INSURANCE BROKERS AND THE COVID-19 PANDEMIC: PROBABLE RISKS OF CLAIMS, BUT UNCERTAIN SUCCESS FOR POLICYHOLDERS
According to a recent article published by S&P, “Broker lawsuits are inevitable in virus claims war, but their success is not”. The coronavirus pandemic has led to widespread disruption and business closures resulting in substantial financial loss. Many customers have made claims for these losses under their BI insurance policies. For this type of claim, many European insurers have so far declined cover, leading policyholders to sue their broker in order to be indemnified. However, it will be difficult for them to prove that their insurance broker has not met his duties.
A major problem arising from the Covid-19 pandemic is that of the policy wordings in place. Indeed, most SME policies only cover property damage and have basic cover for BI as a consequence of property damage. Nevertheless, some policies also offer cover for BI arising from infectious or notifiable diseases (a notifiable disease is any disease that is required by law to be reported to government authorities) and non-damage denial of access and public authority closures or restrictions. In some cases, insurance companies have accepted liability under these policies, but others have refused to do so, leading to widespread concern about this lack of clarity.
In France and the UK, local supervisors undertook various initiatives to remove doubt as to whether insurance policies were intended to provide coverage for financial losses resulting from the Covid-19 pandemic:
- In the UK, the High Court has delivered its judgment in the Financial Conduct Authority’s (FCA) test case over disputed UK Business Insurance coverage in light of the Covid-19 (coronavirus) pandemic. This test case marks an attempt to provide more clarity and reduce the amount of litigation around this issue. The test case is not intended to encompass all possible disputes, but to resolve some key contractual uncertainties. The FCA’s role was to put forward policyholders’ arguments to their best advantage, and the regulator selected a representative sample of policy wordings written by eight insurers. The Court found in favour of the arguments raised by the FCA on most of the key issues. That’s the reason why most of the test case’s participants decided to file for an appeal. On 2 October, the High Court approved an appeal to be heard at the Supreme Court directly.
- In France, on 6 May, the Autorité de contrôle prudentiel et de résolution (ACPR) – the French Supervisory Authority – initiated a thematic survey on Business Interruption coverage due to the pandemic crisis and its consequences. On May 23rd, the ACPR made public the findings of its investigation: Covid-19 is, for 93.3% of policyholders, not covered by their insurance policy, either because they only cover business interruption in the event of direct material damage (fire, water damage), or “more rarely” because insurance companies have explicitly excluded the pandemic from their contracts. The ACPR thus identified doubts about the application of policy guarantees for 4% of the policyholders: “In this case, only a judge’s interpretation would remove any uncertainty if the insurers concerned do not interpret the contract in favour of the insured”, it points out.
Therefore, number of policyholders will be tempted to sue their insurance broker, in order to obtain an indemnity when a policy wording does not provide cover or does not pay out enough. Aaron Le Marquer, a partner at Fenchurch Law, said in an interview quoted by S&P’s article that there would “inevitably” be legal claims against brokers, because “wherever policyholders are left with no coverage and don’t get their claims paid, brokers are always next in the firing line and the target for potential recovery.” One can easily imagine the case of an insured stating that the broker should have recommended a policy that could have enabled him to be indemnified, while the policy in place is not intended to do so.
Nevertheless, it might be difficult for policyholders to prove that the broker acted negligently. Indeed, S&P’s article highlights the fact that in the UK, “To find a broker liable, policyholders have to show not only that the broker breached its duty of care, but also that this breach caused them a loss. Brokers could not have known which of the policy wordings the High Court would deem responsive to the coronavirus pandemic, given insurers’ contention that such policies were not designed to cover pandemics at all”. Ben Hardiman, a partner at law firm Mills & Reeve, said in S&P’s article that: “The fact that these particular insurers are before the High Court with the FCA is because their wordings are poor, not because they ever intended to provide cover”.
This article underlines the fact that in reality, claims numbers are so far small in Europe, and quotes Eric Evian, chairman at CGPA Europe, explaining that business interruption disputes were mainly confined to the U.K, Ireland, France, Germany and Switzerland. In Ireland, CGPA Europe has received nine circumstance notifications that were “nothing serious for the time being,” while in France there were 35 cases “that we are following very closely,” of which a third were turning into litigation, but where insurance agents were “not the main targets of the litigation.” In Germany and Switzerland, he added, there were no cases where intermediaries were involved. But he stressed that this was the situation “as of today” and that there could be “a totally different reaction,” if courts reject most policyholder claims.