Going for broke(rs): Claims as a result of Covid-19 on insurance policies and against insurance brokers

This article follows the #HardwickeBrew given by Hardwicke’s Professional Liability Team on 22nd April 2020 which looked at some of the issues affecting professional negligence claims at the moment, both Covid-19 and non Covid-19 related, and in particular relating to insurance brokers. All the information below was correct as of 22nd April 2020.

 Introduction

The outbreak of the Covid-19 pandemic has affected every aspect of life for both businesses and individuals. As businesses transition from dealing with the day-to-day issues created by the outbreak and the associated lockdown many will look to insurance policies in the hope or expectation that they may be able to recover some of their losses. However, it seems that for many this hope will be forlorn. In this article, Tom Bell and Martyn Griffiths address some of the issues that may arise in respect of cover in the context of business interruption and event cancellation policies, and address whether disappointed clients might be able to recover against their insurance broker.

Business Interruption Insurance

Why is it that many (most?) businesses are finding that their business interruption (BI) insurance doesn’t cover losses arising from the Covid-19-related compulsory closures.

• The primary insuring clause for BI cover requires the business interruption to be consequential upon physical damage to insured property. It seems unlikely that the presence of coronavirus would constitute physical damage: see, by way of analogy, Merlin v British Nuclear Fuels plc [1990] 3 WLR 383, which held that the presence of alpha emitting radionuclides in the claimant’s property did not constitute ‘damage to property’. (Though compare Blue Circle Industries Plc v. Ministry of Defence [1999] Ch 289, where the fact that radioactive waste had intermingled with the claimant’s soil constituted physical damage.)
• In any case, even if a business owner could show that coronavirus had physically damaged her property, that wouldn’t be enough for a claim under the primary insuring clause, since it would not have been the damage which caused the downturn in business but the actions taken by the government to control the pandemic nationwide.
• It may be that the policy contains an extension to cover in respect of infectious diseases (though many will not). However, such extensions are unlikely to assist:
  • Many policies will require the cause of the loss to be an outbreak of disease at the insured’s premises, i.e. would not extend to an outbreak of the disease in society generally (i.e. an epidemic or a pandemic).
  • Many policies will be confined to a list of specified diseases, which does not include Covid-19 or SARS. Some, however, will cover “notifiable diseases”, which would cover Covid-19 since it was classified as such in early March 2020.
• There are (or at least, may be) exceptions. The standard wording in Hiscox policies is particularly broad, providing as it does cover against BI losses caused by the insured’s:

“inability to use the insured premises due to restrictions imposed by a public authority during the period of insurance following… an occurrence of any human infectious or human contagious disease, an outbreak of which must be notified to the local authority”.

This wording is the subject of a claim by an action group of disgruntled Hiscox policyholders. It will be interesting to see how that claim progresses.

Event Cancellation Insurance

Policies normally require that cancellation must have been beyond the insured’s control. This should be relatively straightforward if the event was due to take place post-lockdown and had not been cancelled as at the date that the government introduced the lockdown. However, if the event was cancelled pre-emptively before the lockdown came into effect, this may not be easy to satisfy. This may also cause difficulties for events that have been cancelled or postponed some way ahead of time; if the lockdown is relaxed or brought to an end such that the event could have gone ahead, this may mean that the policy will not respond.

An event cancellation policy may have an extension dealing with communicable diseases. If this is the case the following may also be present:

1. The policy may have an exclusion for loss arising from fear or threat of the disease. This could be engaged if an event was cancelled because of anticipated low attendance because of Covid-19 rather than directly because of the pandemic or if the event was cancelled in order to prevent possible transmission of the virus between attendees.
2. The policy may require an order from government or local authority to close for the cover to be engaged. As above, this will be easier to satisfy post-lockdown than for events cancelled earlier.
3. Any cover may be restricted to outbreaks of disease within the locality of the business rather than the pandemic conditions that Covid-19 presents. (See also, the similar requirements for BI policies, above).

As with all insurance policies the availability of cover will turn on the wording of the individual policy and the precise circumstances of the insured. It appears that there are some policy wordings in existence that may respond, although, on the basis of the limited information in the public domain at present, it seems that this is more in the arena of bespoke policies than in ‘off the shelf’ ones.

Claims against the broker

If a business owner receives the disappointing news that her BI (or event cancellation) cover doesn’t respond, she may ask herself whether her broker was at fault – i.e. whether she has a professional negligence claim.

In the usual way, in order to succeed, the claimant would need to establish (i) duty (ii) breach (iii) causation.

Duty

Generally, a broker owes a duty to ascertain their client’s insurance needs by taking instructions and by considering the information available to the broker about the client’s business.

In certain circumstances, the broker must then advise on the scope and type of cover available to meet those needs. How far this duty extends is not altogether clear from the cases.

