FCA Seeks Legal Clarity on Business Interruption Insurance  

The conduct regulator of financial services of over 58000 firms, wants the court to intervene in terms of providing clarity on specific policy terms & conditions to resolve disputes on Business Interruption (BI) insurance policies. As the businesses across the globe are completely devastated by the outbreak of the novel coronavirus, they are looking up to bailout packages from the government and insurers. Some of the businesses, such as the airline carriers might even collapse. The situation is further aggravated by declining prices of oil. The global financial markets are witnessing one of the biggest meltdowns of the century. This is an unprecedented and unseen scenario; more than 28 thousand people have died in the United Kingdom due to this pandemic.

This Financial regulator wants court intervention as 56 per cent business interruption insurance claims made by members of the British Beer & Pub Association (BBPA) were rejected. Given the current emergency inflicted by the pandemic, in a majority of the cases, the BI insurance would not be able to provide the cover. However, there are still several policies which are required to provide coverage in such circumstances. It is important for these claims to be settled quickly and in a hassle-free manner. In some cases, the buyers might have confusion about what exactly is covered under BI.

The FCA has written to smaller companies seeking their take on BI claims and expects their reply by 15 May and then it would ask them to join in the court proceedings. The main objective of the FCA is to clear the uncertainties as quickly as possible to provide greater clarity for the insurance companies and the insured.

The FCA expects that consumers are provided with temporary support in the light of catastrophe and disruption caused by the novel coronavirus. The FCA has provided guidance to the insurers, and the insurance products should cover the impact of coronavirus. In addition, FCA has asked the insurers to help the individual customers who are facing difficulties to pay their insurance premiums due to the pandemic.

Insurance more of a concept than a mere product

Insurance as a concept means to hedge against unprecedented or unseen loss which may or may not be financial. On this concept, the insurance companies have developed products which cater to specific losses. The people who opt for these specific products are known as policyholders. These products strictly define the amount of coverage, the insurers would provide against specific pre-defined losses depending upon the product purchased in return for a premium (payment is done monthly, half-yearly, annually) paid by the policyholders. There are broadly two types of insurances: Life Insurance and Non-Life Insurance. Life insurance is a product which guarantees a sum of money to the beneficiary of the policyholder, in the case of death. All insurance products excluding Life Insurance comes under the umbrella of Non-Life Insurance. The profit of the insurance companies is a function of earned premiums plus investment income.

What firms should consider from business interruption insurance?

Just like fire insurance, there might be potential risks which cannot be envisioned, but they exist. Hence, Business interruption (BI) insurance can help in mitigating those unseen risks. As most of the countries are grappling with climate change, many people consider buying Business interruption insurance to hedge against fire and windstorms.

Many policyholders just factor the risks in their policy buying decision. Only a few of them can see the full picture. They fail to analyse that the damage caused by fire or windstorm will not just damage their business premises but also, they would not be able to resume operations the very next day since the premise would be temporarily unusable.

Business interruption insurance is like an add-on cover sold with the property insurance policy and not sold as an individual product. While the factory is being reconstructed, the business model might fail and lose out to the competition in the industry. It is imperative of the company’s business to resume operations quickly and work at a peak level of performance.

In case of fire, disaster-related damage, the property insurance policy would compensate the company for lost income because of damage caused to the business premises. Now, one might think, then what is the relevance of Business interruption insurance? The Business interruption cover would have helped the company in getting the coverage for revenue, that the business might have earned had the disaster not occurred. The revenue coverage is likely to be calculated in previous years financial performance of the company. In addition, the BI insurance covers for certain expenses like electricity, water supply, even when the operations at business premises have come to a halt.

The insured companies should take enough coverage to give themselves a little cushion in resuming its operations. In case of disaster, the amount of time needed to resume operations cannot be assessed, and it can take more time than anticipated to resume operations at the damaged site.

Like many other insurance products, the Business interruption insurance also comes with a waiting period of 48 hours, only after which the companies would be able to register a claim. The price of the product is related to fire and related other disaster insurance products, which can cause potential damage to your business. However, the product pricing could be different for a factory than a pub because of different risks associated with the nature of these businesses.

The unresolved issues…

Influenza pandemic, also known as Spanish flu, had reportedly claimed nearly100 million deaths across the world in 1918. A pandemic can cause big holes in the pockets of the insurers due to the rise in the number of deaths of the policy buyers. Insurers can prepare for such pandemics by segregating the insured population into different age brackets based on their fatality rate due to the pandemic and could maintain enough reserves.

Another major issue that the world needs to resolve is that we lack adequate pandemic detection systems. The countries are struggling with medical infrastructure and availability of resources. The laboratories are not equipped to develop vaccines in a short span of time, and that’s why contagious diseases wreak havoc around the world and can aggravate the situation, in a matter of few weeks by infecting a vast majority of the population.