The FCA’s test case action brought ambiguous business interruption policy wordings to the fore, however the final judgment will very likely have ramifications across numerous lines of business. Insurance Times takes a closer look at the impact on insurers and brokers
Problems with buyers not understanding exactly what they are covered for have rumbled on for decades, despite constant talk of a drive towards greater clarity and transparency.
However, the Supreme Court’s judgment on 15 January, which substantially allowed the FCA’s appeal on behalf of business interruption (BI) policyholders originally denied payouts for coronavirus-related losses, must prove the catalyst for genuine change.
Importantly, clarity within policy wordings should not just be regarded as a BI issue. It has proved a PR disaster for the insurance industry as a whole, fuelling the notion that greedy insurers are trying to wriggle out of paying valid claims – this has significant implications for policy wordings in all areas of commercial and personal lines.
Naz Gauri, a principal associate in law firm Eversheds Sutherland’s insurance and reinsurance team, said: “The judgment has emphasised the need to have regard to case law precedent when drafting insurance policy wordings.
“No doubt a landmark decision such as this one will prompt some brokers and insurers to revisit their wordings to ensure that the use of terms such as ‘event’, ‘occurrence’, ‘incident’ and ‘originating cause’ still reflect the meaning they were intended to have in any given context.”
All wordings relevant to large numbers of customers are now potentially vulnerable to the next big crisis if they contain any ambiguity.
Branko Bjelobaba, principal of general insurance compliance consultancy Branko, is adamant that if insurers don’t now revisit their wordings as a whole, they will have another disaster.
He explained: “The judgment talks about wordings beyond BI and I think all policies need to be revisited to obtain greater clarity.
“Even Hiscox’s wordings, which are the very simplest, were still found wanting as policyholders don’t understand things in the same way as insurers.
“The way wordings have been put together generally on insurance policies isn’t articulating clearly their insurer’s intentions and they are too verbose.”
Broker-produced wordings, on the other hand, may not be a major issue going forward as their days could be numbered.
Nick Smallcorn, director of corporate clients at The Clear Group, said: “I think broker-produced wordings will begin to disappear as I don’t think insurers will want words out there that aren’t purely their own.”
Time for review?
Following the conclusion of the FCA’s test case, insurer wordings undoubtedly must be revisited and one would have thought that those insurers involved in the Supreme Court appeal – namely Hiscox, RSA, QBE, MS Amlin, Arch and Argenta – would be among the first to tackle this issue.
But, if any have been taking such steps, they are certainly hiding their light under a bushel. All refused to comment for this feature.
Industry bodies offer no satisfactory explanation for such silence, but point out that these companies are heavily preoccupied with settling BI claims.
ABI spokesperson Malcolm Tarling said: “The industry has certainly taken a reputational hit and it does need to regain trust. But the priority now is for those insurers to settle those claims affected by the judgment as soon as possible.”
Other insurers not involved in the appeal are also reluctant to comment, although Allianz is unusual in volunteering that it is examining its wordings.
Zurich reported that it regularly reviews its wordings and Aviva, while steering clear of whether it is currently reviewing wordings, at least stated a belief that there will be a drive for simplification industrywide across all policies.
Some brokers do, in fact, observe pockets of activity from insurers. Provenance Insurance Brokers reported some adjustments to definitions and changes to covers at personal lines renewals, while The Clear Group is aware of some insurers already working with legal advisors to revisit wordings across most of their commercial lines policies.
On the other hand, Stuart Williams, client director at broker Konsileo, added: “The industry is naval gazing when in reality it has the opportunity to rebuild bridges with customers and close the expectation gap that seems to exist between customer and insurer because the market has focused primarily on price.”
Industry next steps
Some brokers have highlighted industry initiatives they feel should bode well for clearer policy wordings, like Lloyd’s ‘Building simpler insurance products to better protect customers’ report, Biba’s recent manifesto pledge to work with stakeholders to obtain clarity and the Chartered Insurance Institute’s (CII) Chartered Transparency Forum, which has produced a guide explaining the actions needed to ensure consumers understand the extent of cover offered.
A cynic might feel they have been hearing about similar initiatives and guides for donkey’s years, without much ever changing.
But Biba executive director Graeme Trudgill, who sits on the CII’s Chartered Transparency Forum, said: “There is more urgency and activity on policy wordings at this forum than I’ve experienced at any point in my career.
“I do think insurers are considering changes they need to make in this respect.”
Matt Connell, director of policy and public affairs at the CII, added: “The real goal is to restore trust in our united profession, not as a PR exercise, but to reset relationships and allow for professionals to continue to support the public from a place of confidence.”
However, other industry voices feel that commercial considerations are more likely to instigate widespread wording changes than any number of guides.
Smallcorn said: “I‘ve always been slightly sceptical about the ability of industry bodies to influence things and I feel the critical issue here is market forces because I think stakeholders and shareholders will want to see wording changes happening.
“I expect material change within the next 12 months. But my fear is that this will result in a much tighter application of wordings and, therefore, compromised cover.”