Philippa Handyside, Director and General Counsel, responds to questions on the impact of legal challenges, including Pru-Rothesay, the FCA test case and Part VII transfers
As we await a decision in the FCA test case, what would you say is at stake for the industry?
This is a really important case that shines a light on whether policies are matching customer expectations and whether customers are sufficiently involved with the buying process. Insurance is rarely an enthusiastic purchase and there is a question about whether businesses – and small businesses, in particular – are able to engage with what can be quite complex risks and coverage.
There are 21 wordings at issue in this case, which have required the input of armies of lawyers and several judges. This fact alone must point to a complexity that must be difficult for businesses to navigate. The importance of insurers learning lessons, not just for business interruption (BI) cover, but for insurance more generally, could not be greater.
What has the ABI done in this case?
Before the case formally began, the ABI worked closely with the FCA to frame the process and the parameters of the dispute. In doing so, we convened our members, acting as the single point of contact. After individual insurers were named as defendants, we served as the link for firms not directly involved, both in terms of the conduct of the case and the regulatory requirements around it. The FCA released guidance about what firms should do, and when, regarding the key milestones in the case, and we worked with our members and the FCA to make sure these were realistic and helpful for customers.
What is likely to be the main impact of the case?
In the first instance, every firm will be analysing the judgment and reviewing their decisions on claims to make sure they were correct. Beyond that, I suspect there will be a much wider review of business interruption and other products, to see whether the cover is providing exactly what insurers intend it to provide.
Another big case recently has been the Pru/Rothesay decision on Part VII transfers, on which the Court of Appeal overturned the judgment of the High Court. What’s your view on this outcome?
We are very pleased the appeal was successful, for several reasons. The court’s role is to consider whether to approve transfers of insurance business (Part VII transfers) only after an exhaustive technical analysis by the regulators and an independent expert to determine whether there is any chance of detriment to customers. When the High Court refused to sanction this transfer in August last year, it was essentially preferring the court’s and a small number of objecting customers’ subjective opinions of the comparative resilience of the transferor and transferee to the detailed, informed technical analysis performed by the experts.
Had that been allowed to stand, customers could have ended up worse off, because they might end up staying with a firm that no longer specialises in their business. From the firms’ point of view, it might mean they’re locked into servicing a small group of customers for the next 40 years, irrespective of what their business plans might be. The chilling effects on efficient deployment of capital would have been profound.
The ABI intervened to argue that Part VII transfers are a safe and effective process, which, – when combined with the ongoing regulatory requirements of firms – afford stringent policyholder protections. In allowing the appeal, the Court of Appeal restated the primacy of the views of the independent expert and regulators as regards the security of financial benefits for policyholders. Any wider factors to which the court can have regard must not include the potential for any non-contractual wider financial support or the policyholders’ original choice of firm on the basis of its age and venerability. The Court of Appeal thereby restored welcome predictability and objectivity to this important legal process.
What was the role of the ABI in this case?
The ABI’s Board supported an intervention in this appeal because of the implications for ABI members in terms of long-term business planning and their ability to service customers in an appropriate way. As such, we made representations on behalf of the entire industry in support of a process that we feel generates predictable, clear and positive outcomes for customers and the industry.
Do these cases suggest a trend towards litigation in the insurance market?
While the unprecedented nature of the pandemic might lead to further cases on the precise extent of coverage, I don’t see a wider trend towards litigation. The Financial Ombudsman Service (FOS) now has greater jurisdiction over consumer and small business disputes, which, in fact, nudges in the other direction. The FOS decides cases on the basis of what is fair and reasonable in all the circumstances, which reduces the room for legal disputes about the legal meaning of policy language.
What do these cases say about the importance of managing the public narrative?
The public narrative is so often framed around insurers refusing to pay out on legitimate claims. However, the test case is all about whether insurers should pay out for long-term pandemic disruption when they only charged premiums for short, sharp business closure. To the extent insurers are told to pay BI claims by the Supreme Court, they will be doing so without having charged any premium – so, the ‘normal narrative’ simply doesn’t apply here. The vast majority of business interruption policies cover everyday risks such as fire, theft and flood, and there is no question of pandemic cover, which would cost many times more. Instances such as this require the ABI to communicate with the public and parliamentarians, to ensure the narrative reflects the reality.
Alongside all of this, you’ve also been overseeing work to return the ABI team to the office after the lockdown. How has the ABI adapted to this?
Fundamentally, the ABI is all about relationships, so switching to online working has involved an enormous change. We’ve done really well to continue offering a broad spectrum of engagement opportunities while making a virtue of the new virtual environment. For example, we’ve provided webinars and online events to keep members informed, providing an important forum for discussion in these challenging times. Virtual capabilities enable you to engage with more people, more often and more easily.
Working from home can be difficult, and it’s been our pleasure to reopen our office in a Covid-secure way to provide a facility for people who are unable to work from home. Overall, I think the ABI’s crisis response has been hugely effective, highlighting the importance of working together. Like many others, we’ve faced unprecedented and unforeseen challenges – I’d say it’s been our hardest year, but also our best.