Articles - BI Insurance and a testing time for the industry

The touchpaper has officially been lit after the Business Interruption Test case judgment was handed down in mid September. In summary, the High Court ruled in favour of policyholders on many clauses- but with some significant nuances in favour of insurers- after a test case was launched by the Financial Conduct Authority to resolve contractual uncertainty in non-damage business interruption policy wordings.

 By Kareline Daguer, Financial Services Director at PwC
 The Court generally ruled in favour of claimants whose policies include ‘disease’, ‘hybrid’ and ‘trend’ wordings. Therefore the ruling has a significant impact on around 370,000 policyholders covered directly or indirectly by the 21 wordings that were subject to the judgment.
 Although the Court ruled in favour of policyholders on many of the issues under scrutiny, the nuances to the judgment meant many claims might not be ‘on cover’ after all. This also resulted in some wordings where, depending on the business on cover and the circumstances of the policyholder, the policy might or might not pay. This raises the technical complexity of moving forward promptly for insurers. Insurers very well may decide to appeal. In fact, ‘consequential hearings’ to decide which elements of the judgment could potentially be challenged were scheduled for 2 October.
 Shortly after the initial ruling the FCA issued a firm, ‘Dear CEO’ letter stating that they also expect all insurers to take a pragmatic, transparent and consistent approach to their interactions with policyholders over any remaining evidence that applies to individual claims, rather than any pending issue creating additional barriers or delays to paying valid claims. We are entering a period where insurers will need to make significant decisions, with the regulator expecting claims and complaints to be handled fairly and in accordance with all rules and regulations.
 Market reaction
 Firms are acutely aware of the need to avoid the risk of creating expectation gaps with policyholders. For example, the nuances of interpretation referred to earlier will mean careful analysis is required to identify those policies where the Court has found in favour of insurers and where claims will not be paid out. Firms outside the eight insurers on the case will need to map their own policy wordings to the 21 wordings subject to this judgment. This process might require a degree of interpretation and additional legal uncertainty.
 Possibly even more pressing is the fact that current local lockdowns might result in policies coming ‘on cover’ where before they were not. Therefore, a significant and widespread second wave of the pandemic could have unforeseen effects on these exposures for many insurers. As a result, the legal proceedings are not just about the 370,000 claims identified so far, it might also mean some policyholders deciding to file a claim based on the results of the judgment, or more claims due to a second wave. It is also unclear for those that made policy wording changes recently whether under the judgment any exclusions would be effective.
 Longer term, consensus among clients centred on a need for accelerating contract standardisation and digitisation. It is clear that inconsistency in underwriting controls and policy wordings affects many products and lines of business and this truth is being laid bare by the current crisis.
 What next and how does it all work in practice?
 Insurers affected are now carefully reviewing the 162-page judgment, considering (a) how the findings apply to their policy wordings; and (b) what additional considerations will need to be made for valid claims to be established and proved in light of any nuances the judgment has highlighted. Insurers are also considering how to manage the operational challenge of dealing with these claims promptly and fairly as soon as possible to ensure a fair outcome for customers.
 Many firms are grappling with the dilemma of whether to wait until the results of an appeal are known to process these claims.
 Firms might need to be pragmatic on how they go about this issue. It would be reasonable to handle the claims as soon as possible but withhold payment until the results of an appeal are known only where the claim is subject to a wording that will be subject to appeal. What is clear is that the longer the wait, the greater the risk of reputational damage. Some law firms are raising the possibility of policyholders claiming for damage due to delays in payment and raising questions on the fairness of continuing to delay payment where a High Court judgment has been obtained.
 For firms with non-damage BI policies that are affected by the judgment and in particular where the High Court found in favour of policyholders, this issue will continue to have an impact for many months to come. Throughout this process firms need to ensure there is robust governance around decision making and project management. Although the touchpaper has been lit, insurers need to be wise to ensure this does not become an inferno of their own making.

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