Harvest Trucking Co Ltd v P B Davis Insurance Services [1991] 2 Lloyd’s Rep 638 – the extent of the broker’s duty “must depend in the last resort on the circumstances of the particular case, including the particular instructions which he has received from his client. In many cases those duties will include advising his client on the type of insurance best suited to his requirements and, subject to his client’s instructions, exercising reasonable care to obtain insurance which will best meet those requirements”.

Fine’s Flowers Ltd. v. General Accident Assurance Co (1977) 17 O.R. (2d) 529 (Ontario Court of Appeal) – brokers were asked to obtain full coverage for the client’s horticultural business. The cover did not include damage to plants from freezing caused by the failure of a water pump. In finding the brokers negligent, the court distinguished between clients who seek specific cover and those who rely on their broker to advise them on what cover they should have, in which case the broker’s duty extends to “inform[ing] himself about his client’s business in order to assess the foreseeable risks and insure his clients against them…”. The client’s instructions to obtain ‘full cover’ meant that the broker should have obtained cover against all risks which the nursery could have faced and that the failure of the water pumps was both foreseeable and an insurable risk: “[the brokers] failed to obtain insurance cover against the most obvious and fundamental of all risks which would face a nursery”.

In O’Brien v Hughes-Gibb & Co (No.2) [1995] L.R.L.R. 90,46 it was found that the client had not instructed the broker to obtain “full coverage”; rather, the client had provided specific instructions as to the cover required. Rattee J suggested, however, that if the client had instructed the broker to obtain “full” cover, this could have placed a greater duty on the broker of the type mooted in the Canadian case of Fine’s Flowers v General Accident Assurance Co of Canada.

So, in conclusion: the question of duty is very much fact-specific and will depend largely on (a) nature of client’s business and (b) nature of client’s instructions. In practice, it will require something akin to an instruction to obtain ‘full cover’ (or, more obviously, ‘cover against pandemics’) to engage the broker’s duty – and even then, it must be reasonably foreseeable to the broker that ‘pandemic cover’ is the sort of cover this particular client should consider – i.e. it is within the scope of covers that ‘full cover’ should include.

Breach

If the claimant can show that the broker owed a duty to obtain, or to advise the claimant to obtain, ‘pandemic insurance’ or similar, then it should be fairly easy to establish breach. However, if the duty is framed (as it may have to be) in vaguer terms – e.g., a duty to advise on the sort of cover that the client should consider obtaining – then breach will be harder to prove, since the question will become whether ‘pandemic insurance’ fell within the scope of that duty.

If the duty was to obtain ‘full cover’, then the question of breach will very much depend on the facts of the case and the nature of the client’s business. ‘Full cover’ is a concept that will mean different things to different insureds.

Causation

Causation in our view is likely to present the biggest challenge to claims against insurance brokers. In order to be able to make out a claim it will be necessary to show that, but for the breach, the client would have taken out insurance that covered the risk that eventuated. There are potentially two issues with this:

Cost

It is likely that any premium would have been prohibitively expensive. Whilst a client may say that in hindsight they would have paid such a premium and taken the cover out, it is likely that in order to persuade a court of this they will need to demonstrate a history of being very risk-averse. If a client has previously taken out comprehensive insurance notwithstanding the high expense involved it will be easier to demonstrate that they would have taken out a policy that would have responded to Covid-19 than it would otherwise be.

Availability

The client would need to show not just a willingness to pay for the insurance, but also be able to demonstrate that such insurance was available in the market. Here, we effectively come full circle to the analysis of common insurance policies above. It will be a very difficult element of the case to demonstrate that the broker was under a duty to obtain bespoke cover.

Miscellaneous

Beyond the claims arising as a consequence of policies obtained not responding to the circumstances of the Covid-19 pandemic there is a potential for claims arising out of the circumstances created by Covid-19 that affect all professionals in the unusual circumstances that we are all faced with.

Potential breaches of duty will include deadlines being missed (whether that is in respect of making claims or renewing cover) or correspondence being missed as a consequence of the lockdown. It may also be that the process of obtaining or renewing cover takes longer than it would in more normal times, if this results in a client being exposed to gaps in cover, this may well give rise to liability on the part of the broker.

As the world moves beyond the pandemic, it may be that brokers are exposed to liability by failing to address any changes emanating from the crisis. Potential issues could be as diverse as failing to advise clients about obtaining further cover (i.e. cyber cover) to deal with increased working from home and reliance on technology. Alternatively, it could be the result of failing to advise clients about the solvency requirements of policies during the difficult trading circumstances that now present themselves. Any future failure to bring new exclusions introduced by insurers at renewal to deal with Covid-19 or similar future events might also give rise to liability.