It is fair to say that the commercial insurance world has been rocked by the pandemic. Garon Anthony looks at just some of the issues arising out of the global COVID-19 crisis
Extensive coverage of the debate between insureds and insurers over business interruption insurance has played out in the media over the past months. Some insureds say that BI insurers are trying to avoid paying out on meritorious claims, and are taking advantage of complicated policy wordings to defeat businesses that are already in financial trouble.
Whilst insurers respond that BI policies were never designed to respond to losses caused by pandemics, that COVID-19 does not cause property damage and that policy wordings do not envisage such coverage for non-damage business interruption losses. Back in May, the Financial Conduct Authority intervened in the debate in an unprecedented fashion, when it announced its intention to ask the High Court for a declaration on an urgent basis to try and help resolve the ongoing uncertainties around non-damage related BI insurance cover. The FCA said it is bringing a unique test case because of continuing and widespread concerns about the lack of clarity and certainty for those making BI claims, and the basis on which some insurers are making policy coverage decisions.
Whilst accepting that court proceedings will not encompass all BI policy coverage disputes, the FCA hopes that they may resolve some contractual uncertainties to assist insurers and insureds in unlocking claims. The FCA have stressed that its test case will not prevent policyholders from pursuing their own litigation through the court (many group actions are now up and running) or complaints by individuals and SMEs to the Financial Ombudsman Service.
Battle lines have now been drawn between the FCA and the eight defendant insurers over the correct interpretation of specific BI policy wordings and trial in the High Court started on 20th July 2020.
Whatever the outcome, the case will have a very significant impact on those businesses that have suffered non-damage BI losses and on the insurance industry more generally in the future. Such may be the significance and financial impact of the court’s decision that the case may end up in the Court of Appeal or even the Supreme Court in the months ahead.
It has been reported that UK insurers paid out £315 million to help firms cope with bad debt in 2019. But the market has been hit hard by COVID-19. Some trade credit insurers pulled lines of credit on individual customers (especially in the retail sector) or refused new insurance cover altogether.
As at April 2020, the UK’s trade credit insurers provided cover for £171 billion of business activity, covering 13,000 suppliers and 650,000 buyers, according to the Association of British Insurers.
It was, then, to the relief of businesses across the country that the Government and private sector insurers agreed in June to a landmark £10 billion support scheme, offering companies the benefit of credit cover as they emerge from lockdown.
Welcomed by the ABI, the first of a kind scheme will cover 90 per cent of B2B trade credit insurance transactions until the end of this year, with a review at the end of September on potentially extending it. Trade credit insurers will share 90 per cent of their premiums with the state. All UK-domiciled businesses with a trade credit insurance policy are covered for both their domestic and export trade.
In it together?
At present, litigation by businesses around losses caused by COVID-19 may still be deemed impolitic and certainly jars with the general sentiment that we are all in this crisis together. However, the experience of the global financial crisis tells us that this will not be the case for long.
Financial imperatives will start to weigh in the balance and shareholder activism may be on the rise again looking for compensation in respect of dramatic share price falls in March and April 2020. And regulators are already starting to look at how well firms and their directors prepared for and responded to the pandemic and how they treated their customers.
Regulatory investigations and enforcement action are bound to follow shortly. All of this may well lead to an uptick in D&O related claims.
We have already seen examples of this in the US where a class action has begun against, amongst others, the directors of Norwegian Cruise Lines for potentially misleading statements made about the impact of COVID-19 on its ability to trade.
Market volatility and reduced staffing levels means that some regulated entities will inevitably have failed to comply with their disclosure obligations. This may lead to litigation against directors and possible regulatory intervention.
The same is true for directors of companies who are found not to have had robust business continuity plans or overstated their ability to weather the Covid-19 storm thereby causing investors to suffer losses.
Indeed, it may be inevitable that regulators across the piece will start asking tough questions of companies and directors as to how they prepared for and managed their company’s response to the pandemic.
By way of example, the FCA has been in regular contact with the financial services community as to its expectations of how companies and directors should be treating customers fairly in a time of crisis. If anyone in that community has not been listening properly to the FCA, then this will lead to increases in the number of investigations into directors’ conduct and enforcement actions and with that more claims under D&O policies.
Other lines of cover
COVID-19 is also likely to lead to an increase of cyber liability insurance claims. That is because the cyber criminals are keen to capitalise on the crisis and there has been a marked increase in the number of attempts to defraud companies via push payments or phishing.
That is compounded by the fact that cyber security arrangements may not be as robust when people are working from home and may not enjoy the full benefit of the company’s firewall or software updates. Working from home also raises an enhanced risk of data breaches. All of this gives rise to the possibility of companies suffering financial consequences of cyber attack and needing to claim under their cyber liability policies Claims under professional indemnity insurances are also likely to increase as a result of COVID-19. Again, the Financial Crisis taught us that people will hold firms responsible for the consequences of investment fall. World stock markets plummeted in March 2020, and we may well see an uptick in the number of claims against financial institutions and advisers alleging product misselling and with that claims under professional indemnity policies.
If businesses suffer from a declined insurance claim, then inevitably questions will be asked over the advice that was given by the insurance broker. Brokers owe contractual and tortious duties to their clients to use reasonable skill and care to obtain insurance cover that meets their clients’ needs. They are also subject to the conduct of business rules in the FCA’s Insurance Code of Conduct sourcebook.
One of the FCA requirements is for brokers to assess the client’s demands and needs and the suitability of the insurance.
So an insured who has suffered a declined claim may well ask was the insurance consistent with what the insured requested or instructed the broker to procure or with what the broker described?
Many of these issues may be highly fact sensitive, depending on the nature and extent of the broker’s retainer and how much advice on insurance issue the client expected to give.
But, for example, did the broker properly consider and advise on insurance for pandemic risk? That would be especially relevant in the early part of this year as COVID-19 was reported as transpiring in China at the end of December 2019 and was declared a Public Health Emergency of International Concern on 30th January 2020. Did a broker turn his mind to these issues when providing insurance advice to the client, particularly having regard to the nature and geographical extent of the client’s business?
One can readily foresee an increase in the number of negligence claims against insurance brokers in the wake of declined insurance claims/policy coverage dispute and with those, more claims under brokers’ errors and omissions insurance.