Yesterday, the FCA published a "Dear CEO" letter to insurers, concerning Covid-19 and business interruption cover for SMEs.
SMEs in all sectors are experiencing unprecedented disruption to their business as a result of Covid-19. It is therefore unsurprising that insurers and business interruption policies are increasingly coming under the spotlight, as businesses look to see if they can obtain any insurance cover for their losses.
The FCA's "Dear CEO" letter states that the FCA estimates most SMEs' business interruption policies will offer only "basic cover" and will not cover pandemics. So, insurers will not be obliged to pay out. The FCA recognises that "While this may be disappointing for the policyholder we see no reasonable grounds to intervene in such circumstances."
This statement is likely to be welcomed by many in the insurance industry, given the increasingly public pressure insurers are facing from customers and the media.
However, the FCA's "Dear CEO" letter also makes plain that there will be "policies where it is clear that the firm has an obligation to pay out" and in those cases the FCA will require firms to assess, settle and pay these claims quickly.
Likewise, where there are "reasonable grounds" to pay part of a claim but not the full claim, the FCA has requested that firms adopt the approach of making an interim payment. The letter puts particular emphasis on this request, stating that where insurers disagree with making an interim payment, they should inform the FCA of their grounds for reaching that decision, including how they "believe it represents a fair outcome for customers." This will, in turn, "help inform [the FCA's] assessment of [the firm's] culture".
Insurers should pay particular attention to the content of this "Dear CEO" letter and ensure that claims teams act in accordance with the FCA's expectations, especially as regards interim payments. An escalation process should be considered for such cases, which will need to be considered in detail and, where necessary, a communication made to the FCA.
The FCA also noted in its letter that the Financial Ombudsman Service will share details of the approach it will be taking to deciding complaints about business interruption insurance in due course. Firms should ensure they keep an eye out for this.
For any queries or advice on how this might impact your business, contact your usual Hogan Lovells contact, or a member of the Global Insurance Team.
Authored by Lydia Savill and Ellie Rees.