Overview
For additional guidance, please refer to Steptoe's COVID-19 Resource Center.
In a series of recent statements, the UK Financial Conduct Authority (FCA) has set out how it expects the insurance industry to help consumers and businesses affected by the coronavirus.
The statements[1] include the following points:
- Where a policyholder's circumstances have temporarily changed due to the coronavirus, the insurer should not penalize the policyholder for the change by enforcing policy terms strictly. For example, if a home insurance policy does not usually cover persons who work from home, but the policyholder had to work at home due to the lockdown and a fire occurred as a result of the policyholder being distracted by work, the FCA may expect the insurer to pay the claim.
- Insurers should consider what other steps can be taken to treat their customers fairly, including assessing whether insurance products provided the expected value for money, and possibly offering premium refunds or continuing to hold policyholders covered while premium remains unpaid. A major motor insurer has recently agreed to provide refunds of £25 to every policyholder because vehicle usage has reduced during the lockdown.
- The FCA would like to see a degree of consistency across the industry in how business interruption claims are handled. To help to achieve such consistency, the FCA is planning to ask the English court to make declarations about the scope of various business interruption (BI) clauses.
At this difficult time, policyholders will welcome the FCA's approach. Insurers will want to treat customers fairly, but the statements give rise to various issues for insurers. We highlight in this note three very different legal areas where issues can arise: reinsurance, competition law, and rights under investment treaties.
Reinsurance
The FCA statements will lead to claims being paid which, on a strict reading of the policy terms, are not covered. The question arises whether the insurers will be able to recover such payments from their reinsurers. As always, much will turn on the relevant reinsurance wordings, but as a practical matter it would be prudent for insurers to agree with their reinsurers how claims are to be treated where they are not within the policy terms but are made to comply with the FCA's expectations (or, indeed, simply to maintain the goodwill of customers).
Reaching such agreements should avoid situations like Hiscox v. Outhwaite [1991] 2 Lloyd's Rep 524. In that case, insurers made payments to asbestos producers using an agreed mechanism and formula: the mechanism and formula were entered into for very sound commercial and financial reasons (to greatly reduce the overall amount spent on claims and to process claims quickly). Nevertheless, the court ruled that insurers were unable to recover from their reinsurers because they could not prove that there was liability under the original insurance policies.
The FCA statements will also lead to insurers making changes to their existing insurance arrangements, including offering refunds to policyholders. Questions will arise as to how these impact on existing reinsurance contracts. For example, where an insurer makes a payment to a customer after concluding that a policy was of less value than expected, is that payment to be treated as a return of premium (in the same way as a return of unearned premium on a policy cancellation), or as a regulatory overhead of the insured? Again, much will turn on the relevant reinsurance wordings – and again, the prudent approach is likely to be for insurers to seek agreement with their reinsurers as early as possible.
Competition Law
The FCA has stated that it "want[s] to see a degree of consistency for customers" in the way that coronavirus-related claims and situations are dealt with.
Insurers could understand this to be setting out a desire by the FCA for cooperation between insurers on this issue (and not merely a reference to the FCA's plan to ask the court for rulings on the meaning of certain BI wordings). It is critical for insurers to remember that UK and EU competition laws prohibit agreements, arrangements and understandings between businesses which have the object or effect of restricting competition. Collaboration between competing insurers on, for example, the treatment of claims (i.e., acceptance or rejection of future claims) could fall foul of the competition rules.
Infringement of this prohibition is punishable by fines of up to 10% of the annual worldwide turnover of the insurer's entire corporate group. In competition law, it is not a defense that the infringement was well-intentioned, nor that it was encouraged by a state authority (although it may be a mitigating factor when setting the level of any fine). There are many examples where industries behaved in a manner which was encouraged by national authorities but were subsequently condemned by competition authorities.
The FCA has confirmed to us that the statement "was not intended to suggest that insurers should coordinate their responses to the coronavirus situation in breach of their competition law obligations. Rather, the reference to the FCA wanting to see 'a degree of consistency for consumers' reflects the FCA's expectation that all insurance firms should be considering their obligations under our rules to provide fair customer outcomes in light of the ongoing Coronavirus situation. Firms should be assessing the position of their own customers/products taking into account the expectations set out in any FCA guidance and identify any appropriate actions to take."
The FCA's response is a timely a reminder that even during the crisis, each insurer is still individually bound to comply with the competition rules. Whilst a safe path of coordination might well be lawful, it needs clarity: a clear pro-competitive objective, careful planning, transparent and inclusive engagement and record-keeping and guidance throughout.
Bilateral Investment Treaties: Expropriation and Fair and Equitable Treatment
One effect of the FCA's statements is that the UK insurance regulator is (by reference to the duty to treat customers fairly) effectively imposing an obligation on insurers to pay claims which are outside the scope of those which they contracted to pay.
Where foreign investors in a state suffer losses as a result of action attributable to the state, e.g., an expropriation of the investor's assets, the investor may be entitled to claim damages if there is a bilateral investment treaty (BIT) between the state and the investor's home state. Such treaties are agreements between states under which investors from each state are given certain rights and protections when investing in the other state: these usually include rights (1) not to have assets expropriated without prompt, adequate and effective compensation and (2) to be treated fairly and equitably. Over the last 30 years, BIT arbitration tribunals have ordered compensation to be paid to many companies, including some of the world's leading insurers, for breach of those protections.
The FCA is an independent, non-governmental body, but it is mandated by the UK Government (under the Financial Services and Markets Act 2000) to maintain the integrity of financial markets in the UK. It is arguable that its acts should be deemed to be those of the UK and therefore covered by BITs entered into by the UK.
It is also arguable that the FCA's requirement to pay claims which are not actually covered under a contract amounts to a confiscation of an "asset" (namely the value of the insurance contract to the insurer) and that it fails to treat investors fairly and equitably (in that it does not fulfil the investor's legitimate expectations).
In summary, where an insurer is incorporated in a country which has a BIT with the UK, there may be scope to claim that the FCA's approach amounts to a breach of the treaty, depending on the terms of the treaty in question and a more detailed examination of the scope of the FCA's approach.
[1] The FCA statements:
- Insurance and coronavirus (COVID-19): our expectations of firms
- FCA statement - insuring SMEs: business interruption
- FCA seeks legal clarity on business interruption insurance alongside package of measures to help consumers and small businesses
- Product value and coronavirus: draft guidance for insurance firms
