18 September 2020
On 14 September, the High Court ruled largely in favour of policyholders on the FCA’s business interruption (BI) test case. Whilst all eyes will be on the financial impact to insurers, for me, the ruling also illustrates the risks of ambiguous policy wording, and of “silent cover”.
Ambiguous wording – unambiguously bad for insurers’ reputations
Insurers are not universally trusted by the public and there is sometimes a perception that any loophole is an excuse not to pay a claim. For thousands of businesses around the country, the BI test case ruling will only deepen that sentiment.
The problem, often as not, is a difference between the intention of the underwriter when drafting the policy and the expectation of the policyholder when reading it. The ruling demonstrates that similar looking policy wordings can actually have very different legal meanings and so provide different levels of cover.
For example, the Court ruled that:
- Wording such as “interruption of business following an outbreak of a notifiable disease within X miles of the insured premises” covered the consequences of the COVID-19 pandemic at a national level, but “interruption of business as a consequence of any of the following events;… a notifiable disease within X miles of the insured premises” only covered the consequences of a local outbreak.
- Use of the term “denial of access” meant that a mandatory closure was required to trigger the policy; whereas “restriction of access” meant that only substantial interference with the business was required.
- There were also differences between policies which covered denial of access “on the advice” of a competent public authority, and those which covered denial of access “due to restrictions of” or “due to the actions of” one.
It is important to remember that these BI policies are mostly sold to small and medium-sized enterprises, where the buyer is no more an expert than the average personal lines consumer. It is not reasonable to expect SME policyholders to interpret these seemingly interchangeable phrases as meaningful variations in cover. Indeed, it is far from clear that underwriters themselves understood the ramifications of their choice of phrase.
The fact that two neighbouring businesses can purchase seemingly identical BI cover, but now find themselves with vastly different payouts at such a critical time, will only damage trust in insurers. So will the fact that the same insurers had to be taken to court before they paid out at all.
How should insurers respond?
Providing greater clarity and explanation of policy wording may help repair insurers’ reputations following COVID-19. “Treating customers fairly” has been a key FCA principle for several years. Insurers have made visible progress in the personal lines space, but this week’s ruling suggests to me that there is still plenty of room for improvement on commercial lines, particularly when it comes to clearly explaining coverage to policyholders.
Arguably payouts for business interruption due to COVID-19 are an example of “silent cover” and have parallels with silent cyber risks. Poor drafting of the disease clauses envisaged to cover highly localised disease outbreaks have inadvertently exposed insurers to pandemic type risks that were never factored into premiums. The industry responded to silent cyber risks by clarifying policy wording to either explicitly include or exclude the risk. To me, it seems likely that that BI cover providers will follow the lead of travel insurers and add explicit pandemic exclusionary wording to future policies.
The ruling will be a wake-up call to the industry. Insurers should prioritise reviews of policy wordings and put in place procedures to address the risks of further silent cover shocks in future. I would expect to see a greater focus on this type of risk in future ORSA reports, and for capital actuaries to give consideration to whether current modelling approaches reflect silent cover risks. Non-executive directors will play a key role in holding management to account for ensuring procedures are strengthened and that this sort of risk is more effectively mitigated in future.