FCA issues update on test case of validity of business interruption claims

FCA issues update on test case of validity of business interruption claims

The Financial Conduct Authority (FCA) has provided an update on progress on its court action on business interruption (BI) insurance policies.

Since the FCA made its last announcement on 1 May, the FCA has approached 56 insurers and reviewed over 500 relevant policies from 40 insurers. The watchdog has identified a sample of 17 policy wordings that capture the majority of the key issues that could be in dispute.

This update gives further detail on the proposed court action, including identifying the representative sample of policy wordings to be examined in the test case, insurers that use those wordings, and which of those insurers we have invited, and have agreed, to participate in the proceedings.

This initial list of insurers and the policy wordings they use is not exhaustive, and the FCA is also now publishing a short consultation on draft guidance asking all insurers to check their policy wordings against those we intend to test to see if theirs will be impacted by the outcome of the case.

The FCA expects to publish a list of all the relevant insurers and policies that may have impacted wordings in early July.

The consultation on draft guidance also sets out the FCA’s expectations of all firms handling BI claims and any related complaints between now and the court decision.

Christopher Woolard, interim chief executive at the FCA, said: “The court action we are taking is aimed at providing clarity and certainty for everyone involved in these BI disputes, policyholder and insurer alike. We feel it is also the quickest route to this clarity and by covering multiple policies and insurers, it will also be of most use across the market. The identification of a representative sample of policies and the agreement of insurers who underwrite them to participate in these proceedings is a major step forward in progressing the matter to court.”

The FCA has said that it wants to achieve clarity for all concerned in an unprecedented situation. To do this, the organisation is taking a representative sample of cases to court. The FCA will put forward policyholders’ arguments to their best advantage in the public interest. The FCA has retained the services of Colin Edelman QC, Leigh-Ann Mulcahy QC, Richard Coleman QC and Herbert Smith Freehills to assist it in the case.

As stated in the FCA’s Dear CEO letter of 15 April, the watchdog has said it’s view remains that most SME insurance policies are focused on property damage (and only have basic cover for BI as a consequence of property damage) so, at least in the majority of cases, insurers are not obliged to pay out in relation to the coronavirus pandemic. This case is focused on the remainder of policies that could be argued to include cover.

Policyholders should not assume that simple inclusion of their policy wording in this case will mean their policies are responsive.

The FCA is seeking a judgment that will help policyholders and insurers have a much clearer view of which business interruption policies respond to the pandemic, and those that don’t. Therefore, the court may well decide a number of these policies respond to the pandemic and others do not.

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