FCA Update and Guidance on the Business Interruption Insurance Test Case

Overview

On 1 June the FCA published further detail about its plans to bring a test case in the High Court in relation to non-damage business interruption (“BI”) insurance policies in response to uncertainty faced by policyholders, in particular SMEs, about whether their policies cover losses caused by the COVID-19 pandemic.

A key part of the FCA’s update includes the publication of new draft guidance outlining its expectation of insurers. In particular, it expects insurers to conduct:

1. a review of their policy wordings to determine whether the outcome of the FCA’s test case may impact their claims and complaints handling for relevant policies. This review should take place within two weeks of publication of the final guidance and the results should be reported to the FCA;
2. a review of relevant existing claims and complaints to reflect the results of the policy wording review. The results of this review should be notified to each relevant policyholder within three weeks of publication of the final guidance; and
3. a reassessment of previously rejected claims and complaints. This should take place once the test case has been determined. Again, the results of this reassessment should be notified to relevant policyholders.

Although this draft guidance and the test case is predominantly of relevance to insurers writing non-damage BI policies and intermediaries distributing them, the outcome of the test case may have wider implications for other policies impacted by COVID-19 related claims.

The manner in which insurers have responded to this crisis is likely to attract FCA scrutiny once current circumstances have settled. It is therefore important that insurers not only take the FCA guidance into account, but also ensure they have in place robust governance arrangements to support the process.

The deadline for submitting comments on the FCA’s test case documents is 3pm on 5 June.

Background

SME Business Interruption insurance and COVID 19

As the scale and impact of the COVID-19 pandemic became clear earlier this year, the FCA quickly focused on the handling of claims by SMEs under BI insurance policies. Given that so many SMEs were forced to cease operations overnight, the impact on SMEs and the potential for claims to be brought under BI insurance policies is huge.

The FCA’s early assessment, communicated in its Dear CEO letter of 15 April 2020, was that most BI policies have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the COVID-19 pandemic. It therefore did not propose any active intervention.

However, it quickly emerged that there is a significant range of policy wording and types of coverage available in the BI insurance market. The FCA therefore significantly stepped up its response and on 1 May 2020 announced that it intended to obtain a court declaration to resolve uncertainty over whether certain BI policies cover interruption as a result of pandemics.

The test case

On 1 June, the FCA announced that it has identified a representative sample of 17 policy wordings which are representative of the key arguable issues and asked eight insurers who underwrite policies in the sample to participate in the test case. The Court’s declaration in the test case will be binding on the insurers that are party to the case and is expected to provide guidance on the interpretation of many BI policies that are not included in the representative sample. The FCA hopes that by providing clarity on whether the wordings in the ‘arguable’ test cases covers pandemics or not, SMEs’ claims under these policies can be resolved one way or the other without further delay.

The FCA will file the papers to officially start the test case proceedings on 9 June. It is expected that the test case will be heard over two weeks in the second half of July.

The FCA is inviting a wide range of stakeholders, including policyholders and insurers (whether or not they are being invited to be party to the test case) to comment on the documents it has published that will form the basis of the test case, namely its proposed representative sample of policy wordings, assumed facts, issues matrix and questions for determination.

These documents are all available on the FCA’s webpage on the test case, here. The deadline for submitting comments on the test case documents is 3pm on 5 June.

The FCA’s new draft guidance: three key workstreams for insurers

The draft FCA guidance relates to actual or potential claims or complaints relating to non-damage BI losses resulting from the coronavirus pandemic. It does not apply to insurers that have accepted claims without adjustment or deduction for general causation or determined that their policies do not cover COVID-19.

The guidance focuses on steps firms should take to:

1. identify the potential implications of the test case on their decisions to reject claims;
2. keep policyholders informed about the test case and its implications for policies, claims and any settlement offers; and
3. treat policyholders fairly when the test case is resolved.

