COVID-19 regulatory spotlight: FCA updates on business interruption test case

Gavin Stewart Gavin Stewart

This is the latest in a series of blogs looking at the impact on regulators with the intention of shedding light on a particularly significant regulatory event.

My thanks to Ben Farmer and Paul Staples for this short spotlight blog on a fast moving issue.

Two quick thoughts:

1 the Financial Conduct Authority (FCA) has moved a long way since its 15 April 'Dear CEO' letter; 2 court cases on regulation have a history of delivering surprises (e.g. Equitable Life), so watch this space.

On 1 June 2020, the FCA published a progress update and a number of documents relating to its court test case regarding business interruption (BI) cover during the COVID-19 pandemic. With a court hearing expected in the second half of July, the FCA has also published draft guidance for firms handling BI claims in the interim.

These latest documents are comprehensive, insightful and warrant a detailed review by affected firms.  Here we provide a summary of the immediate implications to firms.

Firms will welcome the granularity of this latest communication from the FCA and the industry will look on with keen interest as the case progresses, particularly in light of the recent decision in the French Courts which ordered AXA to satisfy claims for insureds.

Test case update

Working with external legal counsel, the FCA has reviewed submissions from 40 insurers and over 1,200 brokers and policyholders to select a representative sample of 17 policy wordings for inclusion in the test case. A number of insurers have already decided to cover claims under policy wordings that were previously in dispute, however the FCA is careful to remain balanced in its assessment of the case, stating that it will “put forward policyholders’ arguments to their best advantage in the public interest”. It also emphasises a desire to obtain legal clarity on whether cover exists, rather than portraying this exercise as an attempt to force insurers to provide cover.

The supporting documents reveal much of the FCA’s thinking regarding this case, including a primary focus on SME customers rather than larger corporate policyholders. Key areas on which clarity is being sought include:

  • the impact of key policy definitions such as ‘notifiable disease’ or ‘outbreak’ on policy coverage
  • the impact of any geographical limits in relation to a national outbreak, and
  • the impact of the government-ordered lockdown for denial of access clauses.

Draft guidance for firms

The FCA has also set out expectations for insurers and intermediaries handling BI-related claims and complaints during the test case. This draft guidance does not apply to insurers who have already decided to accept BI claims arising from COVID-19. In these cases, firms are expected to continue handling these claims and ensure they are paid in a timely manner.

Insurers will be required to review the test case and decide whether or not its outcome affects decisions on claims under each policy wording. This applies both to claims currently in progress, and where insurers have already reached a decision to decline claims. Insurers must also identify policies that are not affected by the test case but which may make use of its outcome as guidance, as well as those where the test case is not relevant. Firms are required to document their decisions and the reasons behind these for each policy wording, and update as the situation develops. There is also specific guidance for co-insured risks, or policies arranged via the Lloyd’s market, to establish which firm is responsible for this assessment.

Firms are required to appoint a Senior Manager to oversee this review, which must be completed within two weeks of this guidance coming into effect (which will occur when the FCA issues the claim form to start the test case). The FCA will provide a data template for firms to submit the outcome of this review.

Insurers are expected to keep customers up-to-date with progress of the test case and its potential impact on claims under their policies, both through general communications via a firm’s website or similar means and with specific communication to customers who have existing claims or complaints. Firms should check the FCA draft guidance which sets out specific information that must be included in these communications and the timing of updates.

In order to treat customers fairly, insurers who are awaiting the final resolution of the test case to make their final decision on claims or complaints must not include this period within any time limits imposed on customers to take action regarding their claim or complaint.

Following the final resolution of the test case, firms will need to reassess any affected claims or complaints that were previously rejected and communicate the result of that reassessment to customers. Where this results in an updated final response letter being issued to a complainant, if relevant, firms must inform the policyholder that they consent to waive the time limit for FOS referrals to allow older complaints to be referred.   

Additional reading

FCA announcement

FCA draft guidance for firms

List of insurers and policies involved in the test case

Sample of policy wordings

Proposed questions for determination