The FCA test case on the validity of business interruption claims in the wake of the coronavirus outbreak will start next month. While insurers have been the ones under the spotlight so far, brokers could be next if insurer’s get a favourable outcome

The FCA test case on business interruption policies is a crunch point for the insurance industry.

The Covid-19 crisis has laid bare the difference in expectations between customers and insurers when it comes to what is and isn’t covered under a policy, and with business interruption policies, the difference between an insurer paying out or denying a claim can mean either life or death for a business.

Insurers too, will be facing a pivotal moment in their history, and if they are forced to pay out on claims, there will be a significant impact on profitability and capital positions.

So the stakes are incredibly high for all involved, and that is why the FCA is looking to the courts for some much needed clarity.

Questions Need Answering

Insurers have claimed it was not their intention to cover pandemic risks under their business interruption policies, but the FCA is saying that is not enough, and is asking the High Court to clarify that specific exclusions are needed, not just an intention to not provide cover.

There are other questions too, that the FCA is looking to have answered.

With the Covid-19 outbreak being a nationwide crisis, does that fact alone satisfy the need for an instance of the disease to be in the vicinity of a business for it to make a claim?

Do the lockdown restrictions announced by the government constitute definitive orders to close by a public authority? What is meant by denial of access?

And once all these have been answered, the next big question for the industry could be are brokers next?

Brokers In the Firing Line

So far, brokers have been relatively unaffected by the fallout from insurers denying business interruption claims, but that will all change if the High Court sides with insurers and claims are denied.

Then, all the action groups and claimant lawyers that have been targeting insurers will set their sights firmly on the broking fraternity.

The FCA is certainly concerned by this, and has already issued guidance talking about “disorderly failure” and “credible wind-down plans”.

While this guidance wasn’t directly linked to the business interruption furore, or even Covid-19 more generally, it will certainly have been on the regulator’s radar when considering their guidance.

Indeed, in its report FG 20/1 Our framework: assessing adequate financial resources, the regulator said that while its guidance “does not place specific additional requirements on firms because of Covid-19”, the crisis “underlines the need for all firms to have adequate resources in place”.

And professional indemnity insurers are also showing their concerns, becoming more restrictive on broker PI policies, with some now excluding Covid-19-related liabilities.

As such, the eyes of the entire insurance industry will be on the High Court when the case finally gets underway.

But even when this case is over, it could be some time before we know the full extent of the fallout reputationally, financially and, for some, potentially existentially.