There are three key work streams for insurers that arise from the guidance:

1. Insurers should review their own policy wordings against the test case to determine if these may be impacted by the outcome of test case. This should be completed within 2 weeks of the guidance coming into force and the results should be reported to the FCA.
2. Insurers should review all existing and new claims and complaints relating to relevant BI policies to determine if these may be impacted by the outcome of the test case. This should be completed within 3 weeks of the guidance coming into force and the results should be communicated to policyholders.
3. All claims and complaints that were rejected before resolution of the test case should be reassessed following resolution of the test case (other than rejected complaints that have been referred to the FOS).

What this means in practice for relevant insurers

1. Review of BI policy wordings

The first task for insurers is to review the FCA’s test case documents, including the sample policy wordings, assumed facts, issues matrix and the questions the FCA is asking the Court to determine (links available on the FCA’s webpage here), and from that determine whether or not the outcome of the test case will impact any decisions they have already taken on claims or any decisions they may have to make on claims in the future.

Insurers should also identify any policies where the test case may provide guidance on the interpretation of policy wordings (even if that policy is not strictly affected by the test case).

This information should be sent to the FCA within 2 weeks of publication of the final guidance using a template to be provided by the FCA and insurers should update this information on an ongoing basis if their determination changes. The FCA may publish the names of insurers, the policies notified and the insurers’ conclusions in respect of those policies.

The guidance states that a senior manager should be allocated responsibility for oversight of this review. Insurers should ensure that the senior manager has the appropriate skills and sufficient capacity and this should be reflected in an updated statement of responsibility for the relevant individual. The relevant individual will need to ensure that they are fully engaged with the review process and exercise appropriate oversight by, for example, setting up a project team to carry out the review with clear guidance, implementing a clear escalation and reporting process, collating appropriate management information and distributing this appropriately.

If a relevant BI policy has been underwritten by more than one insurer, the FCA suggests that the most appropriate person to review the wording of that policy is:

• the insurer with responsibility for claims (if this responsibility has been assigned); or
• the lead insurer (if there is one nominated or if responsibility for claims has not been assigned); or
• the insurer which has underwritten the largest proportion of the policy; or
• the lead managing agent for the policy (if the policy is written by a Lloyd’s syndicate).

2. Review of new and existing claims/complaints

The next step is for insurers to review existing claims and complaints relating to relevant BI policy wording to determine whether these are, or are likely to be, impacted by the outcome of the test case.

Within 3 weeks of the guidance coming into effect, insurers should inform relevant policyholders of whether their claim or complaint will be affected by the test case or not, the reasons for this and the implications for their claim or complaint. This information must also be provided to policyholders bringing new claims or complaints.

Insurers can still make offers to settle claims or redress or remedy complaints that would otherwise be determined in accordance with the outcome of the test case, but when doing so the insurer must make sure the policyholder is informed about the test case and its implications.

Importantly, if an offer to settle has been made before the guidance comes into effect, an insurer must:

• where the offer has a deadline for acceptance which is less than 14 days from expiring, extend the time for a policyholder to accept the offer to 2 weeks from the date when the policyholder receives the information about the test case and its implications; and
• unless increasing the offer, not withdraw the offer within any timeframe given to the policyholder to accept it.

Information about the test case and its implications should also be included if an insurer cannot provide a written response to a complaint within the usual deadlines because it considers that the outcome would be determined by the outcome of the test case. The insurer must in this case also commit to providing a final response promptly on resolution of the test case.

3. Review of rejected claims/complaints that would otherwise have been impacted by the outcome of test case

The third aspect of the task is for insurers to reassess all claims and complaints that they have previously rejected that would, if still open, be impacted by the outcome of the test case. When reassessing rejected claims and complaints, insurers have to apply the judgment(s) in the test case.

Insurers are required to promptly inform relevant policyholders that this reassessment has taken place and its outcome. In respect of rejected complaints a revised final response under DISP 1.6.2R should be provided.

