Business interruption insurance – what does the FCA say?

We first wrote about business interruption insurance in the times of COVID-19 in our blog on 21 April. We noted that at that time, the Financial Conduct Authority (FCA) had said that it expected all insurers to show fairness and flexibility in the treatment of their customers during the pandemic, but that was really the extent of their guidance.

Listen to Lucy Nash appear on BBC Radio 5Live - explaining the FCA test case and how this can help businesses

Since then, the FCA has taken significant steps to seek legal clarity on business interruption insurance in order to respond to the widespread concern about the lack of clarity and certainty for a lot of policy holders, as well as the blanket refusals by some insurers to pay out despite some policy wording being, in our view, quite clear in providing cover in these circumstances.

Test case on the validity of business interruption claims

The FCA recognises that a number of businesses are facing imminent closure and that in some cases, payment of a valid claim under their insurance policy could prevent that from happening. As such, it acknowledges that it needs to act fast in obtaining court declarations aimed at resolving the contractual uncertainty around the validity of such claims.

We have been advising clients extensively on this issue and so far, each policy we have reviewed has been different to the rest. In order to deal with this, the FCA has reviewed over 500 relevant policies from 40 insurers, and identified a sample of 17 policy wordings that capture the majority of the key issues it suggests could be in dispute.

The latest update from the FCA can be found here and provides a link to the (non-exhaustive) initial list of those insurers and the relevant policy wordings. It also confirms that it is publishing a short consultation on draft guidance, asking all insurers to check their policy wordings against those it intends to test to see if they will be impacted, and setting out its expectations of all firms handling business interruption claims and any related complaints between now and the court decision.

What does this mean for you?

Have you notified your insurer of a claim which has been rejected?

If so, check the list to see whether your policy has been chosen to form part of the representative sample to be examined in the FCA's test case. If it has, then those insurers have entered into a framework agreement with the FCA to govern the process and the timetable for the test case, but in short, it is envisaged that the court hearing will be held during the second half of July, so you could have some clarity relatively soon.

If your insurer has not been selected to form part of the representative sample to be examined in the FCA’s test case then you should seek advice as to whether the relevant wording in your policy is the same or similar to those policies that have been selected as, depending on the outcome of the test case, this could give you the leverage you will need to either negotiate a settlement or issue proceedings (if necessary).

Even if your policy wording does not appear to be the same or similar to those policies being tested then it would still be worth seeking advice on whether there may be scope to argue that the policy provides cover for business interruption in these circumstances. Don’t just assume that because the media coverage of these disputes has to date been largely negative, that you should just accept an insurer’s refusal to pay out.