11 June 2020

UK's Financial Conduct Authority announces test case on business interruption insurance

Benjamin Lyon

Benjamin Lyon

Eight insurers are participating as guidance is sought on Covid-19's impact on policies, report Benjamin Lyon and Katie Power

The UK's Financial Conduct Authority (FCA) announced on 1 May that it will seek a court declaration in order to assist with the potential and ongoing disputes over business interruption insurance written by FCA-regulated UK insurers. It’s a topic we covered for Global Legal Post in May

The FCA proposes to put the example policy wordings before the English courts on an agreed basis with the relevant insurers, and has now announced that eight insurers — MS Amlin, Arch, Argenta, Ecclesiastical, Hiscox, QBE, Royal & Sun and Zurich — have signed a framework agreement to participate in the test case. 

The FCA invited insurers to participate on the basis of 'securing maximum relevant coverage for the relevant policies whilst minimising the number of parties engaged' rather than selecting firms by their market share.

As part of the process of deciding which insurers would participate in the test case, the FCA identified 17 policy wordings that could be in dispute, after approaching 56 insurers and reviewing more than 500 relevant policy wordings.

Carriers using the relevant wording include Allianz, AIG, Aspen, Aviva, Axa, Chubb, Liberty Mutual and Protector, as well as the eight participating insurers.

Comprehensive list

However, the FCA has indicated that this list is not expected to be complete, and a comprehensive list of insurers and business interruption policies in the market will be published in early July.

The focus of the policy wordings identified by the FCA is on the coverage provided by 'non-damage' extensions to business interruption policies. For example, this includes non-damage denial of access, infection disease and public authority clauses.

Policyholders, insurers and other stakeholders have been invited to provide comments to the FCA on the proposed sample policy wordings, assumed facts and issues matrix which it published on 1 June.

On 15 May, the FCA noted that the results of the test case will be legally binding on the insurers who are parties to the case, in respect of the sample policy language under consideration. However, the FCA also noted that the test case will provide persuasive guidance for the interpretation of similar policy wordings and claims, which can be taken into account in other court cases, as well as by the Financial Ombudsman Service and the FCA. 

The industry reacted positively to the FCA’s update, although the Hiscox Action Group complained that the FCA had not instructed Hiscox to make 'interim payments' to its insureds. 

The hearing is expected to cover a variety of questions including what is meant by 'interruption or interference' and whether coronavirus is a 'notifiable disease'.

The eight insurers will submit their defences by 23 June. The court hearing is scheduled to take place over five to ten days in the second half of July, likely 20 July. 

The framework agreement does permit the parties to appeal any decision from the English High Court.

Insurance Measures

On 14 May, the FCA published finalised guidance, following a short consultation, requiring that insurance firms consider the options they can provide to customers identified as being in temporary financial difficulties as a result of coronavirus, including:

Reassessing the risk profile of customers;

Considering whether there are other products they can offer which would better meet the customer’s needs and revise the cover accordingly; 

Working with customers to avoid the need for cancellation of necessary cover, such as by considering payment deferrals (where amendments to the insurance cover do not help alleviate customers’ temporary payment difficulties) and

Waiving cancellation and other fees associated with adjusting customers’ policies.

Where it is not in the customers’ interest to offer a payment deferral, insurers should 'promptly offer' other forms of temporary relief, such as: 

Accepting reduced payments;

Waiving missed or late payment fees; or

Permitting a customer to amend their repayment date at no additional cost.

The finalised guidance took effect from 18 May.

As expected, the FCA has indicated that it will review these measures in the next three months and that the measures may be revised. 

Benjamin Lyon is an international counsel and Katie Power is an associate in Debevoise & Plimpton’s London office. More information on the coronavirus can be found at the Debevoise Coronavirus Resource Center

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