BI test case: If the FCA wins, everyone loses

This article by Pollyanna Deane and Chris Finney was first published by Insurance Day on 11 September 2020.

The judgment is to be handed down on September 15. It would be a mistake to think the fallout will be restricted to the business interruption insurance market.

The Financial Conduct Authority’s (FCA) business interruption insurance test case against eight general insurers has kept the London market on tenterhooks. 

The Hiscox and Aviva action groups marshalled policyholders in an attempt to try the insurers in the court of public opinion. And the FCA joined the fray on the policyholders’ side, damaging its reputation in the insurance market considerably. Why? Because it is taking so many issues against so many insurers, in such an aggressive way, that it is difficult to see how anyone will win in the end, if the FCA wins now.

It is certainly fair to say that other countries’ regulators, when asked, think the FCA is being foolhardy, not only because an FCA win in the litigation will inevitably lead to an FCA loss in every other respect, but because it is acting in such a rabble rousing way. Why did the FCA choose to do this; and why did eight insurers agree to participate?

The FCA’s public position seems straight forward. According to Christopher Woolard, its interim chief executive, the test case was “designed to resolve a … number of key issues … as promptly as possible and to provide greater clarity for all parties”.

The insurers’ position is more complex. For some, it is better to be involved in the litigation and to have a voice, than to watch from the side lines and be stuck with the result. For others, it is better to put the matter before the courts, where the results are likely to be predictable and well reasoned, than to risk a deluge of complaints to the Financial Ombudsman Service (FOS). Why? Because the Court will stick to the law, whereas the FOS will only take the law into account. The Court is also widely seen as impartial, where the FOS is more likely to be the consumer’s champion.

The FCA is certainly running some novel legal arguments. For example, the FCA, the Prudential Regulation Authority  and a small group of insurers met representatives of HM Treasury in March, and an “agreement” was reached: if the insurers received a claim, they would pay it, if the only reason not to do so was that cover depended on a public authority making an order, and no order had been made. That agreement might bind the insurers that were there. The FCA seems to think it should also bind the insurers that weren’t there, and the FOS might well agree.

Bruce Carnegie Brown, the chairman of Lloyd’s, called for greater focus on contract wordings, an argument that would be anything but controversial in more normal times. 

Appeal

So, what happens next? The court’s judgment will be handed down on September 15 and there will almost certainly be a “leapfrog” appeal to the Supreme Court – so much for clarity and speed.

If the FCA wins in the Supreme Court, the market will be forced to pay claims it did not underwrite, reserve for or expect to pay, and that will materially reduce insurers’ reserves. 

The court will have made findings that turn decades of law and insurance practice on their heads. Policies will have to be rewritten and are likely to be longer and more complicated than the FCA (or consumers) would like. Fewer insurers will be willing to write business interruption business, and prices will inevitably rise. If some insurers are also forced into run-off, capacity and competition will be reduced, and premiums will increase even more. 

Who would want to do business in the UK, after that? After all, a regulator that’s legally obliged  to balance the interests of all stakeholders, to secure an “appropriate degree of protection” for consumers, to maintain market stability, and enhance competition, will have acted in a way that suggests that policyholder protection is the only thing that counts, and the rest doesn’t matter. Things are difficult enough in a pandemic, no-one needs a buccaneering regulator and legal and regulatory instability as well.

And if the FCA loses? That would be embarrassing, for sure. So much cost, so much fuss, and red faces all round. And another reason not to come to (or stay) in the UK. If the regulator is prepared to go to these lengths and loses, will it be more circumspect next time, or just more determined to be seen to be trying to do the right thing?

Either way, it would be a mistake to think the fall-out will be restricted to the business interruption insurance market, or the insurance market. If the FCA wins, everyone will lose in the end. And if the FCA loses, no-one will really win. Anyone for another test case?