Member Article

COVID-19 Compensation Claims: Are We Heading for a New PPI Scandal?

Even if you weren’t directly affected by the PPI scandal, you’d have been aware of it. A massive controversy that rocked the banking and loans industry, mis-sold insurance premiums saw consumers reclaim billions from lenders.

It was hard to imagine any scandal gripping the compensation claims sector in quite the same way as the PPI debacle, but in the wake of the COVID-19 crisis, that is exactly what we might end up seeing.

What’s the Current Situation?

Following the SARS outbreak of 2003, some insurance companies put into place certain clauses that protected themselves against further outbreaks — such as COVID-19. The idea was that on everything from travel to business insurance, insurers would be protected from mass claims that could collapse their funding structures.

The keyword here is some.

Not every insurer made this change. And even if they did, some policies were exempt or made no mention of coverage not applying to such circumstances. Some policies also expressly stated that payments would be made in the event of financial loss due to the spread of disease that caused closures. What basically happened here was that the rise of the “no-quibbles” policy attempted to take advantage of a competitive market.

And then COVID-19 hit.

In a sweeping move across the industry, insurers came out en masse to state they would not be providing compensation for businesses and private individuals affected by the COVID-19 crisis.

The excuse?

Experts claimed that if insurers were to pay out on all claims made because of COVID-19, the industry would go bankrupt. The sheer volume of claims submitted was not financially sustainable, and thus the sector came out in collective solidarity to say nobody would receive payments. This was true of providers that had stated their policies did not cover such outbreaks — and those that had either stated they did or had not said they didn’t.

Are Insurers Acting Illegally?

What many insurers (it should be stressed, not all) have done is effectively moved for herd protection. Acting as one, they put a blanket statement out on COVID-19 claims. Insurers are using the unprecedented circumstances of this global outbreak to deny payments, claiming policies don’t cover such changes as mandatory lockdowns by parliament.

The problem is: it’s a legally grey area. Fine print can be a fickle thing.

The insurers argue they have not expressly stated they’ll cover a crisis such as COVID-19, so they are not obliged to pay. They say their cover was never intended to deal with such a wide-scale pandemic situation because it’s not a normal situation and therefore is not covered under typical policies.

The argument of the consumer, however, is they were covered for the effects of the emergence of COVID-19. Some policies even explicitly state that they include the results of the spread of disease. This means the insurer should cover them — even if the reference to “spread of disease” were intended only to cover local and isolated incidents, and not a worldwide pandemic — as these types of policies do not state otherwise.

Many business owners are already taking legal action against insurers not paying out, and the Financial Conduct Authority is starting to urge insurers to pay fees or face the consequences. Support appears to favour the consumer, with media outlets also backing their position.

But that isn’t enough to save companies. At such a time of uncertainty and economic instability, it seems unlikely the immediate impact of insurers’ decision not to payout is going to be widely acknowledged. Quite simply, the direct threat of COVID-19 to life and health is drawing attention away from more peripheral problems like insurance claims. The result is unpaid claims, and businesses closing.

But this COVID-19 smokescreen won’t last.

As with the PPI scandal, the service provider has an obligation to its customer. They are required to be clear and transparent with how they manage an account and do so in a reasonable way. By flouting reasonable grounds for payment under contract agreements, they not only flout the legal system around which the contract is built but the regulations under which they operate. Insurance is a complicated business, and regulators are in place to ensure providers conduct themselves in a way considered honest and fair to the consumer; a service that acts in their best interests.

The treatment of consumers under COVID-19 is unlikely to be considered fair, or at any point working to secure their best interests.

If an insurer has provided coverage in which they claim they’ll payout under the circumstances resultant of COVID-19 — even if they’ve not directly stated as a result of a global pandemic — they are liable to pay the agreed compensation terms. By not paying out at all, they risk being found in breach of contract, as well as going against the regulatory standards set out by governing bodies to protect industry fairness.

Denial of these policies, many argue, is denying people and businesses money they are legally and morally owed. The purpose of insurance policies is to provide cover in exceptional circumstances — exactly what COVID-19 has caused.

This regulatory problem was the exact catalyst for the PPI scandal that began back in 2004. Technically, the banks that sold PPI were acting within the law, but what they were doing was considered profiteering and going against consumers’ best interests. This behaviour was in breach of regulations and thus, the scandal unfolded.

A Future Scandal Looms

Right now, it’s easy for insurers to say “no” to claims. They are protected by the chaos wrought by COVID-19 and the legal grey areas that come with such unprecedented circumstances of a global pandemic and government-enforced lockdowns.

Yet, that doesn’t mean it’s over. As with PPI, this is set to be a drawn-out affair.

Insurers are currently not acting within regulatory standards. Businesses are failing without insurance protection they believed made them secure. The interests of the consumer are being sacrificed for profit margins, and that — as we’ve seen through the PPI scandal — cannot just be swept under the rug.

People are aware. Legal action is being taken and watchdogs are taking notice and issuing warnings. Failure to comply is going to mean one thing: a new compensation claims scandal. As with PPI, people will start taking action into their own hands, making legal claims for the compensation they are owed.

Yaakov Smith — Director of Logican Solutions, a provider of claims management software for CMCs — suggests we could see a large-scale campaign for compensation claims in a post-COVID landscape. “It’s not just one or two valid insurance claims going unpaid during this crisis; it’s hundreds if not thousands. We won’t see the full effects until we’re on more stable ground, but once normality resumes, those dodging payouts will struggle to hide. At the moment, it’s all just white noise in the background of the COVID-19 crisis, but you can’t silence ruined businesses and out-of-pocket individuals forever. Unless insurance companies reverse their stance soon, we’ll likely see a deluge in legal compensation claims for unpaid cover.”

This was posted in Bdaily's Members' News section by Logican .