With large parts of the UK economy currently unable to function under lockdown, many SMEs are looking closely at the terms of their business interruption insurance in order to try to ensure their survival. Meanwhile, insurers attempt to deal with a deluge of claims in circumstances where the time taken to process a claim could be the difference between survival or failure for the policyholder SMEs.
The insurers' regulator, the FCA, has now stepped in with a Dear CEO letter to insurers, to clarify its expectations of how insurers should be treating their policyholders during this period of unprecedented demand, and with a thinly veiled 'message' directed at insurers that fall short of its expectations.
This is timely as press reports in the past week have increasingly reported pressure on insurers and that firms are putting together class actions.
Will a business interruption policy cover the coronavirus pandemic at all?
The FCA's letter clearly indicates that, based on their work to date, a majority of business interruption policies only include "basic cover" and will not cover the current pandemic at all - this is consistent with an earlier statement from the Association of British Insurers. Pandemics tends to be covered as an additional and unusual risk only in a limited number of cases, often where specifically requested by a policyholder.
Whilst this is unfortunate, the FCA have inevitably concluded that they are not able to intervene in such cases.
The first task for most businesses is therefore to check the terms of their cover to determine if losses arising from the pandemic are covered – if you are unsure then your first port of call should be your broker.
As a general proposition, insurers are taking the approach that business interruption cover (even with notifiable disease extension) is not intended for national or regional pandemics which cause widespread shut downs or interruption to commerce generally but more location specific interruption. An outbreak of norovirus at a particular food and drink establishment (subject to carve outs) may have cover, but a global pandemic does not. The ABI's website has a page explaining the cover here: https://www.abi.org.uk/products-and-issues/topics-and-issues/coronavirus-hub/business-insurance/
The reality is that a statement of general proposition about what business interruption insurance is "intended for" is not the last word – the wording of the actual policy is what governs.
What if your policy does cover losses arising from the pandemic?
The FCA makes it clear that it expects insurers to settle valid claims quickly and notes that this is consistent with the wider objective of the "authorities" to support businesses and consumers during the crisis caused by the pandemic.
To this end, the FCA has a clear expectation that insurers will adopt a policy of making interim payments where it is clear that at least part of the claim is covered, but the total amount of the claim, or the validity of a part of the claim, cannot be assessed quickly. This approach should allow insurers to support their insureds with swift payment whilst at the same time giving them some time to assess the full claim properly.
And, crucially, the FCA go as far as to say that if an insurer decides that it will not adopt a policy of making interim payments then (i) the insurer must explain to the FCA the grounds for that decision and why they believe that it represents a fair outcome for customers, and (ii) the FCA will use that information to "help inform our [the FCA's] assessment of its [the insurer's] culture".
It is not difficult to read between the lines of that message – insurers will find it very difficult to justify to the FCA a policy of not making interim payments and this could have significant regulatory consequences for the insurer concerned.
What should an SME do now?
As indicated above, check your policy to see if it appears to cover pandemic losses. If it does and it's clear that you can immediately make a claim, then do so and push for an interim payment.
If it is unclear whether you are covered or not and/or whether, in terms of timing, you are already entitled to submit a claim under the terms of the policy, then you should seek assistance from your broker or another independent professional (e.g. a lawyer) with experience in this area. As a guiding principle if you think you have a potential claim, don't delay: notify it to the insurer or through your broker, as delay itself can be a defence to coverage.
Smaller policyholder SMEs (annual turnover of <£6.5m and either <50 employees or total balance sheet assets of <£5m) may also have the right to seek redress from the Financial Ombudsman Service if they believe that they have been unfairly treated by their insurer and have first exhausted the insurer's internal complaints procedure.