How are Business Interruption Insurance Policies Affecting SMEs During Covid-19?

COVID-19 has proven to be an unprecedented situation and created a level of uncertainty not previously seen in the business world. Lockdown conditions have impacted enterprises across the economy and many SMEs have been struggling to survive. Business interruption cover is something that many people assumed would provide help during this time but that has frequently proven not to be the case with many insurers refusing claims that relate to COVID-19. Now, the Financial Conduct Authority (FCA) has announced that it is launching a test case that should provide some clarity on how the industry should respond.

What’s the purpose of the test case?

The FCA has said that it is taking action to “assist policyholders, and particularly SMEs, whose claims are being refused when they think the firm should respond.” The results of the test case will be binding on the insurers who are a party to it and are likely to set a precedent for the rest of the industry to follow when it comes to business interruption pay outs during this time.

Who is the test case designed to benefit?

In theory it will benefit both the industry and policyholders because the case will provide clarity that will help to reduce time and resources that are being dedicated to handling disputes. However, the FCA has made clear that it is taking the action with the interests of policyholders at heart. It will put forward policyholders’ arguments “to their best advantage.” The idea is to obtain legal guidance swiftly and with minimised cost, something that individual policyholders would probably be unlikely to achieve if they were to take court action themselves.

The basis of the test case

The FCA is currently inviting consultation with policyholders who have unresolved disputes with insurers over the terms of business interruption policies. Given that the COVID-19 pandemic is likely to have had an impact on SMEs in a variety of different ways there is no single basis for the test case. Instead, the FCA is currently looking at all the potential ways in which SMEs believe that their organisation should be covered by a business interruption policy that has not paid out. The FCA response is also driven by its own fundamental principles and objectives, which include consumer protection and market integrity.

Is this test case the only legal action policyholders can take?

No. It is not designed to prevent other action from being taken. For example, court proceedings could still be started or resolution achieved via arbitration or a negotiated settlement.

How far will the outcome of the test case reach?

As well as binding the insurers who are a party to the test case its outcome will provide guidance for interpretation of similar policy wordings and claims. This guidance can be used in other court proceedings and also by the Financial Ombudsman and the FCA when looking at other complaints that insurers are not handling claims fairly.

It is frequently unclear whether a business interruption policy should be interpreted as providing cover for the impact of COVID-19 on SMEs. The actions taken by the FCA should help to start the process of obtaining some clarity.

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