Coronavirus – Business interruption insurance test case: draft guidance for firms - UK

• United Kingdom

• Coronavirus - Insurance issues
• Financial services disputes and investigations
• Insurance and reinsurance
• Financial services - Insurance market

03-06-2020

On 1 June 2020, the FCA issued a raft of documents, alongside its update, on the  test case in which it is seeking a declaration as to the extent that COVID-19 business losses are covered under insurance policies (see our earlier briefing).  They included draft guidance setting out its expectations for insurers and insurance intermediaries when handling claims and complaints for business interruption policies whilst the test case is ongoing.

Draft Guidance

The guidance covers actual or potential claims or complaints relating to non-damage business interruption losses resulting from the coronavirus pandemic.

The guidance will apply to insurers party to the test case, and to other insurers that, before the test case, underwrote a relevant business interruption policy, and to the parties who handle claims in respect of such policies.

The FCA highlight particular steps it considers firms should take to:

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

The following will apply if the draft guidance is implemented:

1.    Review of Policy Wordings

The FCA will expect insurers to undertake a number of pro-active steps and expects:

• insurers to review the published documents in relation to the test case and determine whether or not their decisions on claims (including questions of causation of loss) for each relevant policy wording may (i) if already taken, will be affected by, or (ii) if not yet taken, will depend on, the final resolution of the test case. Insurers  should also record whether the test case may provide guidance on the interpretation of policy wording and  keep the reasons for conclusions reached under review;
• a senior manager to be appointed, to oversee the review of policy wordings.
• the review to be completed within two weeks of the guidance coming into effect.

The FCA will provide firms with a template to submit the results of their reviews into the following categories:

• policies where the final resolution of the test case may provide guidance on the interpretation or effect of a relevant policy wording does not or will not affect their decisions on claims, and
• policies where the test case is not relevant to the interpretation or effect of a relevant policy wording  

The FCA may publish the names of insurers, the policies notified and the insurers’ conclusions in respect of those policies.

2.    Keeping customers informed

Insurers will be expected to publish sufficient details with appropriate prominence and signposting to keep all policyholders with relevant policies updated about the test case and its implications for potential claims, together with a link to the FCA’s webpage for the test case and to any material issued by the FOS on the matter.

Insurers will also need to consider providing appropriate information to intermediaries to pass on to policyholders to keep them updated.

Where insurers have made statements or other communications to policyholders or insurance intermediaries on whether their relevant policies cover claims for losses resulting from the coronavirus pandemic they should review those statements and communications and:

• promptly amend or supplement any statements or communications as necessary in light of the test case
• take appropriate and timely steps to ensure that policyholders are made aware of any amendments or supplements and
• inform their insurance intermediaries of the amendments or supplements

The FCA expects that communications about the test case be balanced.

3.    Claims and Complaints

Insurers and intermediaries will be expected to filter claims and complaints (including those received before the guidance was implemented) to identify whether all or part of a claim or complaint:

• is a test case claim or a test case complaint;
• is a claim or complaint relating to policy wordings, where the test case will provide guidance on the interpretation of the wording but the insurer believes that final resolution of the test case does not affect their decision on the claim or complaint, or
• relates to policy wording where the test case is not relevant to the interpretation of the wording

Within 3 weeks of the guidance coming into effect, insurers should notify policyholders with existing claims or complaints:

• whether their claim or complaint is a test case claim or a test case complaint and the implications of that, or
• the reasons why their claim or complaint is not a test case claim or test case complaint, and the implications of this

Insurers should also provide this information to policyholders making new claims or complaints.

Insurers and intermediaries should give all policyholders who have made a test case claim or a test case complaint appropriate updates about the test case and its implications.. In particular, they should keep policyholders updated on whether their decision may be affected by the final resolution of the test case.

The updates should include individual communications to the policyholders, through the insurer’s usual channel of communication at the following times:

• 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
• at any other significant development in the test case that may be relevant to the policyholder’s claim or complaint

These updates should be made as soon as possible after the event is identified by the insurer, and in any event within 1 week of the event occurring.

Whilst Insurers may continue to offer to settle a test case claim, or in the case of a test case complaint, make an offer of redress, including on a full and final settlement basis, they  should inform policyholders about the test case and its implications.

If offers to settle have been made before the guidance has come into effect and they have not been accepted or rejected, insurers should provide policyholders with information about the test case. Further, timeframes for acceptance should be extended to run from the date when the policyholder receives information about the test case, and offers should not be withdrawn within a time period given for acceptance.

Timing

Firms have until 5pm on Friday 5 June 2020 to comment on the draft guidance. If issued, it will come into force around the time that the FCA issues its claim form (anticipated to be around 9 June 2020). The guidance may be revised, in light of developments in the test case.

Comment

The draft guidance is essential reading for insurers and for those parties involved in the claims process. The FCA is seeking that insurers share responsibility for ensuring that policyholders are made aware of the test case and its implications. If implemented as drafted, insurers will have a short window to act in order to ensure that all relevant procedures are put in place.

Useful links

Business interruption insurance test case: draft guidance for firms

Business Interruption insurance

FCA coronavirus (Covid-19) hub