Are insurers assisting businesses in their hour of need?

The beginning of the first UK lockdown inevitably led to a surge in insurance claims, estimated at around 370,000. Whilst government intervention in the form of the furlough scheme, restrictions on forfeiture of commercial leases and the Eat Out to Help Out offered some temporary respite, the cumulative levels of financial loss forced many businesses to permanently close.

For others that suffered huge losses during the pandemic, particularly those in the hospitality and retail sectors, their business interruption (BI) policies were their only lifeline to survival, any yet despite the circumstances, many insurers refused to pay out by relying on unclear terms within their policies. The Financial Conduct Authority (FCA) responded by bringing a test case against several leading insurance companies with the intention of resolving some key contractual uncertainties and ‘causation’ issues (The Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2021] UKSC 1). The FCA did this in order to quickly assist businesses that faced immense financial strain to stay afloat.

The Court’s ruling was mainly favourable for policyholders on key issues of coverage, causation and trends clauses.  The Court decided that the ‘disease clauses’ under consideration were largely found to respond to Covid-19 closures, whereas the ‘prevention of access’ clauses mostly did not.  Whilst the judgment provided some much-needed clarification within the market, insurers continue to face criticism about how they have handled these claims.

Following a recent review, the FCA raised concerns about how firms have handled claims from vulnerable customers, many of whom would not have been in a position to seek professional advice about how to progress their claims.  

As a result, a statement has been issued outlining both good and bad practices for insurers when dealing with BI claims, which include the following:

Good Practices:

• Firms were quick to move resources to priority business areas and employed technical external expertise where necessary.
• Interim payments were issued using basic information received from policyholders, with more detailed assessments of further information to determine full and final settlements.
• A range of channels was made available for customers to contact firms, such as greater telephone access and web-based forms.
• Firms issued proactive communications, encouraging policyholders to provide information to progress their claims.

Bad Practices:

• Firms and their partners did not produce clear and robust conduct Management Information, which affected their ability to identify and address delays in the claims process.
• Some firms did not have records of policy wordings that were easily accessible for claims handlers, which resulted in delays for customers.
• Firms did not adequately identify vulnerable customers or took an inconsistent approach in dealing with the needs of vulnerable customers.
• Quality Assurance reviews were too focused on the financial outcome of the claim rather than the full customer experience and failed to identify where customers experienced unreasonable delays.
• Customer communications were not always tailored to the recipient.

As well as this, the FCA highlighted the new Consumer Duty, which requires firms to ensure consumers receive communications they can understand, products and services meet their needs and offer fair value, and they get the support they need. The FCA explained that firms must support their customer throughout the entire lifecycle of a product, including through the claims handling process. The FCA encouraged firms to review their procedures to make sure they mitigate the risk of customer harm.

Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said:  

“We have been working alongside insurers to ensure that claims are settled quickly… while we have observed good practice, there are lessons to be learned.”

“We have seen several significant issues through our BI work and where necessary, we will consider using all regulatory tools to rectify these issues.”

In addition, there have been several developments through the Courts.  The High Court has recently handed down a mixed ruling on three claims with overlapping issues brought by hospitality companies: Greggs plc v Zurich Insurance plc (Case No: CL-2021-000622), Stonegate Pub Co. Ltd. v. MS Amlin Corporate Member Ltd. and others (Case No: CL-2021-000161) and Various Eateries Trading Ltd. v. Allianz Insurance PLC (Case No CL-2021-000396).  The key issues in all three cases were:

• What is the relevant “trigger” under the relevant Insuring Clauses in each policy?
• Were the claimed BI Losses capable of being aggregated to one or more “single occurrences”?
• Were the claimed losses proximately caused by Covered Events within the relevant Policy Periods?
• Was the additional increased cost of working (“AICOW”) sub-limit (in Stonegate) an aggregate limit or applicable to each Single Business Interruption Loss?
• Does AICOW cover apply to economic Increased Cost of Working (“ICOW”) or only to uneconomic ICOW?
• Are payments received by an insured under the Furlough Scheme or any Business Rates relief to be considered when calculating the sums recoverable under the Policy?

The Court has found largely in favour of insurers, resulting in a significant reduction in the sums claimed by the policy holders. Key findings from the Judgment include:

• Insurers are entitled to the benefit of third-party payments to include government support in the form of the furlough scheme or business rates, resulting in policyholders’ claims being significantly reduced.
• The insurer’s argument that there was only one “single occurrence” under the policy was rejected. In the Greggs case, the insurers contended that there was only one ‘single occurrence’ under the insurance policy, limiting Greggs’ claim to only one limit of £2.5m for all its losses. Greggs argued that it was entitled to access a separate limit of £2.5m each time the Westminster and devolved governments in the UK adopted a major Covid restriction measure affecting Greggs’ business, meaning that there were multiple such restrictions and corresponding £2.5m limits. The judge agreed in part and ruled that there was a single occurrence at the outset (from March 2020 until May 2020) which was followed by separate occurrences as major restrictions in place were adjusted from time to time and local lockdowns or other restrictions were introduced. However, the Judge did confirm that those regulations which merely continued existing restrictions or made trivial changes did not provide additional £2.5m limits.

The implication of this for policyholders is that claims are likely to be dealt with much more quickly and with improved, clearer communication – whilst use of alternative solutions such as interim payments is likely to increase. This will be encouraging news considering inflationary pressures and the rising cost of living.

Further, in light of this recent Judgment, whilst it appears government support will be considered when determining the amount payable, insurers will not be able to limit the entirety of Covid restrictions as one ‘single occurrence’. Instead, it is likely the period of March 2020 until May 2020 will be recognised as a single occurrence followed by separate occurrences each time major restrictions were adjusted, or local lockdowns were introduced. Despite this, Stonegate have expressed their intention to appeal the decision.

Gurpreet and Charlie's article was published in Law360, 23 November 2022, and can be found here.