Insurers lose landmark UK business interruption case
Insurance groups in the UK face a hefty bill after the Supreme Court today ruled in favour of small businesses in a complex test case over business interruption claims.
As many as 370,000 small business policyholders could be in line for a payout following the ruling at Britain’s highest court, the Financial Conduct Authority (FCA) estimates.
Policyholders claimed they had wrongly been denied payouts from their insurers. They said business interruption (BI) policies, which protect them against losses if they are unable to trade due to an unexpected event, should compensate them for the downtime associated with last year’s COVID-19 lockdowns. Many policies are limited to property damage, though some go further and protect against losses caused by spreading infection and disease or closures imposed by public authorities.
Insurers argued, however, that the policy wording did not include coronavirus, and they could not be reasonably expected to cover government-imposed business closure, or various other impacts caused by a global event as unpredictable and impactful as last year's outbreak.
Judges reject appeals
In September 2020, the Financial Conduct Authority (FCA) assembled a sample of policy wording from eight insurers and convinced judges that many were liable to make payments. Appeals by insurers were subsequently launched, but were today shot down. At the conclusion of a complex case, judges rejected appeals from six major insurers - among them Hiscox, MS Amlin, and Arch Insurance - instead finding in favour of tens of thousands of small business policyholders that launched challenges as part of the case.
What today’s ruling means is clarity specifically on 14 types of policy issued by six insurers, as well as similarly worded policies in the wider market. It is understood around 700 policies issued by 60 different insurers will be affected. It will lead to successful claims that could cost the insurance industry at least £1.2bn, though some analysts believe the amount could be much higher.
Claims roadblocks removed
“Today’s judgment decisively removes many of the roadblocks to claims by policyholders,” said Sheldon Mills, Executive Director, Consumers and Competition at the FCA. He said the ruling would positively affect tens of thousands of businesses and the potentially hundreds of thousands of jobs that rely on the payouts.
“We will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible,” Mills added. “Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.”
Michael Cotter, a financial services lawyer, warned that although today’s decision provides greater clarity for policyholders, it does not mean their individual outcomes will be “clear-cut”.
"Businesses would be best advised to get their specific policy reviewed so that they can receive legal advice on the status of their position,” he added. "Further, any business who has been told by their broker or insurer that they do not have a valid claim should now get their policy re-reviewed by an expert and may want to seek legal advice.”
Today’s ruling is another blow to the insurance industry, which faces significant hardship in the short to medium-term after the fallout of last year.
FCA bans ‘price walking’ for insurers from Jan 2022
Insurers will no longer be allowed to raise premiums upon annual customer renewals following a new ruling by the Financial Conduct Authority (FCA)
The new move, which comes into effect in January 2022, will directly affect people renewing their home or motor insurance because they will pay no more for their premiums than a new customer.
The FCA said the change will save loyal customers an estimated £4.2bn over a 10-year-period. However, it also admitted the move could mean cheaper deals for new customers can no longer be sustainable for insurers attempting to attract business.
Price walking practices ended
According to reports, the FCA has been working on changing the rules on ‘price walking’ as it is termed, because customers are charged more their annual premiums, even though their level of risk remains the same. The system has resulted in complaints from consumer groups that loyal customers pay more unnecessarily.
"These measures will put an end to the very high prices paid by many loyal customers. Consumers can still benefit from shopping around or negotiating with their current provider, but won't be charged more at renewal just for being an existing customer."
Victory for the customer
Consumer groups have hailed the change as a victory for customers who have ended up paying higher premiums unnecessarily, but admitted it presented huge implications for insurers in the short term.
Consumer Intelligence CEO, Ian Hughes said, “These changes represent a tsunami for both insurers and their customers, but we should be in no doubt that the fault line that sits underneath this is fair value, mentioned 153 times in the final statement. GIPP changes will feel like just a ripple for those who don’t offer fair value to customers."
He continued, “This is going to be a bumpy ride for insurance brands and consumers alike in the short term. Today, the FCA has revealed that cash and cash-equivalent incentives, other than toys and carbon off setting, cannot be used to entice new customers without being offered to renewing customers. This means the savviest consumers who shop around each year will see prices rise and discounts and offers disappear.
“However, there is an opportunity for the industry to take advantage of all this change that is coming and do something that will be good for brands, good for the industry and good for consumers."
Consumer Intelligence PR and communications manager, Catherine Carey agreed, and described the victory as “a shot in the arm for innovation.”
Carey said the move “presses a giant reset button on the relationship between price and value, it will change the relationship between brands and consumers.”
She explained, “We expect to see insurers changing their models and new firms entering the market for the first time as loss-making year one pricing phases out. If you look at these new rules, and specifically the introduction of fair value, it’s the most exciting time for the development of the general insurance market for decades.”
Hughes also warned against insurers resisting the regulatory change, “Those that don’t take advantage of the opportunity are going to find it really tough.”
He added, “The tipping point we find ourselves at today is a critical point in the journey of this industry and there is an opportunity to be positive.”