Business interruption insurance test case: draft guidance for firms

This guidance highlights particular steps that we consider firms should be taking to:

• identify the potential implications of the test case on their decisions to reject claims
• keep policyholders informed about the test case and its implications for policies, claims and any settlement offers
• treat policyholders fairly when the test case is resolved

This is guidance on firms’ obligations under:

• the FCA Principles for Businesses (PRIN), in particular Principles 6, 7 and 11
• the Insurance Conduct of Business sourcebook (ICOBS), in particular ICOBS 2.5.-1R and ICOBS 8.1
• the Dispute Resolution: Complaints sourcebook (DISP), in particular DISP 1.4 and DISP 1.6

Who this guidance applies to

• an insurer which is a party in the test case
• any other insurer which, before the date that the test case began, underwrote a relevant non-damage business interruption policy
• an insurance intermediary or insurer which handles claims on another insurer’s relevant non-damage business interruption policy
• a managing agent that manages a Lloyd’s syndicate which has underwritten a relevant non-damage business interruption policy (and references to ‘insurers’ in this guidance should be read as including managing agents)

For clarity, this guidance does not apply, where an insurer has, without adjustment or deduction for general causation:

• decided to accept claims, or
• determined that its non-damage business interruption policies do respond to coronavirus

The FCA expects insurers who are accepting claims or have determined their policies respond to continue handling claims in accordance with their current approach and to pay agreed claims on a timely basis.

This guidance covers actual or potential claims or complaints relating to non-damage business interruption losses resulting from the coronavirus pandemic.

Insurers and insurance intermediaries should also take appropriate account of this guidance as far as the insurers’ other policies, including their other business interruption policies, contain terms whose interpretation or response may be affected by the outcome of the test case.

Insurers should also ensure that their third party administrators are aware of this guidance and apply it as appropriate for any work they undertake on relevant non-damage business interruption policies.

Definitions

In this guidance, the terms used have the meanings set out below:

Final resolution	(For a test case claim or test case complaint) when the Court has determined the questions in the test case, after all rights of appeal have been concluded. If an appeal is made about only some of these questions and not others, the final resolution will have been made for any questions that have not been appealed.
Relevant non-damage business interruption policy	A policy containing policy wording (’relevant policy wording’) 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 of such wording include cover for ’non-damage denial or access’, ’public authority closure’, ’notifiable disease outbreak’ or similar matters. Condition (i) is that, 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. Condition (ii) is that the insurer has told policyholders or said publicly that their business interruption policies with non-damage cover do not respond to coronavirus.
Relevant policy wording	Has the meaning given within the definition of relevant non-damage business interruption policy above.
Test case	The proceedings brought by the FCA to resolve uncertainty in business interruption insurance.
Test case claim	A claim made under a relevant non-damage business interruption policy where the outcome of the claim, including issues of causation, may (if already taken) be affected by or (if not yet taken) depend on the final resolution in the test case, whether or not the insurer has declined the claim by issuing a declinature letter).
Test case complaint	A complaint (as defined in the Glossary to the FCA’s Handbook of rules and guidance) made in respect of a relevant non-damage business interruption policy where the resolution of the complaint may be affected by or depend on the final resolution in the test case. This is whether or not the insurer has issued a final response under DISP 1.6.2R and whether or not the policyholder has referred the complaint to the Financial Ombudsman Service.

How insurers should check if the test case applies to their policies

Insurers should review the test case, including the representative sample of policy wordings, assumed facts and questions for determination by the court. They should then determine whether or not their decisions on claims (including questions of causation of loss) for each relevant policy wording may:

• if already taken, be affected by, or
• if not yet taken, will depend on,

the final resolution of the test case.

When carrying out their review, insurers should also identify any policies where either:

• the test case may provide guidance on the interpretation or effect of a relevant policy wording but where the insurer believes that their decision on claims under the policy will not be affected by the test case, or
• the test case is not relevant to the interpretation or effect of a relevant policy wording

Insurers should record their reasons for their conclusions under their review and should update them as the test case develops or in the light of other changing circumstances, for example changes in their decisions on claims or the settlement of claims.

For clarity, it is accepted that the actual effect of the test case cannot be determined until its final resolution.   

Co-insurance and Lloyd’s – who should check if the test case applies?

A relevant non-damage business interruption policy may have been underwritten by more than one insurer. In such cases, the assessment of how the test case affects the policy should be undertaken by:

• the insurer with responsibility for claims where this responsibility has been assigned, or
• where this does not apply, the lead insurer if one has been nominated, or
• the insurer which has underwritten the largest proportion of the policy

In the case of a policy written by a Lloyd’s syndicate, the lead managing agent for the policy should undertake the assessment.

