Everyone in the insurance industry is all too well aware that the Supreme Court has now handed down its judgement on the business interruption test case brought by the Financial Conduct Authority. Both the regulator and the defendant insurers had sought to appeal various elements of the High Court’s decision given in September 2020. That previous judgement was substantially in favour of the FCA and the subsequent appeals focused on six key issues. Once again the legal outcomes were largely in favour of the FCA’s asserted position and those main decisions can be briefly summarised:
Disease clauses – recovery is likely under these clauses if a case of Covid-19 was present in the area defined by the policy.
Prevention of access or hybrid clauses – partial closure, rather than full closure, should be enough to trigger the policy with indemnity applying from the date the business was ‘instructed’ to close, rather than the later date any formal legislation was enacted.
Causation – the ‘but for’ test need not apply when a variety of issues simultaneously combine to cause losses.
Trends clauses and Pre-trigger losses – the general impact of covid-19 would have caused losses even if the policyholder’s cover had not been triggered. However the Court ruled that insurers cannot use this argument to decrease any payouts.
Orient-Express Hotels decision – this precedent case, which some of the insurers’ arguments relied heavily upon, was deemed to have been incorrectly decided.
This final stage of the legal proceedings focused on 14 wordings underwritten by 6 insurers. For those businesses with potential claims under the affected policies this should now provide a definitive answer to whether their claims are valid and, in addition, provide some welcome guidance on how any settlement figures should be calculated and agreed.
Inevitably the majority of policyholders are not insured with the specific policies considered in the case. The very nature of a test case is not to review every possible circumstance but to provide a broad framework under which all other insurer policies can now be compared against. The FCA provides a very useful resource for verifying which policies are identical or similar to any which were within the Court’s contemplation.
The UK media and others have portrayed the case as a “a win for small business owners against the big insurers” and that is unhelpful for the industry and somewhat misleading for consumers. Although the Test Case covered up to 370,000 policyholders, there are around 6 million SME businesses across the UK and so it covers only a relatively small number of policyholders; the rest either not buying BI at all or have cover placed under a far more prevalent ‘property damage’ extension.
It is abundantly clear from the number of queries brokers have received in the days since the judgement that this has not provided a conclusive end to the process. The following are a broadly representative sample of the questions we have received so far along with our preliminary assessments and initial responses:
Should we be taking any immediate action with clients at the moment?
For those clients who have already attempted to notify claims under their policies, the FCA has within its ‘Dear CEO’ letter squarely put the onus on insurers to be proactive in re-assessing any matters already notified and contacting policyholders directly.
However it would certainly be good practice to make sure that:
- all those existing situations are recorded; and
- a plan is in place to follow-up with the insured/insurer to ensure relevant claims have been appropriately assessed; and
- any payments due are provided promptly.
Consideration will also have to be given to following up with relevant insurers about settling legitimate claims . Under The Enterprise Act insurers have a legal duty to settle claims within ‘a reasonable timeframe’ and make interim payments where appropriate. Thought should also be given to how brokers monitor insurers settlement of individual claims and whether they fall in line with expectations following the judgement.
What would the implications have been for us if we had placed a customer policy that did not cover this event and some other insurers did include the cover?
An insurance broker, like any other professional, has a duty to exercise reasonable skill and care in the provision of their services. The standard expected is of a fellow professional who is competent (not an expert) and is judged against the prevailing knowledge at the time in that industry. In terms of reasonable foreseeability a broker would need to have:
[a] predicted the global pandemic; and
[b] advised clients on the validity of claims under policy clauses which, as proven by the lengthy legal case, insurers did NOT intend to provide any cover under.
Our considered view is that to characterise those failures of foresight as ‘negligence’ would go substantially beyond the normal duty of care required of the professions.
Will this have any impact on my own PI renewal?
Systemic issues relating to claims and previously prevailing pricing meant the PI market was already hardening prior to the pandemic. The position for insurance brokers will not be helped by an industry-wide issue which has already, and will continue to, generate allegations (however ill-founded or spurious), against intermediaries. We have always advocated sustainable PI solutions with insurers proven to commit to building a long-term relationship with brokers: that is why the Griffiths & Armour scheme remains a safe haven even in difficult times.
Do we need to write to all our clients (including those that haven’t previously enquired about a Covid claim) and ask them if they want to make a claim against their policies following the Supreme Court ruling?
One of the key fundamentals of being a good broker is treating each client as an individual. If you have reason to believe that the ruling will positively affect the chances of a client now making a successful claim, you should contact them.
A blanket mailshot asking all clients to make a claim may well be counterproductive – it could generate a lot of unnecessary work and, like some of the press reporting of the case, give false hope.
We are thinking of drafting a response letter for clients and also add some website content. Do we need this approving by insurers?
If your proposed communications relate to a specific circumstance already notified under your own PI policy then absolutely that would need to be drafted in conjunction with your insurers.
If you are providing a ‘holding’ response while insurers review their own position, or generalised guidance relating to the Court’s decision, those would not be messages insurers would typically need to review. We are happy to advise you on any specific issue, as required.
Am I correct in thinking that we only need to report to our insurers any Covid notifications (old or new) in the same way as any other possible PI claim? i.e. where there is the possibility of a PI claim/dissatisfaction expressed etc. Similarly, our insurers do not need to know all declined clients Covid claims only those that we have reasonable cause to consider could give rise to being a PI claim against us as a result?
You need to review the specific notification conditions under your policy and if they raise any concerns discuss it further with your broker.
The cover specification of our broker scheme means that there is no reason to treat pandemic-related notifications differently to any other matter which may need to be drawn to the insurer’s attention.
Based on recent experience, are there any specifically recommended do’s/don’ts?
DO: refer to this guidance which is currently in draft form, final version to be released soon
DO: contact BIBA to request a copy of the Weightmans broker legal defence document which has recently been updated
DO: engage with us as early as possible in relation to your own PI cover needs
DON’T: stop doing what you’ve always done before, giving your customers timely and accurate advice on their insurance requirements.
DON’T: allow Covid-19 matters to become an overwhelming distraction. It’s just as important now as it was pre-2020 for brokers to be able to document and evidence the excellent work they are performing on behalf of clients.
Concluding Comments from Carl Evans, Partner and Group Chief Executive – Professional Risks
This remains an extremely complex and indeed delicate issue, and we must all do what we can to help and assist our customers navigate their way through. We have no doubt that Covid will continue to be a defining event in the lives of many, and will live long in the memory of everyone. It remains a reality that “the loss” in its widest sense will be both the largest insured event and at the same time the largest uninsured event to impact the modern world. In a world of “haves and have nots” many of those entitled to the benefit of an insurance policy will do so more from a position of good luck rather than by design.
The true impact on the insurance industry will clearly not be known for some time and there are many horrors still to work their way through the system. A further postponement or even cancellation of the Olympic games, for example, which has been rearranged for July 2021, has the potential to devastate the contingency insurance market. This year will be an important year for our industry on many levels and the Griffiths & Armour Intermediary team remain fully available to assist our broker clients through this period.