In 2020, the unprecedented Covid-19 pandemic resulted in widespread business interruption and the failure of some insurers to respond to subsequent business interruption claims led to the Financial Conduct Authority (FCA) instigating a test case against several insurers to resolve contractual uncertainties surrounding a number of business interruption insurance policies. The initial High Court judgement was handed down on 15 September 2020. This judgement, which found in favour of the FCA on many issues - in particular in respect of coverage triggers, causation and ‘trend’ clauses - was subsequently appealed by various parties with the appeals being heard in the Supreme Court.
The Supreme Court’s judgement was handed down on 15 January 2021 and held that standard non-damage business interruption extensions, for example, disease clauses and denial of access clauses, widely available to businesses pre-pandemic, do provide full cover. As a result, many more businesses who were initially told their insurance policy would not respond will receive payments for their claims under non-damage business interruption clauses.
There will, however, still be many businesses whose policies did not include such non-damage extensions or where such cover was limited, who will not receive any recompense for their losses.
Businesses, or liquidators of failed businesses, who have not been able to claim for business interruption losses suffered as a result of the Covid-19 pandemic, may potentially allege their insurance brokers were negligent and look to litigate against them to recover their losses, arguing their insurance broker should have advised them on the availability of such cover.
Where a business or its representatives consider its insurance broker to be at fault, there may be cause for a professional negligence claim against them. For such a claim to be successful, it needs to be established that:
Proving each of these steps is a matter for the law and outside my expertise, but it is likely the following would need to be considered.
Whether there was a duty to recommend business interruption insurance is likely to be considered on a case-by-case basis. Insurance brokers should take instructions and consider available information about their client’s business, and the question of duty is likely to depend on both the nature of the client’s business and the nature of the client’s instructions.
Consideration is likely to be given to the balance of expertise between the broker and their client regarding the client’s insurance needs. A client might ask the broker what insurance they would recommend, and insurance is taken out based on the broker’s recommendation. In some instances, a client may know what insurance they need and will provide their broker with instructions to obtain specific insurance. In other instances, a client might be less specific. For example, regarding the pandemic, clients may have asked that their insurance broker obtain ‘full cover’ or ‘pandemic cover’.
If a Claimant can show that the broker owed them a duty to obtain ‘pandemic cover’ or something similar, this should aid them in establishing a breach. However, it might be harder where the Claimant has requested ‘full cover’ as this can mean different things to different insureds/businesses.
I understand that consideration should be given to whether it was reasonably foreseeable that a particular client would need such cover. The broker might argue that a pandemic was not foreseeable. On the other hand, a client may argue that the Government had identified the possibility of a pandemic as high risk. However, no one had anticipated the unprecedented national lockdown which ensued.
In Covid-19 related claims, Claimants will need to establish that cover which would have responded to the pandemic was available at the time the relevant policy was taken out or renewed. Whilst somewhat of a grey area, interestingly, before the FCA test case, I understand that the prevailing view amongst insurers and brokers was that the aforementioned non-damage business interruption extension clauses were not considered to cover pandemics, but rather were restricted to local occurrences.
In addition, the Claimant would need to show that the cost of obtaining the cover was not prohibitive i.e. would the Claimant have been willing to pay the high premiums for such cover. This is likely to be more easily established where a Claimant has demonstrated their risk-averse nature through previously purchasing comprehensive cover at a high premium.
It may be easier for those Claimants who took out or renewed their policies in the early part of 2020, when the virus was starting to cause disruption and before insurers imposed blanket Covid-19 exclusions, to prove each of the above steps in comparison to those who may be simply bringing such claims based on hindsight.
Where liability can be established i.e., that there was a duty, which was breached resulting in a loss, lawyers may look to appoint a forensic accountant to assist with quantifying the loss.
Armstrong Watson’s Forensic Accounting team can be instructed on behalf of the Claimant or the Defendant in such matters, either in an advisory capacity or as an expert.
Whilst it would be outside our expertise to comment on liability, we can assist with calculating the financial effects or damages of the alleged negligent actions; thereby assisting with the quantum element of the case. Essentially the broker negligence claim will be for the business interruption losses a business would have been able to recover from its insurer, had the appropriate insurance cover been in place.
Quantifying business interruption losses arising from the pandemic is further complicated by the need to consider how insurers are treating government support provided to assist businesses. Whilst the Government has made it very clear to insurers that its grant funds intended to provide emergency support to businesses are not to be deducted from business interruption insurance claims, it is far from clear what the position is with regards to other support, for example, the Coronavirus Job Retention Scheme, with insurers routinely taking this as a saving to remain true to the principle of indemnity. It is possible that, in time, the FCA will offer definitive guidance to its members on how such government support should be treated in the context of business interruption claims.
To date, it looks like the anticipated spike in the number of broker negligence claims has yet to materialise. It is unclear whether this is because insurance companies are still working through a large volume of claims or due to the burden of proving a duty, breach and causation in such an unprecedented situation. It may be that the anticipated spike could still arise further down the line. No doubt, time will tell.