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Coronavirus – ‘Dear CEO’ letter on SME business interruption insurance - UK

  • United Kingdom
  • Coronavirus - Insurance issues
  • Financial services disputes and investigations
  • Litigation and dispute management
  • Financial services - Insurance market


After previously setting out its expectations of general insurance firms in relation to their treatment of consumers during the coronavirus (Covid-19) pandemic, on 15 April 2020 the UK Financial Regulator, the Financial Conduct Authority (FCA), issued a Dear CEO letter specifically relating to business interruption cover for SMEs.

The UK insurance industry is firmly under the spotlight regarding its response to business interruption claims arising from the government-mandated Covid-19 lockdown. Some insurers are facing heavy criticism for what appears to be a blanket refusal to pay out on such claims, setting up the prospect of litigation and, in cases involving smaller policyholders, the referral of complaints to the Financial Ombudsman Service (the “Ombudsman”). Insurance brokers are likely to be drawn into these disputes as another potential avenue for redress.

The FCA has now stepped in to warn insurers of the need to ensure that their approach to assessing business interruption claims does not result in unfair outcomes for customers. 

FCA expectations

The FCA recognises that most business interruption policies do not provide cover for pandemics and would, therefore, have no obligation to pay out in relation to Covid-19. As such, the regulator considers that there are no reasonable grounds for it to intervene. This will be welcome news to the sector and contrasts with developments in the US, where some state legislatures are taking action to compel insurers to pay business interruption claims regardless of the terms and conditions of cover.

The FCA is collecting information from insurers to help it assess how they are interpreting policies and has stressed that where it is clear that policies do provide cover, claims should be assessed and settled as soon as possible. Consistent with the UK authorities’ aim to support business and consumers during the Covid-19 crisis, a key FCA objective is to ensure that the financial pressures on policyholders are not exacerbated by slow payment of claims.

The FCA’s expectation is that where there are reasonable grounds to pay part of a claim, insurers should adopt an approach of making interim payments. If a firm disagrees with this approach, the regulator expects the firm to provide it with the grounds for reaching that decision, including how the decision represents a fair outcome for customers. Rather than looking at this information in isolation, the FCA is likely to use it in its broader assessment of a firm’s culture.

The FCA notes that where there is a dispute over cover and the policyholder is a small business[1], the Ombudsman is likely to have jurisdiction. For such customers, the Ombudsman route offers the prospect of a speedier resolution compared to litigation. The Ombudsman will in due course share details of the approach it will be taking to complaints about business interruption insurance, most likely through a series of “lead cases”.

Steps insurers should take

The request that firms inform the FCA of the grounds for not making interim payments where there are reasonable grounds to pay part of a claim is an unusual step and demonstrates the FCA’s interest in insurers’ decision-making in this area.

Insurers need to ensure that they review each of their product lines and clearly establish which of their products provide business interruption cover in relation to Covid-19. Where policy wording is ambiguous and does not clearly exclude cover, a blanket rejection of claims, or a delay in making payment on individual claims, is unlikely to amount to fair treatment. Such an approach will not be looked upon kindly by the FCA, may trigger a flood of costly litigation and complaints to the Ombudsman, and could also result in significant reputational damage to the firm.

As the Dear CEO letter highlights, the FCA is concerned with achieving fair outcomes and may draw conclusions about a firm’s culture from the decisions it makes regarding cover.  It is, therefore, critical that when making those decisions, firms do not give undue weight to commercial considerations, at the expense of customers’ interests. Ensuring there is a clear governance process around decision-making is a prudent measure, as is the clear recording of decisions and their rationale.  This will enable firms, and Senior Managers, to demonstrate the reasons for the approach taken and the steps taken to achieve fair outcomes for customers, thereby mitigating the risk of future regulatory action.

Whilst the FCA expects firms to assess and settle business interruption claims quickly, there may be practical difficulties with doing so. Assessing such claims is generally not  straightforward and requires evidence that may not be readily available. The FCA previously outlined its expectation that insurers should show flexibility in their treatment of customers, and this may require firms to adapt their usual claim processes. Firms should be mindful that expecting customers to adhere to standard procedures, e.g. in respect of supporting evidence, interviews and physical inspections of premises, may not be reasonable in the current climate and may result in unfair outcomes.

Firms should also ensure that their communications with customers regarding business interruption claims are clear, fair and not misleading. This is not limited to customer-specific communications such as letters, emails and call centre scripts, but extends to more general public communications such as press releases and media statements, as well as social media channels.

Wider FCA agenda

The Dear CEO letter is a clear warning that firms and Senior Managers should assess claims properly and quickly and, in doing so, not lose sight of their obligation to treat customers fairly. Firms that fail to do so are likely to face increased regulatory scrutiny, including the possibility of enforcement investigations, in the months and years to come. Such action could extend to Senior Managers whom the FCA considers have failed to take reasonable steps to comply with relevant regulatory requirements.

In its latest Business Plan, the FCA comments that the current regulatory framework is too focused on rules and process, and not enough on principles and outcomes. In the FCA’s view, too many resources have been directed at providing redress and remediation after things have gone wrong, with not enough attention being paid to preventing harm. These comments, and the Dear CEO Letter, put firms and Senior Managers on notice that they should do the right thing now.

Useful links

Dear CEO letter

FCA expectations of general insurers

FCA 2020/21 Business Plan

FCA coronavirus (Covid-19) hub

[1] An enterprise with an annual turnover of less than £6.5 million which (i) employs fewer than 50 people, or (ii) has a balance sheet total of less than £5 million.