01 May 2020

FCA has announced today (1 May) its intention to obtain a court declaration on business interruption ("BI") insurance to resolve doubt for businesses who are facing uncertainty on their claims in the light of the ongoing problems resulting from COVID-19. Its decision comes in the light of continuing and widespread concerns about the lack of clarity and certainty for some customers making BI claims, and the basis on which some insurers are making their decisions on claims.

Additionally, it is consulting on draft guidance on whether certain insurance products still offer good value, and on separate guidance on how insurance sector firms should deal with consumers who are in financial difficulties as a result of COVID-19

Proof of the urgency with which FCA views the need for these measures is that it is asking for responses on its proposed guidance for helping customers in financial difficulty by May, and for responses on the value guidance and to its requests relating to BI insurance by 15 May.

Why?

Christopher Woolard, Interim Chief Executive of the FCA, said:

'We have been clear that we believe in the majority of cases, business interruption insurance was not purchased to, and is unlikely to, cover the current emergency. However, there remain a number of policies where it is clear that the firm has an obligation to pay out on a policy. For these policies, it is important that claims are assessed and settled quickly. There are also some other policies where firms may consider there is no doubt about wording and decline to pay a claim, but customers may still consider there is genuine uncertainty about whether their policy provides cover.

"Our intended court action is designed to resolve a selected number of key issues causing uncertainty as promptly as possible and to provide greater clarity for all parties, both insured and insurers. It is clear that decisive action is appropriate given the severity of the potential consequences for customers."

More widely, FCA is also proposing a series of measures to support both consumers and businesses who hold insurance products and are facing other issues as a result of COVID-19.

The regulator recognises that the current emergency has altered the value of some insurance products, and the measures set out its expectation that insurance firms should consider whether their products still offer value to customers in the current situation and whether they can be doing more for those suffering a financial impact because of the virus.

Business interruption insurance

In its statement on BI insurance, FCA recognises that the issues around BI policies are complex and there are significant differences in policy wording across firms. FCA believes these complexities have the potential to create ongoing uncertainty and, given the severity of the potential consequences for customers in the current COVID-19 emergency, decisive action is appropriate.

In this context, FCA intends to actively work to resolve issues causing uncertainty over BI coverage, to provide greater clarity for parties and help ensure there is no undue delay to payments where customers have valid claims.

FCA intends to do this by bringing key 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. It is working to identify a sample of cases representative of the most frequently used policy wordings that are giving rise to uncertainty.

FCA intends to do this on an agreed basis with the insurers concerned in order to get the fastest possible judgement. It has outlined to a small number of relevant firms, and the Association of British Insurers, its proposals for seeking a timely, transparent and authoritative judgment and is writing to these firms for clarification about whether they are declining, or intend to decline, BI claims. FCA expects firms to reply by 15 May 2020. Based on the information received, it will consider which firms to ask to join the court process.

The regulator intends to take this action in the public interest to advance its consumer protection and market integrity objectives. It believes the circumstances of the current COVID-19 emergency, and its effect on businesses holding BI policies, means that any uncertainty needs to be resolved quickly.

In its statement, FCA is clear that this action is not intended to encompass all possible disputes, but is intended to resolve some key contractual uncertainties, and will enable the provision of an independent view on disputed policies. It will not determine how much is payable under individual policies, but will provide the basis for doing so. FCA believes this will assist both insurers and insureds. 

FCA guidance

FCA's additional guidance proposals are designed to provide consumers with temporary support in light of the exceptional circumstances arising from COVID-19 and follow steps FCA has taken in other markets, such as credit cards, overdrafts and personal loans. But in the insurance marketplace, many of the measures will be relevant to commercial customers, and are not merely designed to protect consumers.

The package of measures sets out how FCA expects insurance firms to:

  • ensure products continue to offer value and are appropriate for customers, taking into account the impact of COVID-19 and the firm’s ability to deliver the benefits promised; and
  • help individual customers who may be finding it difficult to pay their insurance premiums or meet their premium finance payments as a result of COVID-19.

Value of products

FCA recognises that COVID-19 may be having a temporary impact on the extent to which customers can use and access benefits from their insurance products. For example, liability insurance may be temporarily irrelevant for businesses such as hairdressers, bars and restaurants that are closed in accordance with Government interventions.

The regulator expects insurers to assess the value of their insurance products to customers during this period of emergency and to consider appropriate action. FCA says this might include changing how benefits are delivered, refunding some premiums or suspending monthly payments for a certain period of time. It proposes to give insurers up to six months to assess this so that it can take into account effects of COVID-19.

FCA seeks comments on its draft guidance by 15 May and intends to bring its guidance into force as soon thereafter as possible.

Customers in financial difficulties

FCA also recognises that the virus may be making it harder for customers to afford their insurance and premium finance payments. Consequently, it is setting expectations for insurers, brokers, premium finance lenders and intermediaries and debt collectors to take steps to help customers alleviate temporary financial distress and maintain insurance cover that meets their demands and needs. Its guidance will apply to all non-investment insurance products but to lending only to consumers. 

Insurers should consider whether the consumer's risk profile should be reassessed and whether other products might better suit current needs. Firms should also work with customers to avoid unnecessary cancellation of necessary cover for financial reasons. FCA says insurers will have a range of options they can consider appropriate to the policy and says this might include giving customers payment holidays, waiving administration and cancellation fees, relaxing charges or interest incurred for missed payment, extending cooling off periods and partly refunding premium payments where the whole amount has been paid up front. Where appropriate to give a payment deferral, FCA says the period for which the deferral should last should be for between 1 and 3 months, and that the customer should pay no fees in relation to it. As with credit products, firms should consider the potential consequences of whether the customer will be able to repay at the end of the deferral, and the deferred payments may accrue interest, but the firm should not seek immediately to recover it. Also as with credit products, firms can propose alternative solutions, if these are in the customer's best interests.

The draft guidance includes recommendations to firms to make clear in all personal and public communications what the possible solutions are, and to encourage consumers to contact the firm if they are in difficulties. It also notes that it does not expect any of its solutions to result in an increase in premium.

FCA is seeking comments on this draft guidance by 5 May 2020, with a view to bringing it into force from 13 May. Once implemented, FCA will review this guidance in 3 months and may revise the guidance if appropriate.