Other key considerations for affected insurers

Governance

In accordance with insurers’ regulatory obligations, which are likely to be a matter of future regulatory scrutiny, it is essential that insurers build a strong governance framework around their compliance with the FCA’s guidance. In particular, they should ensure that:

• Each aspect of the three review processes is carefully scoped, planned and documented, with the rationale for their conclusions clearly recorded;
• Relevant senior managers, which will include the senior managers responsible for claims and complaints handling as well as the senior manager allocated the responsibility for the review (if different) should be fully engaged so that they can exercise the appropriate oversight and challenge and clear escalation processes should be implemented to ensure that key decisions and issues are being resolved at an appropriate level of seniority; and
• Claims and complaints handlers should receive training on how the test case and associated FCA guidance impacts ongoing and new claims and complaints and the processes that should be followed in respect of these.

Customer updates

The guidance makes it clear that insurers are expected to keep policyholders up to date with the progress and the impact of the test case, both generally and on an individual basis.

The FCA expects insurers to publish details of the test case and its implications for potential claims on its website or by other general means so that all relevant policyholders can be kept up to date. Insurers should review any statements or communications that they have previously made to policyholders or intermediaries about whether they will pay out claims under BI policies, and update these if necessary in light of the test case.

Where insurers have determined that the outcome of certain policyholders’ claims/complaints will depend on the outcome of the test case, insurers should update the relevant policyholders individually on the status of the test case and its implications for their claim or complaint at certain key points throughout the process. These individual communications should be made as soon as possible or at the latest within 1 week of the following events:

• when the test case starts;
• when all judgments at first instance or appeals on substantive issues in the test case are given;
• when the test case reaches final resolution; and
• at any other significant development in the test case that may be relevant to the policyholder’s claim or complaint.

Clearly, the guidance places a significant obligation on insurers to keep up to date with proceedings in the test case and to have systems in place to be able to assess the impact on policyholders, react to developments quickly and deploy the individual communications required.

Above all, in order to treat customers fairly, customer communications will need to be clear and balanced. This will need careful thought as the test case presents complex issues and involves significant uncertainty which may be a challenge to communicate to customers clearly, especially if it involves updating previous communications.

Third Party Administrators and Appointed Representatives

The guidance expects insurers to make their third party administrators aware of the guidance and apply it where relevant. Insurers should take the same approach with any appointed representatives.

As well as making them aware of the guidance, insurers should ensure they appropriately oversee how these third parties are applying the guidance and should consider asking them to implement particular procedures in relation to the guidance and/or provide training and draft communication for them to use.

Insurers should also obtain, review and act on appropriate management information from these third parties and make sure these processes are carefully documented.

Non-BI policies

Although the draft guidance does not directly apply to types of insurance other than non-damage BI policies, other policies may be indirectly affected as the FCA expects insurers and intermediaries to take the guidance into account for other policies that contain terms whose interpretation or response may be affected by the outcome of the test case.

Such policies should not form part of the formal policy wordings review required by the FCA, but insurers should bear in mind that claims and complaints in respect of such policies should be treated in accordance with the guidance.

All insurers and intermediaries would therefore be well advised to keep up to date with the test case and its potential impact even if they do not write non-damage BI policies.

Next steps

Stakeholders have until 3pm on 5 June to respond to the consultation on the draft guidelines.

The final guidance will enter into force when the FCA files its papers to start the test case, which it expects to do on 9 June, or shortly thereafter. This means that the first deadline for insurers will likely be on 23 June, by when they will need to have completed their review of BI policy wordings and report the results to the FCA.

Insurers should consider using the time before the guidance comes into force to prepare for the steps they will need to take to meet this and subsequent deadlines and the FCA’s expectations.

Key steps will include:

• pulling together resources to undertake the reviews;
• ensuring appropriate senior manager oversight of all aspects;
• ensuring that all parties involved know and understand their roles in the process; and
• contacting third party administrators, appointed representatives and co-insurers as necessary to discuss the process and procedures that will be followed.

Article co-authored by Maggie Lund