02 Jun 2020

We previously reported on FCA's intentions to bring a test case to obtain court declarations that would help resolve contractual uncertainty in several business interruption policies, stemming from claims relating to COVID-19. On 1 June, it confirmed the results of its enquiries to date, and its next steps.

What has FCA done?

FCA approached 56 insurers after its communication on 1 May, and in return has received and reviewed over 500 policies from 40 insurers. From this review, it has identified 17 policy wordings that it will take forward and that it believes capture most of the controversial issues.

It also asked policyholders and brokers who were in dispute with their insurers over coverage to provide the relevant wording and arguments. It received over 1200 responses to this request.

As a result, FCA has named 16 insurers who use at least one of the wordings in the representative sample, and has selected 8 of them to help it by participating in the test case.

What is the wording?

FCA says it has identified policies which are representative of the key issues, rather than selecting firms on the basis of market share. Its desire is to get the maximum relevant coverage while minimising the number of insurers it needs to involve in the case. For the time being, it has published a preliminary list, listing each relevant policy and the relevant insurer.

Within its list, FCA has marked some policies with an asterisk and intends these to be the lead wording for the wording "type". The clauses relate to:

  • Disease (and definition of "notifiable disease")
  • Denial of access
  • Definitions (including of "damage")
  • Trends (and definition of "standard turnover" and "income")
  • Exclusions and
  • Sub-limits of indemnity.

FCA is asking insurers to confirm other wordings in policies listed under the "lead wording" in each case are materially identical to the lead wording chosen.

Preparation for test case

FCA has published a number of documents.

Framework agreement

FCA has published a Framework Agreement with each insurer who will participate in the test case in which the insurers agree the background to the test case. The mutual objective of the case is stated to be to achieve the maximum clarity possible for the maximum number of policyholders. They agree that the case will determine, in relation to a set of agreed facts and assumed facts, whether the policies provide cover in principle and whether policyholders can establish the necessary causal link between assumed losses and any relevant peril, event or circumstance covered by the relevant terms. The agreement covers the process of agreeing the facts, and requires the insurers to agree to FCA's disclosure of various information, and to work with FCA to its proposed timetable. The agreement also covers the process where an insurer settles any claim in respect of a relevant term.

Assumed facts

FCA has published a list of proposed "assumed facts" that sets out various assumptions on the nature of the business, its location, incidence of COVID-19, the permutations on opening, closure and impact on the business, whether there was guidance or action from the local authority or policy and the reasons for loss of revenue. The facts cover business that fell within one of the following categories:

  • told to close
  • told to close except for essential business
  • expressly permitted to stay open
  • permitted only to make deliveries or respond to non-face-to-face orders
  • in relation to which the Regulations were silent – and neither required closure nor permitted opening
  • hotel or holiday accommodation and
  • nursery or educational establishments or places of worship.

Issues matrix

FCA's proposed "issues matrix" sets out some of the key terms that are likely to be argued, although FCA makes it clear that inclusion in the matrix does not necessarily mean they are applicable to any or all of the claims being considered.

Questions for determination by the Court

FCA has suggested 21 questions for determination, under several categories:

  • central questions: whether on applying the agreed facts and working through the applicable permutations of the assumed facts, there is cover in principle and, if there is, can the policyholders establish the necessary causal link between their assumed losses and the relevant covered risk;
  • generic issues: what effect on the business is actually required for cover to apply;
  • disease cover: do various terms include COVID-19, if a disease is required to be "in the vicinity" what does this mean, and what is required by way of proof of any geographical condition? In respect of a disease, what does "occurrence", "manifest" or "sustained" mean, what is an "outbreak" and what proof of any required notifications are needed?
  • denial or prevention of access cover: what must the policyholder prove in terms of prevention or denial of access and similar terms, and what must be proved to establish the relevant "interference" is due to steps taken, or not taken, by Government or other agreed authorities? Again, how to interpret "vicinity" and what is required by way of proof if there are geographical conditions? What is an "emergency", if this is a required condition, and what is encompassed within relevant definitions of "authorities"?
  • causation: what causal links must be established on particular policy wordings between the loss, interruption, closures and restrictions, and what is the applicable test for causation where certain expressions are used, such as "resulting from", "which results in", "caused by" or "as a consequence of"? What is the relevance of trends clauses in relation to the causation test and is there more than one potentially operative cause and if so, what is the legal effect on recovery? And
  • potential exclusions: do exclusions for "micro-organisms" and similar include COVID-19, and how do exclusions relating to pollution or contamination apply?

Draft guidance consultation

Who is the guidance for?

