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Earlier this year, the FCA and some insurers went to court for a decision on whether the business interruption cover provided by these insurers protected their customers from Covid-19 losses.
Much has been written about the decision (subject to appeal at the time of writing) but I thought it would be useful to consider what we can all learn.
Insurance policies are created so that:
As the insurer writes the policy document, if any ambiguity exists in the way a term (strictly, an exclusion) is worded, the interpretation that benefits the policyholder prevails (this is known as Contra Proferentem).
The description of cover starts by saying what triggers a claim and then what exclusions apply. It is for the policyholder to prove an event that triggers a claim has caused loss or damage and then, if appropriate, the onus is on the insurer to show an exclusion applies. The claimant does not have to disprove an exclusion if the insurer cannot prove it.
One of the key issues in the BI decision is the location of Covid-19 sufferers. The policies that provided cover for losses where a disease caused the business to shut down, usually did so if the interruption was due to there being an occurrence (or incidence) of Covid-19 within a certain area (such as 5 miles) of the business premises. Some policies were less specific, saying occurrence had to be ”in the vicinity”.
Generally, the conclusion was that policyholders did not have to point to a specific occurrence in the area as the pandemic has been so widespread and not every incidence has been diagnosed, let alone reported. Some of the wordings did narrow cover, requiring policyholders to prove an incidence in their area had directly caused the loss to their business.
I suspect that the insurers who had written cover to only apply if there is an incidence of the disease “in the vicinity” were thinking vicinity meant within sight of the business premises.
Vicinity feels close doesn’t it?
Well interestingly the courts said this needed to be interpreted in the context of the situation and, for Covid-19, considered the whole of the UK to be “in the vicinity” (for a UK based business).
Definition of disease
While some insurers provided cover for any pandemic, some provided cover where interruption to the business was caused by one on a specific list of diseases and Covid-19 was not on that list. Of course, it was probably not on the list because at the time the policy wording was drafted it did not exist. These insurers made the decision to cover only a list of specific diseases.
Moving forward, I wonder whether customers buying decisions will be impacted. I think if I was running a business that was affected by Covid-19 I would, in the future, be looking for cover that did not restrict claims to a list of known diseases/pandemics only.
The amount of the claim
A third issue is the way the claim payment will be calculated. I was once told (many years ago) that BI claims are the easiest to assess as they way they are calculated is set out in the policy wording. Superficially that’s true, but in the case of Covid-19 BI claims even if the policy provides cover for the business, not every part of their loss of income will be covered.
Did the business have to stop trading because of government lockdown or other factors that meant the business owner was not able (or inclined) to trade? There is usually a good reason not to open for business. For example, a business owner may have shut because they needed time at home to home-school or perhaps are part of a vulnerable group. Loss of income due to these reasons to stop (or reduce) trading is unlikely to be covered.
A reduction in footfall/custom is another factor that will contribute to the losses suffered by many businesses. Some policies could cover this, while others may limit cover to losses caused by a forced shutdown of the business. Those that were not forced to shutdown but chose to, may find themselves without cover. As may those who had both an on-line and high street presence.
Christine and I will generally be leaving our clients to make a decision about whether their policy provides cover for the Covid-19 pandemic, based on the court’s decision and any further guidance from the Financial Ombudsman Service or the Financial Conduct Authority (or coming out of the appeal). We know many insurers will be taking legal advice on this matter.
We will be helping clients with each specific complaint and most specifically the calculation of claims settlement. In our time dealing with complaints we have often had to review policyholders' business accounts to understand the reduction in income specifically due to an insured event and it’s not unusual for us to have to unravel which elements of a downturn in income are covered and which are not.
One particular issue we both feel quite passionate about is supporting those claimants with valid claims even if the extent of the loss is not known. Withholding claims payments until the matter is completely resolved could cause many businesses to suffer and so we will be encouraging clients to make interim payments on valid claims.
If you want to know more about our complaints handling support, please contact me via Linkedin Messenger or via our contact page. We are a small (but expert) team with flexibility so tell us what you need.
We can also provide services to help you with the design of your policy wording. Perhaps we can help you with some readability checks or by running a focus group. Get ahead of the game and make sure your policy cover is what your customers need.
Author: Sally Pearce (Conduct Matters Ltd)
Sally Pearce started Conduct Matters in 2014 after 35 years working in the insurance industry. She was originally an underwriter, but since 2000 has worked in dispute resolution and helping Insurance firms understand how to treat their customers fairly. Her experience includes working for the Financial Ombudsman, in the Lloyd’s market and dealing with regulators. Sally is ACII, a qualified mediator and yoga teacher. She is also available for public speaking.