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Most BI policies have no obligation to pay out on COVID-19: FCA

15th April 2020 - Author: Luke Gallin

In a letter to insurance and reinsurance company Chief Executive Officers (CEOs), the UK’s Financial Conduct Authority (FCA) has said that most policies have no obligation to pay out in relation to the COVID-19 coronavirus pandemic.

financial-conduct-authority-logoThe comments come from the FCA’s interim CEO, Christopher Woolard, and focus solely on conduct related to business interruption insurance (BI) sold to small and medium-sized enterprises.

On March 19th, the FCA outlined its expectations for insurance firms following the outbreak of the COVID-19 pandemic, calling on companies to carefully consider the needs of their customers and to show flexibility in challenging times.

While these expectations apply to all insurance solutions sold to SMEs, Woolard’s letter is focused specifically on BI insurance amid uncertainty among policyholders around whether or not they have the appropriate protection in place.

The FCA says that insurers and intermediaries have an important role to play in supporting their customers during these unprecedented times, underlining the importance of clear, accurate and timely communication. In addition, the FCA says that it is collecting data from companies in an effort to understand how they are interpreting policies.


“Based on our conversations with the industry to date, our estimate is that most policies have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the Covid-19 pandemic. While this may be disappointing for the policyholder we see no reasonable grounds to intervene in such circumstances,” explains the letter.

The BI issue has been well documented in places like the U.S. as legislation seeks to force the retroactive cover of BI claims after pressure from policyholders. Of course, thousands of businesses around the world have been forced to close as part of the measures being taken to stop the spread of the coronavirus, but many are now finding that their BI protection excludes pandemics and requires physical damage, such as from a fire, to trigger the policy.

And while the FCA notes that this will be disappointing for many, especially during such a challenging time, the organisation sees no reasonable grounds to intervene.

However, for policies where it is clear that there’s a claim and the firm has an obligation to pay, the FCA says that it’s very important that these claims are assessed and settled as quickly as possible. In addition, in instances in which a company feels there are reasonable grounds to pay just part of a claim, the FCA asks that companies and their Boards adopt an approach of making interim payments.

“If you disagree with doing so, we would like you to send us the grounds for reaching that decision including how you believe it represents a fair outcome for customers. Your firm’s decision is likely to help inform our assessment of its culture,” says the FCA.

The UK financial regulatory body further states that payment of certain policies may be disputed. Specifically, where a policyholder is a small business with an annual turnover of under £6.5 million, and with less than 50 employees or a balance sheet under £5 million, it is most likely to sit within the jurisdiction of the Financial Ombudsman Service.

“This can offer the prospect of faster decisions (on claims of up to £35,000) than a Court Process and, where appropriate, more timely payments that help firms recover from the impact of the Covid-19 pandemic,” says the FCA.

In its letter to CEOs, the FCA also revealed the establishment of a new small business unit designed to coordinate the activities of the FCA across small business issues. This new unit will be led by a member of the FCA’s senior leadership team, Andrew Wigston, and will be overseen jointly by Jonathan Davidson, Executive Director of Supervision – Retail and Authorisation, and Sheldon Mills, Interim Executive Director of Strategy and Competition.

In response to the letter from the FCA, Keith Richards, Managing Director of Engagement at the Chartered Insurance Institute (CII), welcomed the organisation’s approach to BI insurance, including its decision not to intervene where policies do not cover pandemics.

“We also support the FCA’s focus on paying claims in a timely fashion. Each year, the CII interviews 2000 small businesses to gauge their trust in insurance. To date, SMEs who make claims have told us that their claim is usually dealt with speedily – in fact, speed of payment is one of the best performing indicators that we measure. However, perceptions about how quickly a claim will be dealt with among SMEs buying insurance is significantly worse – our research shows that it is one of the areas that SMEs are most concerned about.

“The insurance sector has an opportunity to demonstrate that its ability to pay claims quickly is better than most people perceive it to be. We are confident that the majority of insurers will continue to build trust in the profession by delivering on their promise with a clear, accurate and timely processes that the FCA is looking for,” said Richards.

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