The Financial Sector Conduct Authority (FSCA) and the Prudential Authority have issued a joint statement setting out their current position on certain aspects of business interruption (BI) insurance cover in light of COVID-19.
The statement also outlines the authorities’ expectations of non-life insurers and intermediaries as to how they should communicate with policyholders in respect of BI claims to ensure that the processing of these claims is not unduly delayed, and that terms and conditions of insurance coverage are not varied without taking a balanced approach to ensure fair outcomes.
The authorities' engagements with various non-life insurers indicate that there are two broad categories of BI insurance, namely: standard BI insurance which requires physical damage as a trigger for the policy to respond; and BI insurance that contains a specific extension for infectious/contagious diseases.
If any new exclusions or requirements are introduced to BI policies during the period of the COVID-19 pandemic, such exclusions must be discussed with the FSCA.
The FSCA has received notifications from various insurers signalling their intention to endorse BI insurance policies by adding general exclusions for infectious or contagious diseases.
Whilst the authorities are still engaging with insurers on these notifications, it is clear that most insurers intend withdrawing cover related to infectious or contagious diseases in the mid-term.
Standard BI insurance
The authorities say that it is clear that the large majority of BI policies relate to standard BI insurance where a policyholder should prove physical damage to the business premises covered under the policy. The authorities are of the view that in the absence of physical damage, an insurer is not contractually bound to provide policy benefits to a policyholder. COVID-19 will not be covered in the standard policy and the authorities see no reasonable grounds to intervene since this is what a policyholder and insurer agreed upon when the insurance contract was concluded.
Insurers are required to communicate exclusions clearly to their policyholders and quote the relevant provisions of the policy document.
BI Insurance with extensions
The statement also says that it seems that there is a small percentage of policies with BI cover in the industry that have specific extensions for infectious/contagious diseases. The engagements with insurers seem to indicate various interpretations as to what the trigger is for valid claims and how exclusions for pandemics should be applied.
The authorities understand that insurers and reinsurers are interpreting the infectious / contagious disease extension and in relation to the COVID-19 pandemic to apply only where the loss of business income was due to the business being interrupted as a result of a localised COVID-19 infection and not as a result of other related actions such as a lockdown introduced by government.
Insurers must communicate this clearly to policyholders, either directly or through their intermediaries.
No retroactive requirement
The statement says that the authorities are not considering initiatives to require insurers to retroactively cover COVID-19 related losses, such as business interruption, that are specifically excluded in existing insurance contracts. Requiring insurers to cover such claims could create material solvency risks and significantly undermine the ability of insurers to pay other types of claims. Such initiatives could ultimately threaten policyholder protection and financial stability, further aggravating the financial and economic impacts of COVID-19.