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UK regulator to seek legal clarity on BI policies

1st May 2020 - Author: Matt Sheehan

The Financial Conduct Authority (FCA) has announced that it intends to obtain a court declaration to resolve contractual uncertainty in business interruption (BI) insurance cover relating to the coronavirus pandemic.

financial-conduct-authority-logoThe UK regulator assured that the process would be undertaken in an “urgent manner,” despite saying last month that most policies would have no obligation to pay out.

In the Authority’s view, most BI policies for SMEs are focused on property damage, although some policies also cover for other causes and may in some cases provide cover.

Whether there is coverage will depend on a number of factors including the policy’s wording, but the FCA noted that the range of wordings and types of coverage are broad enough that it could “create ongoing uncertainty for a lengthy period.”

In response, the regulator will now seek to bring relevant cases to court as soon as possible for an authoritative declaratory judgment regarding the meaning and effect of some BI insurance policy wordings where there remains unresolved uncertainty.

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“It is clear that decisive action is appropriate given the severity of the potential consequences for customers in the current coronavirus emergency,” the FCA said in a statement.

“We are working to identify a sample of cases representative of all the most frequently used policy wordings that are giving rise to uncertainty, where it would be appropriate for us to bring such proceedings.”

Accordingly, the FCA has also written to a small number of relevant firms, and the Association of British Insurers, to determine whether they believe their policy wordings for BI losses may provide cover.

The move has already been welcomed by industry bodies, who urged the market to engage with the resolution activity.

For example, Huw Evans, Director General of the Association of British Insurers (ABI), said: “This is a welcome step from the FCA and insurers will look to work closely with the regulator to make this process a success.”

“Insurers agree with the FCA on the need to continue to review policies as the effects of Covid-19 unfold,” he added. “There are still many unknowable factors in how things will pan out and we welcome a process which allows for solutions to be delivered as the situation evolves.”

A statement from the British Insurance Brokers’ Association (BIBA) also expressed approval for the FCA and encouraged its members to support the push for legal clarity.

“Our members have serious concerns for their clients and their ability to recover from this situation and we have been working to help members resolve these issues,” BIBA said.

“This intervention from the regulator to create certainty for many customers making BI claims, and the basis on which firms are making decisions on claims is a step in the right direction.”

Matt Connell, director of policy and public affairs for the Chartered Insurance Institute (CII), also commented: “The FCA’s decision to test the wording of certain business interruption contracts in court is preferable to a disorderly and potentially lengthy series of test cases that are less likely to reach a comprehensive and definitive solution.”

“As a result, we welcome this move to reduce uncertainly for both insurers and the public. The process which the FCA will use to select test cases will be very important, and we anticipate that the FCA will consult widely with both consumer groups and the insurance sector to maximise the chances of reaching a decision that is fair, comprehensive and definitive.”

The FCA’s announcement comes amid concerns that UK insurers could soon be facing legal action over their refusal to pay out on what many policyholders see as legitimate claims related to BI and the COVID-19 crisis.

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