Insurance brokers can expect to be sued if their clients' coronavirus-related business interruption claims are denied, according to lawyers and specialist insurers. But they add that policyholders and their representatives may struggle to make accusations of negligence stick.
Court battles continue over whether insurers were right to deny policyholders' business interruption claims. In the U.K., the Financial Conduct Authority's test case is moving toward appeal following a mixed High Court judgment that favored policyholders in some circumstances and insurers in others. Whether the U.K. Supreme Court reverses the original decision or affirms it, some policyholders will be disappointed.
Aaron Le Marquer, a partner at Fenchurch Law, which represents policyholders, said in an interview 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."
Roger Franklin, partner and head of insurance litigation at law firm Edwin Coe, said in an interview that pursuing claims against brokers "is something we have certainly been looking at." He added: "We have had a few inquiries already from insureds."
And Charles Manchester, CEO of Manchester Underwriting Management, an underwriting agency that sells professional indemnity insurance to brokers in the U.K., agreed that brokers would face suits.
"There may well be mass claims against brokers and they may well go through the court system. So at the very least you are going to have some expensive legal costs to pay," Manchester said in an interview.
Lines of attack
Insurers typically offer a variety of policy wordings, and so there may be different outcomes from the U.K. test case for policyholders of the same insurer. Policyholders may seek to argue that their broker chose the wrong policy when it had easy access to several from the same source.
"An insured could legitimately say to the broker: 'Why didn't you get me the policy that did and not the one that didn't?'" Franklin said, although he acknowledged that "there is obviously an element of hindsight in that."
Policyholders may also come after brokers if their policies do not pay out enough.
Business interruption cover is part of a property policy, and generally only responds when that property has been physically damaged, unless there is a non-damage extension. Because a coronavirus outbreak is widely held not to cause physical property damage, the non-damage extensions are the parts that could respond to the pandemic, and the High Court found that notifiable disease extensions were the most likely to pay out. But these extensions typically have sublimits, meaning they will sometimes pay out far less than the coverage offered under the main policy.
Franklin said the sublimits "are generally fixed without any reference to the insured at all" and that before the pandemic, extending the sublimit was "quite cheap." It could be therefore argued that a prudent businessman would have bought the extra limit had he known how low the original limit was set, even without anticipating a pandemic. Franklin added that large policies with relatively low sublimits that were not discussed with the policyholder "are probably likely to be the larger claims and therefore worth pursuing."
Hurdles to clear
But not all are convinced that policyholders and their lawyers have a good case. 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.
"I think in the current situation [policyholders] have probably got difficulties with both of those tests," Le Marquer said.
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 an interview: "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."
Policies that explicitly provided pandemic cover were scarce and expensive. Hardiman said that based on the information his company has seen, "there were a few very specific policies out there" and that "I suspect those policies weren't available at a particularly proportionate cost for most businesses." He added that it would be easy for a company to say in hindsight that it would have bought a pandemic-specific policy had it been offered, but "that would be something they have to prove on the balance of probabilities."
Joe Bryant, a partner at law firm Beale & Co, said in an interview that even if "hellishly bespoke and narrowly available" pandemic cover had been widely known about at the time, the number of insurers offering it were so few that "there just wasn't the capacity out there" for all the country's businesses to have bought it.
Given the difference in price between a standard business interruption policy and a pandemic-specific one, he added, "it will take exceptional facts and circumstances for any claimant to argue with any force that had they been advised of pandemic cover, they would have actually inquired further and got it."
Limited for now
If brokers are sued, the cost of defending them, and the final bill if they are found liable, will be picked up by their professional indemnity insurers. Claims notifications have been few and far between to date.
The Griffin Insurance Association, a mutual brokers' professional indemnity insurer, said on its website that as of Aug. 11, it had received three claims notifications, "all currently assessed as low risk." Julian McGuiggan, head of legal services and director of claims at Griffin Managers, Griffin's management company, said in an interview that claims notifications had "not significantly" increased since Aug. 11.
Samantha Peat, managing director and senior underwriting director at Griffin Managers, added that the low number of notifications so far "doesn't suggest that that's because they are still to come, it suggests that they are not there" because Griffin encourages members to make precautionary notifications.
Likewise, there are indications that claims numbers are so far small in Europe. Eric Evian, chairman at mutual brokers' professional indemnity insurer CGPA Europe, which underwrites Manchester Underwriting Management's U.K. broker professional indemnity policies, said in an interview that business interruption disputes were confined to the U.K, Ireland, France, Germany and Switzerland.
In Ireland, the company had received six or seven circumstance notifications that were "nothing serious for the time being," he said, 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.