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June 3, 2020

COVID: U.K. Financial Authority Response

Summary:

The U.K. insurance law imposes a duty to “pay due regard to the interests” of customers and “treat them fairly.”

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SUMMARY

In the U.K., separate regulatory bodies are accountable to supervise prudential matters (solvency) and consumer protection (conduct). The Financial Conduct Authority (FCA) recently took several actions with respect to consumer protection in the context of COVID-19 using different tools than those available to U.S. insurance regulators.

Resolution of Business Income Coverage Disputes

The FCA has retained a law firm to represent the interests of policyholders in a proposed “test case” to be filed in court by the FCA against representative insurers. The FCA has requested insurers, intermediaries and policyholders to submit examples of disputed policy wordings and the respective positions of the parties.

It appears the action will be commenced before the end of July and is expected to result in binding outcomes as to the interpretation of selected wordings and guidance as to the interpretation of other wordings.

At least initially, the FCA’s statements suggested this litigation would be limited to a few rarely purchased coverage options not requiring “property damage.” It is now unclear whether the scope will expand to include coverages that are only triggered in the event of property damage.

Assessment of Product Value

In the U.K., insurance companies do not typically files forms or rates with the insurance supervisor. Instead, the insurance law imposes a duty to “act honestly, fairly and professionally in accordance with the best interests of its customer” on the insurer and its key executives. That duty includes an obligation to provide products that offer a reasonable value to customers.

The FCA plans to require insurers to assess whether and how the value of their products have been affected by the COVID-19 crisis. To the extent a product is no longer delivering the expected value (e.g., the insured risk no longer exists), the insurer must take appropriate action.

Insurers have six months to complete the assessment and take appropriate action. Insurers must be able to demonstrate to the FCA how they have discharged their obligations to customers.

Assistance to Customers in Financial Difficulty

The U.K. insurance law also imposes a duty to “pay due regard to the interests” of customers and “treat them fairly.” The FCA has issued guidance applying this duty in the context of the potential of temporary financial distress resulting from COVID-19 of individual and small business customers.

The FCA obligates firms to discuss options with policyholders that reach out to the insurer for that reason or who have missed a payment, inquired about making a COVID-19 business interruption claim or have asked for a reduction in coverage.

Options may include a reduction or waiver of premium, deferral of premium payments, replacing the policy with a less expensive product or reducing coverages.

Insurers must take steps to make policyholders aware of these possible options including in their websites.

DETAILS

Business Income Coverage Disputes

The FCA announced on May 1, 2020, its intention to commence a court action with respect to coverage for business income loss under policies issued to small and medium-sized businesses. Specifically, the FCA plans to seek a declaration on “key contractual uncertainties.” The insurance industry supports the FCA’s initiative and is working with the FCA to define the disputed issues.

FCA’s View of Business Income Coverage

In a “Dear CEO” letter of April 15, the FCA expressed its understanding that “most policies have basic cover [that does] not cover pandemics and therefore would have no obligation to pay out in relation to the COVID-19 pandemic.”

However, the FCA expects “where it is clear that the firm has an obligation to pay out on a policy . . . it is important that claims are assessed and settled quickly.”

See also: Business Continuity During COVID-19  

Two weeks later, the FCA acknowledged coverage decisions may be more complicated:

  • “[A]t least in the majority of cases, insurers are unlikely to be obliged to pay out in relation to the coronavirus pandemic.”
  • “[F]irms 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.”

FCA’s Intention to Seek Resolution

The FCA has reached out to a small number of insurers (reportedly including QBE, Axa, Zurich and Hiscox). FCA has requested from each typical policy wordings and positions on coverage under several available but typically not purchased optional coverage extensions for:

  • Non-damage denial of access
  • Public authority closures/restrictions
  • Infectious/notifiable diseases

The FCA will “put forward policyholders’ arguments to their best advantage” and has hired an external law firm to do so. On May 15, the FCA asked policyholders to submit examples of disputed wordings and their arguments for coverage.

For its part, the Association of British Insurers called the FCA’s action a “welcome step” and indicated insurers are expected to pay some £900 million in undisputed business income claims.

The FCA has expressed the view that most policies do not cover COVID-19 because they only have “basic cover for BI as a consequence of property damage.” The coverage extensions FCA initially selected for litigation cover “BI losses arising other than from property damage.”

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About the Author

Jason Schupp is the founder and managing member of the Centers for Better Insurance. CBI is an independent organization making available unbiased analysis and insights about key regulatory issues facing the industry for use by insurance professionals, regulators and policymakers.

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