Posted by Ling Ong, the president of London FOIL – part of the Forum of Insurance Lawyers – and a partner at Weightmans
The last 14 months have been a tempestuous year for the insurance industry.
The impact of Covid-19 has been felt across all classes of business and in particular, travel, contingency and trade credit insurances.
In this jurisdiction, the spotlight has been on the Covid-19 litigation brought by the Financial Conduct Authority (FCA) against the insurers of 21 sample business interruption policy wordings.
In an unprecedented test case, the action was dealt with at a rapid speed. It was started in June 2020, given permission to ‘leap frog’ the Court of Appeal, and heard by the Supreme Court in November 2020 with a decision handed down on 15 January 2021.
The aftermath of this decision has presented a new set of challenges, not only for the insurers directly involved, but for all insurers underwriting this type of risk.
It has also shown how law firms may work with insurers to help meet the challenges immediately facing the industry and going forward.
First, an immediate consequence of the FCA decision was that business interruption claims which had been put on hold pending the outcome of the litigation had to be addressed. At the same time, the FCA was clear in its expectations that insurers would move swiftly to deal with this backlog and published its final guidance on 3 March.
Another complication is that, whilst the FCA decision provided clarity in some respects, each claim still had to be considered on its own merits and in light of the specific applicable policy wording.
If nothing else, the FCA litigation demonstrated in no uncertain terms the range of policy wordings which are available and the different interpretation that can be produced.
As expected, the deluge of claims means insurers’ resources were and are strained. The need for a quicker decision-making process provides additional pressure.
As a consequence, we have seen many instances where insurers have sought to involve external lawyers earlier within the claims process than normal. Lawyers are being treated almost as part of the insurers’ claims team, and handling the claims from the start through to a decision is made on policy coverage and then final adjustment.
A further advantage of retaining the same set of lawyers for all the claims for the same book of insurance or scheme is that this allows insurers and the lawyers to identify common themes arising from the claims. It also provides consistency in advice.
Secondly, the FCA decision also highlighted the different nuances that can arise from policy wordings.
To put it into context, the FCA apparently reviewed 500 policy wordings to identify 21 representative policy wordings for the test case; of which 14 were held to provide cover but seven did not.
It was accordingly acknowledged throughout the proceedings that each specific policy wording had to be considered separately and that not all policy wordings will mirror the sample considered by the court.
There is therefore every expectation that insurers underwriting this class of business will re-visit and scrutinise their policy wordings in light of the FCA decision.
The importance of getting the policy wording right is not restricted to business interruption cases. It is a fundamental consideration as the policy wording sets out the scope of the cover and the risk.
Practical, legal and commercial considerations should also be taken into account.
In this context, it should also be borne in mind that there is considerable judicial guidance on the construction and interpretation of insurance policies.
A key principle here is that of contra proferentum, which states that where there is doubt about the meaning of a contract which has been entered into on one of the parties’ standard terms, the words will be construed against the party who drafted the contract.
In other words, any ambiguity will be interpreted so as to benefit the insured.
From a regulatory standpoint, insurers have certain responsibilities in terms of Treating Customers Fairly and the FCA Insurance Conduct of Business Sourcebook (ICOBS) rules. This includes the requirement to provide and communicate information in a way which is clear, fair and not misleading.
Commercially, an obvious point is that a clear policy wording is easier to sell and to explain, and helps to maintain the insured’s confidence in their relationship with insurers.
Ultimately, the reality is that different policy wordings will produce different outcomes and this is an area where insurance lawyers can support the underwriters and their legal team.
Again, we have seen increased collaboration between insurers and their external advisers as to the development and evolution of policy wordings. This can only continue to be the case going forward.