Claims management companies could capitalise on BI insurance action

Out-Law Analysis | 05 Mar 2021 | 11:51 am | 3 min. read

Business interruption insurance (BII) policyholders have reported an increase in targeted online marketing from claims management companies (CMCs) following the UK Supreme Court's recent judgment on BII and Covid-19.

Some CMC firms are seeking a 40% cut of damages per claim, and it may be that this new source of potential revenue could lead to new competitors entering the CMC market. Courts, regulators, insurers and consumer organisations will want to closely monitor any uptick in the numbers of BII disputes flowing from the Supreme Court's January 2021 decision.

The Supreme Court's decision means that many businesses which suffered disruption and closures as a result of the pandemic may now be able to recover some or all of their losses under their BII policies. The Financial Conduct Authority (FCA) has estimated that up to 370,000 policyholders could be directly affected by the outcome of the test case.

It is also anticipated that the newfound position of policyholders will significantly increase legal claims related to Covid-19, with litigation expected to increase by 40% over the course of 2021 according to research commissioned by insurance brokerage Gallagher. The business courts have issued guidance for businesses and their lawyers in the event of a rise in BII claims.

CMCs act as intermediaries between claimants and defendant businesses. Many of these firms are already reporting a surge in claims and an increase in referrals. CMC behaviours remain a source of interest to regulators, businesses and consumer organisations alike, with a new FCA consultation on proposals to cap the amount that CMCs can charge their customers the latest in a series of regulatory interventions since the FCA became responsible for these businesses on 1 April 2019.

The Financial Ombudsman Service (FOS), which handles companies by financial services consumers in the event they feel dissatisfied with the results of an authorised firm's internal complaints procedures, is also anticipating an increase in cases related to CMCs.

What is the FCA proposing?

CMCs are regulated by the FCA and are already subject to a number of requirements. These include not approaching potential claimants in person or via emails, texts or calls unless consent has been provided. They must provide claimants with certain information, including a breakdown of costs, before taking them on; offer a 14-day cooling-off period; and explain the complaints process that claimants can use if they are unhappy with the service.

There is currently no cap on the fee CMCs can charge for their services. The FCA is proposing to introduce a cap on fees of between 15% and 30%, depending on the amount of redress due to the customer. Redress is separated into five bands, with the fee for the lowest band for claims of £1 to £1,499 capped at 30% and the fee for the highest, for claims of over £50,000, capped at 15%. The FCA has estimated that the cap could save consumers around £9.6 million annually.

Under the current proposals, the cap will apply to charges under all contracts, whether or not the contract was entered into before the rules come into force. It will apply to contracts with all types of consumers, whether individuals or businesses.

The FCA is also proposing to enhance the information CMCs must disclose to consumers at the pre-contract stage to include better fee illustrations, and clearer information about free alternative routes to redress.

Critics of the proposals are divided over whether the proposed caps are too generous to CMCs or too limiting. The consultation, which is open until 21 April 2021, will allow CMCs and others to comment on and challenge the proposals. A policy statement confirming the new regulatory measures is expected in the autumn.

What has the FOS said?

The FOS will have a role to play in BII-related complaints between both consumers and CMCs and consumers and their insurers.

The anticipated increase in insurance claims relating to Covid-19 comes amidst a growing amount of claims to the FOS, which received more than 3,500 complaints related to the pandemic in 2020, 20% of which were specific to business protection insurance, according to its annual report. The FOS is also expecting to see cases related to the impact of Covid-19 continue to rise for some time to come.

The FOS has set out its plans for managing the growing number of these complaints in its 2020 annual report and its draft plans and budget for 2020-21.

Co-written by Sarah Donnan of Pinsent Masons.