Oversight and time frame for review, and communication with the FCA

A senior manager should be appointed to oversee the review of relevant policy wordings in insurers’ relevant non-damage business interruption policies. Insurers should complete their review of policy wordings within 2 weeks of this guidance coming into effect. The insurer should have clear documentation available around their review and may be asked to confirm the work completed.

On completion of their review, insurers should provide the FCA with the results of their review using the template provided by the FCA divided into the following categories:

• policies where their decisions on claims may (if already taken) be affected by or (if not yet taken) depend on the final resolution of the test case
• policies where the final resolution of the test case may provide guidance on the interpretation or effect of a relevant policy wording does not or will not affect their decisions on claims, and
• policies where the test case is not relevant to the interpretation or effect of a relevant policy wording  

Insurers should promptly notify the FCA of any changes to that information as a result of updates to their review by providing an updated template clearly indicating the changes.

The FCA may publish the names of insurers, the policies notified and the insurers’ conclusions in respect of those policies, as permitted by Regulation 3 and/or 5 of the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001 (SI 2001/2188).

Communicating with policyholders generally during the test case

Insurers should publish sufficient details with appropriate prominence and signposting to keep all policyholders with relevant non-damage business interruption policies updated about the test case and its implications for potential claims under their policies. Insurers may publish this information on the firm's website or by other general means.

Where insurers have made statements or other communications to policyholders or insurance intermediaries on whether their relevant non-damage business interruption policies to claims for losses resulting from the coronavirus pandemic they should review those statements and communications and:

• promptly amend or supplement any statements or communications as necessary in light of the test case
• take appropriate and timely steps to ensure that policyholders are made aware of any amendments or supplements to previous statements or communications and
• inform any insurance intermediaries used by the insurer of the amendments or supplements to previous statements and communication

Insurers and insurance intermediaries should ensure that their communications about the test case are balanced. 

Insurers should include, in their published details and in any individual communications to policyholders, a link to the FCA’s webpage for the test case and to any material issued by the Financial Ombudsman Service concerning business interruption insurance cases.

Insurers and insurance intermediaries should consider how they can meet the policyholders’ information needs about the test case. Where a policyholder bought their policy through an insurance intermediary, insurers should consider providing appropriate information to their insurance intermediaries to pass on to policyholders to keep them updated.

Identifying claims and complaints affected by the test case

Insurers and insurance intermediaries should filter claims and complaints (including those received before this guidance came into effect) to identify whether all or part of a claim or complaint is:

• a test case claim or a test case complaint
• a claim or complaint relating to relevant policy wording, where the test case will provide guidance on the interpretation or effect of the wording but the insurer believes that final resolution of the test case does not or will not affect their decision on the claim or complaint, or
• a claim or complaint relating to relevant policy wording where the test case is not relevant to the interpretation or effect of the wording

Updating policyholders who have made claims or complaints

Within 3 weeks of this guidance coming into effect, insurers should notify policyholders with existing claims or complaints concerning relevant non-damage business interruption policies:

• whether their claim or complaint is a test case claim or a test case complaint and the implications of that, or
• the reasons why their claim or complaint is not a test case claim or test case complaint, and the implications of this

Insurers should also provide the information above to policyholders who make new claims or complaints concerning relevant non-damage business interruption policies.

Insurers and insurance intermediaries should give all policyholders who have made a test case claim or a test case complaint appropriate updates about the test case and its implications for their claim or compliant. In particular, they should keep policyholders updated on whether their decision may be affected by the final resolution of the test case.

But it is not necessary to provide updates if the policyholder has accepted an offer in full and final settlement of their test case claim or test case complaint.

These updates should include individual communications to policyholders who have made a test case claim or a test case complaint, through the insurer’s usual channel of communication at the following times:

• when the test case starts
• when all judgments at first instance or appeals on substantive issues in the test case are given
• when the test case reaches final resolution
• at any other significant development in the test case that may be relevant to the policyholder’s claim or complaint

These updates should be made as soon as possible after the event is identified by the insurer, and in any event within 1 week of the event occurring.

Handling claims or complaints partially affected by the test case

Where a claim or complaint contains a part that is a test case claim or a test case complaint and another part that is not, an insurer should apply ICOBS 8 or DISP 1 as appropriate to the parts of the claim or complaint that are not related to the test case. In particular, an insurer should:

• handle and assess any non-test case elements of a claim or complaint promptly and fairly
• pay any settlement of that part of the claim or complete any remedial action or redress for that part of the complaint without waiting for the test case to reach final resolution

When handling a claim or complaint that has non-test case elements and ­test case elements, an insurer should explain clearly to the policyholder:

• which elements of the claim or complaint it has addressed
• which elements of the claim or complaint are covered by any offer to settle, or to complete remedial action or redress, and
• which elements, if any, the insurer proposes to assess after final resolution of the test case

Providing information to the Financial Ombudsman Service

Where a policyholder refers a complaint about an insurer’s relevant non-damage business interruption insurance policy to the Financial Ombudsman Service, the insurer should give the Ombudsman the results of its review of the policy under this guidance.

