What Does the FCA Business Interruption Test Case Outcome Mean for Insurers?

Today, we saw a landmark decision from a landmark case. The High Court resoundingly found in favour of small businesses. The judgment says that most, but not all, of the disease clauses in the sample provide cover. It also found in the FCA's favour for certain denial of access clauses, but this was dependant on the detailed wording of the clause itself. 

However, the judgement does not bring about an end to all uncertainty and does mean further work for insurers. It does not state that all eight insurers are liable across all 21 different types of policy wordings examined as part of the case. Instead, it leaves the insurers to undertake a detailed comparison of their policy wordings against the judgments handed down today.

The FCA’s business interruption test case is the first time insurance policy wordings have been scrutinised in detail and en masse by a court of law in the UK. Insurance firms were directly compared and assessed against each other on the strength and or deficiencies of their wordings. The impact of the outcome published today is significant. 

This case demonstrates an interventionist approach taken by the FCA in contrast to other global regulators. We expect the focus on policy wordings and product value to continue, particularly in light of criticism the FCA has recently received in relation to the volume of cases where they reach an outcome and the value of fines levied against firms that are found to be non-compliant.

In recent years, the FCA has focused on the General Insurance (GI) sector, in areas such as the implementation of IDD, renewal transparency, value in the distribution chain, value measures and pricing. However, these activities have failed to bring about the change that the FCA was looking to achieve. It continues to focus its attention on the market to drive change that ensures fair and transparent outcomes for customers. Policy wordings are another lever that the FCA has chosen to pull on to effect the customer-centric culture and better outcomes it has been seeking. Particularly where the actions and interpretations of third parties, such as brokers and MGAs within the chain, including manuscripting, have materially impacted the operation of an insurer’s product.

 The impacts of the outcome published today are far-reaching. Likely outcomes include:

• Protracted and expensive litigation, despite requirement for expedited process focused on individual insurers, creating the potential for greater uncertainty for policyholders;
• Challenges for insurers on how they oversee their policy wordings, particularly where they have delegated the ability to make changes to third parties;
• Millions in pay-outs for insurers who have clauses that have failed to withstand the legal scrutiny;
• A potential increase in fraudulent claims; and
• What is meant by a plain English wording and increased expectations in relation to standard wordings and clauses.

What should firms directly impacted be doing? 

• Act quickly to identify those policies and claims that are impacted and to assess the scale of the issue;
• Decide on a strategy of how you are going to deal with affected customers and an associated communications plan;
• Review your current policy wordings for new policies;
• Review, going forward, how you manage and oversee your policy wordings and any changes made by distributors, including your oversight of MGAs and delegated authorities;
• Ensure that your fraud controls are adequate and you have plans in place to deal with anticipated increased claims volumes;
• Assess your own contingency plans and those of the third parties who work with you; and 
• Consider how to maximise product governance and wordings technology to make oversight more sustainable.

What should all firms be doing?

Policy wordings are complex and can often vary considerably in their technical detail, even where provided by the same insurer, depending on the distributor the policy is sold through. Firms should consider if the processes and controls they have in place over their policy wordings are effective in ensuring the quality of the wording that eventually reaches the customer, both retail and commercial. 

• How do you oversee your policy wordings, including use of best practice clauses, use of plain English and variations of the same product? Consider, in particular, where you have delegated wording changes or there are parties within the chain who can apply manuscripting to individual wordings;
• Review the Product Oversight & Governance proccesses you have in place: including design and oversight processes, sales, pre-contractual disclosures and oversight of policy wordings used by different distributors;
• How do you demonstrate that the customer’s demands and needs have been assessed and how the product and its specific features meet those demands and needs?
• What processes for evidencing that you are acting in the customer’s best interests do you have in place, including customer outcomes testing?
• Consider how to maximise product governance and wordings technology to make oversight more sustainable.