Who could forget the PPI claims scandal. It appeared out of nowhere, yet opened up the UK consumer market to billions in compensation claims. Why did it all come about? Because financial service providers failed to do their job properly.
Now, we could be seeing another claims scandal emerge.
In the wake of COVID-19, businesses are going bankrupt. Insurance policies taken out to protect corporate entities were thought to provide some safety-net against financial hardship, but insurers are refusing to make good on their promises. These denied COVID-19 payouts may not just be unethical — they may also be in breach of financial regulations and conduct.
So, could we be heading for a new mass compensation claims scandal similar to PPI?
Denied COVID-19 Payments: How It All Started
COVID-19 has presented a crisis in more ways than one.
Health and wellbeing are the biggest concerns, but the economy has felt the full force of the virus as well. Businesses have struggled with closures and lockdowns, and have sought to claim financial aid using their interruption of service policies — policies that allow them to claim revenue costs if they are forced to close for reasons beyond their control.
But insurers are refusing to pay.
The stance of the insurance industry is fairly simple but hardline:
- They will not pay because the scale of COVID-19 is unprecedented, and standard insurance policies were never designed to cope with such pressures.
- If insurers were to payout on all COVID-19 claims, they would risk bankruptcy due to the sheer volume of claims made.
After the SARS outbreak of 2002, many insurance companies adopted policies that stated they would not cover outbreaks such as COVID-19. But as time went on, and competitors fought to offer the best deals, insurers increasingly offered “no quibbles” policies, and even went so far as to say they would cover contagious disease outbreaks.
Many of these policies are not being paid out, either.
The reason given by the Insurer’s Association for these denied COVID-19 payouts is that pandemics are not the same as local outbreaks of contagious diseases and therefore are not covered in the same way by the policy. There are exceptions to the rule, as there always are. But the majority of large insurance providers deny COVID-19 payouts.
What Is the Current Situation for Denied COVID-19 Payouts?
Right now, hundreds of thousands of UK businesses face financial ruin and bankruptcy. They are making claims for support from their insurers, but as many as 71% are being denied COVID-19 payouts. Even when claims are accepted, the majority find the insurer is paying out far less than their policy states they are entitled to. Only around 1% are achieving successful claims settlements.
While the insurers claim this is fair treatment given the circumstances, their customers do not share their feelings. They argue that their policies were purchased specifically for business interruption protection. Since their businesses have been interrupted, they are owed the payouts promised as part of their insurance agreement.
Business owners have paid the insurance premiums, in many cases for years, which they feel entitles them to a settlement. Some businesses are taking legal action against insurers for their activities. This action is not specific to the United Kingdom either. Very similar cases are unfolding in the United States, where insurers are also facing court proceedings for their conduct.
In the USA, things are moving in the insurer’s favour because US legal processes are very clearly defined by written contracts. In the UK, financial regulations are a bit different, which means businesses have a much better case to challenge denied COVID-19 payouts — even if their policy doesn’t include contagious disease cover.
Does a Scandal Loom for Insurance Companies?
The PPI claims scandal brings to light an important issue. It was within the fine print of the contracts sold to individuals that payment protection insurance was to be taken. Contractually, no law was broken. However, the scandal came about because while the contracts were sound, they were mis-sold.
Financial organisations like insurers and banks — those that trade in financial services — are regulated by the FCA (the Financial Conduct Authority). The FCA makes clear that those providing financial services are to provide an honest and transparent service that is in the best interest of their customers. They cannot feed them lies to secure better deals or give them inaccurate advice.
This is what happened in the case of PPI. Banks effectively told borrowers they needed payment protection insurance when they didn’t, and thus people were able to claim back their money due to the FCA’s rules on financial conduct.
Denied COVID-19 payments may well fall into the same category.
Businesses took out insurance and routinely paid premiums on business interruption insurance on the assumption they would have protection. This protection has been denied, leaving them shocked and surprised they don’t have support. This could mean businesses did not receive accurate or transparent advice on how the insurance would cover them.
What this does is create a legal grey area.
The COVID-19 Insurance Claims Scandal: What Happens Next?
We’re currently teetering on a knife-edge and we don’t know which way we’ll fall when the wind finally blows.
The UK Treasury Committee is urging insurers to make good on their policies. At the same time, the FCA has put out a clear warning to insurance companies to pay up or face an investigation by financial watchdogs.
Despite these calls, insurers are remaining steadfast in their denial of COVID-19 payments — which they are well within their power to do, thanks to the legal grey area.
There are legitimate arguments in both corners:
- Insurers — This is an unprecedented time for insurance companies. When they sold coverage, they did not expect every single one of their consumers would try to claim huge amounts in one go. If they were to payout, they would surely face massive financial losses and potential bankruptcy themselves. In many cases, there are no stipulations in contracts about disease outbreaks, let alone global pandemics.
- Consumers — They bought insurance and paid premiums based on the notion they’d be protected from service interruption. Some even paid extra or specifically took out insurance policies that covered contagious diseases. Others were under the impression they had protection when they didn’t. But under the regulations of the FCA, this means the insurer could still be liable.
Given the warnings of the FCA and the support of consumers by the UK government, it is anticipated that we’ll end up seeing cases go in favour of the consumer and not the insurer. Once one case is successfully won, a landslide of cases will quickly shift the landscape.
However, until the first domino topples, the rest stand tall.
As of writing in July, the FCA is taking a test case to the High Court. The result of the test case will be used to shape all claims and settlements following its resolution.
Denied COVID-19 claims could open the floodgates for business insurance claims. Even after the final ruling of the FCA test case, there will still be disputes. Claims management companies should prepare for an influx in claims now by adopting claims management software to their business. A powerful software tool, LogiClaim can automate claims processes for more streamlined claims management.
