According to analysts at DBRS Morningstar, the Financial Conduct Authority’s (FCA) efforts to seek legal clarity on business interruption (BI) polices related to the pandemic should expedite thousands of claims for SMEs.
The UK regulator announced on May 1st that it would seek to obtain a court declaration to resolve contractual uncertainty around BI coverage.
It has since approached 56 insurers and reviewed over 500 relevant policies from 40 insurers, identifying 17 policy wordings that capture the majority of key issues that could be in dispute.
Now, the FCA will move ahead by inviting insurers to help take this representative sample of cases to court, putting forward policyholders’ arguments to their best advantage in the public interest.
At present, it is the regulator’s belief that most SME insurance policies are focused on property damage so in the majority of cases insurers are not obliged to pay out in relation to the coronavirus pandemic.
However, there are a number of policies under which the FCA believes it is clear that insurance companies have an obligation to pay out and insurance companies acknowledge that BI coverage is valid.
In DBRS Morningstar’s view, the FCA’s actions could expedite the resolution of thousands of BI claims which UK insurance companies have denied or on which they have not yet rendered a decision.
Additionally, given the importance of the London market to the global insurance industry, the High Court’s conclusions could also affect other countries.
The opportunity to hear arguments from both sides about the interpretation of BI policy wording in an independent and objective forum could resolve the uncertainty that many SME owners and insurance companies involved in this matter are facing.
But alternatively, protracted and lengthy examinations in multiple courts of law could further aggravate the image cost of insurance companies and increase litigation and claims administration expenses, which could also burden the industry’s credit strength.
Still, DBRS Morningstar expects that a fair and objective decision from the High Court will provide the clarity needed in this market, which is a far better outcome than more arbitrary resolutions in other jurisdictions.
