sufficient resource and appetite to tool up the FOS in light of the fact that it applies a different standard of adjudication equivalent to what is fair and reasonable (see s228 FSMA).
- We must not forget that policy renewals continue today and have each day since the crisis begun. What is the FCA doing to ensure that business interruption remains available, effective and priced in a way that does not make cover uneconomical at a time of crisis? Comments about ongoing premium do not answer this point.
- This crisis, if anything, has demonstrated the need for all businesses operating with ever-decreasing capital versus debt ratios and ever-smaller margins in difficult trading environments to have the safety net of insurance. What is the FCA's position on encouraging the government to get behind a new and government-backed Business Interruption Re-insurer (perhaps called BusRe) in the model of FloodRe to ensure cover remains accessible?
- Whilst contract interpretation in English law is an objective exercise, potentially dangerous precedent is set if sectors of the economy are not independently represented before the High Court. What is the FCA's position on welcoming trade bodies as additional parties to its declaratory action, under CPR, r.19.2 or otherwise? Decisions divorced from the facts and the context in which individual businesses are incapable of working will be unacceptable to those businesses and diminish faith in the judicial process.
- How does the FCA resolve its previously expressed views (that most businesses that consider they have business interruption cover do not have it) with their role as the regulator responsible for the integrity of the market and to ensure customers are able to express their views? How will they ensure a fair outcome in any court hearing with this expressed view? Why should the business community have faith in what, to many, looks like a PR exercise?
- For those sectors in the economy whose views and circumstances may not be fully represented or considered through the regulator’s intervention in court, how do the FCA and insurers seek to address important questions in relation to issue estoppel / res judicata?
While there is no doubt that the FCA’s intervention gives some businesses a glimmer of hope, it also brings further delays in businesses having their claims paid. Fundamentally, businesses will be concerned that their interests may not be fairly represented fairly through the FCA’s proposed course of action. Insurers will no doubt have to contend with integrating the court’s decisions into their own claims assessment processes and consequently, there is real concern that insurers will stop and wait until a binding judgment before making further decisions to pay out claims.
The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP. Specific legal advice depends on the facts of each situation and may vary from situation to situation. Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.