Offers to settle during the test case

During the test case, an insurer may continue to offer to settle a test case claim or, in the case of a test case complaint, make an offer of redress or remedial action, including on a full and final settlement basis.

When deciding how to progress a test case claim or test case complaint, including whether to offer to settle, or to offer redress or remedial action, insurers should take account of any communications from the policyholder relating to the outcomes that the policyholder says they would be prepared to consider.

When making an offer to settle a test case claim or an offer of redress or remedial action for a test case complaint, an insurer should inform the policyholder about the test case and its implications. In particular, they should tell the policyholder whether the final resolution of the test case may affect the insurer’s decision about their claim or complaint, and the implications of accepting or rejecting an offer made on a full and final settlement basis.

An offer to settle, or an offer of redress or remedial action, may have been made before this guidance came into effect. In these cases, if it remains open to acceptance and the policyholder has not accepted it or rejected it, an insurer should give the policyholder the above information before the policyholder commits themselves to accepting or rejecting the offer. In addition, the insurer should:

• where the offer has a deadline for acceptance which is less than 14 days from expiring, extend the time for a policyholder to accept the offer to 2 weeks from the date when the policyholder receives the information about the test case and its implications, and
• unless increasing the offer, not withdraw the offer within any timeframe given to the policyholder to accept it

Final responses to complaints during the test case

Where an insurer considers that the final resolution of the test case is necessary to provide a final response to a test case complaint and so intends to provide the policyholder with a written response under DISP 1.6.2R(2):

• the explanation should include information about the test case and its implications for the complaint, and
• the indication of when the insurer expects to be able to give a final response should include that a final response will be provided promptly on final resolution of the test case.

Time limits during the test case

To treat their customers fairly and act in their customers’ best interests, insurers and insurance intermediaries should not include the period between the date this guidance came into effect and the final resolution of the test case when relying on any time limits within which policyholders must:

• make test case claims or take any other step under the terms of their policies, or
• refer test case complaints to the Financial Ombudsman Service    

Insurers should not limit any payment that may be due to a policyholder because of the time period that has elapsed before the test case claim or test case complaint was made.

Actions following final resolution of the test case

Assessing outstanding test case claims and test case complaints

On final resolution of the test case, insurers should handle and assess all outstanding test case claims and test case complaints in accordance with ICOBS 8 and DISP 1 and apply the judgment(s) in the test case so far as relevant.

Review of rejected test case claims and test case complaints

Insurers should reassess all test case claims they rejected before final resolution of the test case that did not proceed to become test case complaints in accordance with ICOBS 8.

Except where an insurer has received notification from the Financial Ombudsman Service that it has accepted a complaint for consideration, insurers should also reassess all test case complaints they rejected before final resolution of the test case in accordance with DISP 1.

When reassessing rejected claims and complaints, insurers should apply the judgment(s) in the test case so far as relevant and:

• inform the policyholder promptly of the outcome of the reassessment, and
• where the reassessment is for a test case complaint, issue a revised final response under DISP 1.6.2R informing the policyholder that, where necessary, the insurer consents to the waiving of time limits under DISP 2.8.2R

Process and next steps

We want to act quickly to protect consumers in these difficult times. We consider that the delay in publishing a formal consultation accompanied by a cost benefit analysis would be prejudicial to the interests of consumers. We are therefore not doing so. There is no statutory requirement to prepare a cost benefit analysis for guidance.

Please respond with any comments to [email protected] (with ‘Guidance consultation - comments’ in the subject line) by 5pm on Friday 5 June.

Timing

If issued, the guidance would come into force when the FCA issues the claim form to start the test case, or shortly thereafter.

We will review this guidance in the light of developments during the test case and may revise the guidance if appropriate.

Submission of policy review data

The guidance sets out the FCA’s expectations that information from insurers’ reviews of their policy wording will be submitted to the FCA.  If this guidance is issued, the FCA intends to provide a simple data submission template for insurers to complete when submitting this information.

The FCA’s objectives and regulatory principles

The proposals in this consultation support our consumer protection objective and are designed to protect consumers in the ways described in this guidance.

Equality and diversity

We are required under the Equality Act 2010 to ‘have due regard’ to the need to eliminate discrimination, harassment, victimisation and any other conduct prohibited by or under the Act, advance equality of opportunity between persons who share a relevant protected characteristic and those who do not, and to foster good relations between people who share a protected characteristic and those who do not.

As part of this, we ensure that we consider the equality and diversity implications of any new policy proposals. We do not consider this guidance will adversely affect consumers with protected characteristics.