Shared & Halved – IHL series: Recovering losses from insurers

As part of our series of webinars to support in-house lawyers during the current pandemic, on 13 May we hosted a webinar looking the recovery of COVID-19 related losses from Insurers (business interruption and more) and the related issues and practical tips.

Introduction

The IHL series of our COVID-19 webinar programme covers bite-size topics designed for a half hour coffee break and focuses on practical tips for in-house lawyers. This session covered insurance and the impact COVID-19 has had.

Cover Available

• Many organisations are questioning the scope of their insurance cover for COVID-19 related losses. This depends on the risk underwritten by insurers and on the exact policy wording. The policy is the contract and the devil is in the detail. But even after reviewing the detailed wording there may be a lack of clarity.
• FCA guidance has shifted over the last few weeks and there have been three announcements:
  • In March the FCA’s expectation was set-out and it asked that insurers treat customers fairly, be flexible and communicate clearly any exclusions that may impact cover.
  • A month later a “Dear CEO” letter was published which focused on business interruption for SMEs and asked that their claims be assessed quickly and interim payments made as necessary. But it also commented that most basic BI insurance would not cover pandemics.
  • However, the position is not black and white – see its latest 1 May announcement that it will take action in the public interest given uncertainity over policy application. FCA now seeking declaratory judgment on some issues and seeking clarification of insurer responses. Insurers are due to respond this coming Friday.

Policies

• There has been a lot of focus on business interruption at the moment.
• However there are other policies/sections you may need to consider:
  • Travel
  • Event cancellation
  • Trade Credit
  • Directors’ & Officers’ Liability
  • Professional Indemnity
  • Cyber
  • Accident and Health
  • Employers’ Liability

Business Interruption Insurance

• The scope of business interruption insurance is a slightly ambiguous area at the minute – at a headline level it is cover which, simply put, puts a company back in the position it would have been if a pre-defined event hadn’t occurred. Pre-defined events (known as perils) are typically fire or flood. Whether COVID-19 cover is granted will depend on the clause wording and perils covered.
• Estimates from the Association of British Insurers puts the bill at £900 million for COVID-19 claims. That may sound high, but it represents only a fraction of the actual losses businesses are sustaining day to day due to COVID-19.

Assessing your cover

• First and foremost, if you have an insurance broker – use them. A broker is usually the agent of the insured. In other words, their duty of care is to your business – not the insurer. A good broker will be able to help interpret your policy.
• But you can also check yourself. To do so:
  • You need all parts of the insurance, and to understand how they interrelate.
    • Schedule (this sets out business description, sum insured) – watch out for inner limits. Look for business interruption and whether it is explicitly mentioned.
    • Definitions
    • Insuring clause (usually at the start of each section) (burden is on the insured to prove they fall within the clause)
    • Exclusions (burden is usually on the insurer to show an exclusion applies).
  • Beware notification requirements! Always check the claims procedure section. Often the requirement is to notify of an event that may lead to a loss – don’t wait until the loss happens.
  • Late notification can result in non-responsive cover.

Business interruption recoverability common issues

• Historically BI cover was contingent on property damage. This is the main difficulty when it comes to recovery under BI sections.
• Check for non-damage perils or extensions – for infectious disease or denial of access/ act of civil or statutory authority. This is key and needs to be reviewed carefully. Some will clearly state no property damage is needed for the cover to be triggered.
• Infectious disease extensions can be problematic as often there will be just a list of specified diseases and therefore COVID-19 wouldn’t be included as it came into being after the policy was written. If it includes SARS then this is a bit different as COVID-19 is part of the same family of viruses – but it depends on the exact wording in the policy.
• Other challenges are general exclusions around pandemics and it may still worth challenging even if the exclusion seems to be watertight at first glance. Possibly not as clear cut as it may first appear.
• As at March 5 COVID-19 was made a notifiable disease in England/Wales so if the policy references cover for notifiable diseases it is more likely to be triggered.
• For denial or access/ extensions relating to government intervention, the facts are key and there may be issues around whether the closure was due to legally binding government action or otherwise.
• Causation and quantification of losses are also problematic areas. One case cited frequently in recent weeks relates to a hotel in New Orleans following Hurricane Katrina which was denied recovery of lost profits under its English law policy as damage to the wider area meant the hotel had no customers anyway. Loss issues are not straightforward.

What to do when insurer declines our claim

• Do not necessarily accept the insurer’s first response, do engage and challenge.
• Brokers often have commercial leverage with the insurer – see if they can mediate the issue.
• If not, consider litigation or arbitration but do check the policy, particularly costs recoverability in arbitration and how this would be split.
• Financial Ombudsman Service jurisdiction extended to small businesses from 1 April 2019. A small business:
  • has an annual turnover of less than £6.5 million
  • has a balance sheet total of less than £5 million, or employs fewer than 50 employees
  • New FOS limit: - £355,000 for more recent cases.
• The Financial Ombudsman Service can make a legally binding decision. Whilst it will closely follow the legal position, it has more flexibility than a court to act fairly due to it’s “fair and reasonable” mandate.
• Finally, if you do not have the cover you think you should have – ask your broker why. There may be a good reason, but there may also be scope for bringing a claim against your broker if they should have recommended better coverage knowing all the circumstances of your business. These claims are difficult, but not unwinnable.
• Take advice if coverage is contentious. We can help.