Pandemic Policies: Financial watchdog picks bone with insurers

May 14, 2020

2 min read

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What's going on here?

The FCA, the UK’s most prominent financial watchdog, has asked the courts to clarify key test cases for pandemic business interruption insurance.

What does this mean?

In late March the UK’s Financial Conduct Authority (FCA) issued a “Dear CEO” letter (relatively rare letters highlighting issues to senior management) to insurers, urging them to act swiftly with payments and assist struggling customers. The regulator also warned that most business interruption (BI) policies with basic cover held by SMEs (Small and Medium Enterprises) do not include pandemics. 

Across the industry a lack of clarity in contracts has precipitated disputes. Each insurer sells slightly different coverage as set out in their policies (contracts stipulating the conditions in which a claim must be paid). On 1 May 2020, seeking to resolve such ambiguities, the FCA announced its decision to take key test cases to court. The financial regulator has requested clarity on policy clauses from insurers by 15 May. From these, the FCA intends to present a judge with a representative sample of commonly-used policy wordings causing uncertainty.

What's the big picture effect?

The impact of the FCA test cases could extend beyond insurers and insured in the UK: English court decisions may be relevant for other common law jurisdictions, especially Commonwealth countries such as Australia, New Zealand and Canada. Major corporates ought to be wary: the litigation landscape has developed dramatically over the past decade, levelling the playing field between consumers and corporations. Litigation funding is more established than a decade ago; since 2015, litigation funding assets have increased fourfold. By bankrolling the lawyers’ fees in exchange for a share of damages awarded, litigation funding enables more group action claimants to successfully pursue claims, and with fewer financial pressures. Technology has also made it easier to organise group action claims, even enabling crowdfunding in some cases. 

As a result of Covid-19, group litigation is poised to explode in the UK. Ambiguity in contracts has precipitated disputes. Law firms are increasingly partnering with litigation funders. Hiscox Action Group, a consortium of over 500 disgruntled policyholders, appointed City firm Mischon de Reya as lead counsel and is in advanced discussions with a litigation funder for its £50m dispute. The last month also saw key hires already being made by major law firms: one US litigation firm made 3 hires from Mischon de Reya’s practice. With insurance litigation set to increase in volume, in addition to the uptick in litigation typically seen in financial downturns, other firms would be well advised to follow suit and strengthen their litigation practices. 

To find out more about recent developments in litigation funding, click here and here.

Report written by Sophie Belcher

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