FCA is also consulting on draft guidance. The draft guidance is addressed to insurers and intermediaries, and should be followed by them when they are handling claims and complaints for business interruption policies during the test case period. The guidance comprises guidance on compliance with the Principles, ICOBS and DISP and applies to insurers which are either party to the test case or which underwrote a relevant "non-damage business interruption policy before the date of the case. It also applies to intermediaries when handling relevant claims and managing agents that manage Lloyd's syndicates that have underwritten relevant policies.

The guidance highlights measures FCA wants firms to take to identify the potential implications of the test case on any decision to reject a claim, to keep policyholders informed about the case and its implications and to treat policyholders fairly once the case is resolved. The guidance is not relevant to firms that have decided to accept claims, or decided that their their polices do respond to COVID-19 – FCA expects these firms to continue handling complaints in their current manner.

What is a "relevant policy wording"?

The guidance defines a "relevant non-damage business interruption policy" as one which provides cover for business interruption losses in circumstances where there has been no physical damage to the insured property and either condition (i) or (ii) applies. Examples are cover for ’non-damage denial or access’, ’public authority closure’, or ’notifiable disease outbreak’. The conditions are that either (i) the insurer has received a claim or complaint for losses from the coronavirus pandemic and has decided to reject the claim, has made an adjustment or deduction for general causation, or has not yet made a decision, or (ii) that the insurer has told policyholders or said publicly that their business interruption policies with non-damage cover do not respond to coronavirus.

What must insurers do?

The guidance requires insurers to review the test case and the documents surrounding it and consider whether their decisions taken on claims (whether the decisions have already been made or not), will be affected by or will depend on, the final resolution of the test case. They should also establish what policy wordings they may have where either the test case may provide guidance but is unlikely to affect the ultimate decision, or where the outcome of the case will not be relevant to the interpretation of a relevant policy wording.

Where there is more than one insurer, the insurer who has taken responsibility for claims, or, if none, the lead insurer, or, if none, the insurer that has underwritten the largest proportion of the policy should carry out the assessment. For Lloyd's policies, the lead managing agent should do so.

In terms of timing, FCA wants a senior manager to be appointed to oversee the review of relevant wordings, and for the review to be complete within 2 weeks of the guidance taking effect. FCA is providing a template on which insurers should then report their conclusions.

The guidance also requires insurers to make sure all policyholders are updated about the case and its implications for potential claims, including amending any communications already made and giving policyholders links to FCA and FOS information.

For all claims (whether already received or not), insurers and intermediaries must classify them as:

  • A test case claim or complaint
  • A claim or complaint that relates to relevant policy wording and where the test case will provide guidance, but the insurer does not believe the outcome of the test case will affect its decision or
  • A claim or complaint that relates to relevant policy wording but the insurer does not consider the test case relevant to the interpretation or effect of the wording.

Then, within 3 weeks of the guidance taking effect, insurers must update policyholders with existing relevant claims or complaints of whether their claim or complaint is affected by the test case or not, and the implications of this. Where the test case will affect them, the policyholder must be kept updated of the progress of the case.

Claim and complaints handling

While the test case is ongoing, insurers must apply FCA rules as normal to any element of the claim or complaint that is not affected by the test case – handling any non-affected part promptly and paying out any assessed settlement, while explaining to the policyholder the treatment of test case and non-test case elements if this is relevant. If a policyholder complains to FOS, the insurer should provide FOS with the results of its policy review.

Insurers may continue to offer to settle test case claims or complaints, but should explain to any affected policyholder the implications of the test case, how it may affect the insurer's decision, and the implications for the policyholder of accepting or rejecting the offer. Any open offers must be supplemented with this information. But if insurers consider they need to wait for resolution of the test case before responding, they must explain this clearly to the policyholder and give an indication of when they expect to be able to respond. When applying relevant time limits, insurers should discount time between the guidance taking effect and the resolution of the test case.

After the case

Once the test case has been resolved, insurers must:

  • Assess all outstanding test case claims and complaints and apply the judgment as relevant; and
  • Review all rejected claims that did not become complaints and reassess all rejected complaints, and inform the policyholder of their decision.

When will the guidance take effect?

FCA asks for comments on the draft guidance by 5pm on 5 June and intends it to take effect once it issues the claim form to start the test case.

What about other insurers?

Of course, the results of the test case will not affect only the insurers involved in the case, or who have been specifically identified so far as using the relevant wording. As noted above, it has published a preliminary list but plans to publish a comprehensive list of other insurers and other policies that it expects the results of the case will affect. For the time being, it is consulting on draft guidance for firms.

What happens next?

FCA plans to file its claim form and particulars on 9 June, with insurers filing defences by 23 June, FCA filing its reply on 3 July and the court hearing, which should last 5-10 days, taking place in the second half of July. But of course there are several uncertainties in the timeline, so it is not set in stone.