Through a series of statements released on May 1, 2020, the Financial Conduct Authority (FCA) made clear its expectations of the insurance sector in light of coronavirus (COVID-19). The FCA:
- Proposes to seek clarity on whether a sample of wordings in business interruption policies do, in fact, provide coverage for COVID-19, via a declaratory judgment in the High Court.
- Sets out its expectations as to firms’ behaviour in relation to product value in cases where the contractual benefits can no longer be provided, or where the insured event can no longer occur, due to COVID-19.
- Sets out its expectations as to firms’ behaviour in respect of customers experiencing temporary financial difficulty as a result of COVID-19.
Clarity on business interruption policies
Perhaps the least expected of the statements related to the FCA’s stance on business interruption cover. Unlike the US, where insurance regulators in certain states have taken an apparently uncharacteristic approach in requiring insurers to pay business interruption claims based on COVID-19 even though the policy wording does not actually cover it, UK regulators have to date taken a far less interventionist approach. Indeed, they have made public their view that in the majority of cases, business interruption was not purchased to cover, and is unlikely to cover, COVID19 with the majority of policies requiring property damage in order for a claims payment to be due.
Notwithstanding this, the FCA intends to seek an urgent court declaration to resolve contractual uncertainty. It is working to identify a sample of cases representative of the most commonly used wordings that are causing uncertainty in the market, and to seek judgement on these wordings. We understand that the FCA wrote to all firms with policy language in scope (some of whom may already have decided not to make payments and others who have not yet decided) and asked them to clarify their positions by May 15.
The FCA’s approach may leave firms in the slightly uncomfortable position of avoiding being joined to the court action only in the event that they agree to make payments in cases where they consider their contractual wordings may in fact enable them to deny coverage. In other words, it appears that a firm whose wording is being challenged as “unclear” but who confirms to the FCA that it will nonetheless pay claims based on COVID-19, will avoid their wording being included in the court determination. On the other hand, joining the FCA proceedings means that matters are rather taken out of a firm’s hands in terms of timing, choice of counsel, choice of forum and the determination of which contractual terms the court will be asked to opine on.
This statement also raises the possibility that certain customers may have been mis-sold a business interruption policy, where there is a gap between the firm’s and the customer’s understanding of what was covered. This could in turn lead to a proliferation of claims on Professional Indemnity policies as customers look to recover losses from their brokers.
This statement also sets out the FCA expectations in relation to policies where COVID-19 is clearly excluded and where it is clearly included. In the former case, the FCA expects firms to communicate clearly and sympathetically to customers and consider whether there is any other help they could offer (for example signposting other areas of support).
Where a pay-out is due, or has been agreed, the FCA expects firms to work quickly to establish amounts to be paid, and in some cases to make partial or interim payments whilst the final amount remains to be determined. Firms are reminded to communicate their approach and decisions clearly and promptly and to investigate appropriately any complaints received. In somewhat ominous wording, the FCA adds (in relation both to firms paying COVID-19 claims and those not paying):
“We will consider firms’ behaviour and performance compared to these expectations during our business- as –usual supervision and when assessing their culture”.
This statement applies to firms carrying on regulated activities in relation to all general insurance products and non-investment life products.
The FCA expects such insurers to consider whether and how COVID-19 may have materially affected the value of the insurance product. COVID-19 may mean:
- Firms can no longer provide the expected contractual benefits (for example medical covers where customers can no longer access care).
- The underlying insured event can no longer occur (for example public liability insurance for shops that have been required to close down).
In such cases, the FCA requires that firms reassess the value of policies and consider what appropriate action to take. This is (deliberately) vague – whilst the FCA lists, by way of example, that firms might deliver benefits in a different way, provide alternative comparable benefits, reduce premiums for the duration of the change in value, or partially refund premiums already paid – they do not mandate specific actions. It should be noted that the product assessment requirement is restricted to cases where the firm cannot deliver a benefit, or where the underlying event cannot happen, and not to cases where claims are still possible but COVID-19 has made a claim far less likely (e.g. reduction in car usage).
The FCA also makes it clear that this requirement is in addition to the existing obligation of firms to review regularly the products they offer and consider whether they remain compatible with the needs, objectives, interests and characteristics of the target market.
Firms have until May 15 to comment on this guidance and the FCA expects to issue final guidance by the end of May. Firms then have six months to complete their product reviews and decide on resulting action. However, the FCA intends to review the guidance in the three months following finalisation, and may revise it if appropriate. This could mean that firms undertake significant amounts of work which is at risk once the guidance is reviewed.
Customers in temporary financial difficulty
Again, this statement applies for firms dealing with customers of general insurance and pure protection policies, i.e. it excludes investment policies in the life sector. It applies to premium finance lenders and brokers as well as to insurers and insurance brokers. For insurers and insurance brokers, the customers in scope are natural persons and small business customers (i.e. the same cohort of customers who fall within “eligible complainants” as set out in DISP 2.7.3.R) who are experiencing or reasonably expecting to experience temporary financial difficulties due to circumstances arising from COVID-19.
The statement is aimed at:
- Minimising the impact of temporary financial distress.
- Ensuring customers continue to have insurance that meets their demands and needs.
The guidance is quite detailed, but in essence, firms are required to consider what options they can provide to the customer and if there are steps that can be taken to deliver a fair outcome to the customer, in light of their changed circumstances. Examples given by the FCA include:
- Reassessing the customer’s risk profile – for example, a customer could be offered lower premiums for a motor insurance policy where the customer no longer uses his car for business.
- Considering whether other products may meet the customer’s changed circumstances better – for example a motor insurance customer may no longer need add on covers such as legal expenses.
- Trying to avoid cancelling necessary cover, for example. by payment deferrals.
- If policies are cancelled, firms should waive cancellation fees; and if a policy is adjusted to reflect changed circumstances, firms must waive any fees associated with amending a policy.
Firms are required to make clear in communications and on their websites and apps, the possible solutions available and encourage customers to contact them if they are experiencing difficulties as a result of COVID-19, for example. Firms must make it as easy as possible for customers to contact them.
If amendments to the insurance cover do not alleviate the payment difficulties, firms should consider reviewing (for example, reducing) interest rates on instalment payments. If customers still have difficulties, then firms must consider granting customers payment deferral.
A payment deferral means the customer makes no payments for a specified time, without being considered in arrears and without the insurer being entitled to cancel the policy for non-payment. The FCA states that the deferral period should be no less than one month and no more than three months; that if a customer requests a payment deferral, the firm should grant it unless it determines (acting reasonably) that it is obviously not in the customer’s interests to do so; and that there should be no fee associated with the granting of the deferral.
Comments on this guidance were required to be submitted by May 5 and it is expected to come into force on May 13. The FCA will review the position after three months.