There is a growing consensus that insurance policies need to be clearer about what they do and do not cover, following raft of disputes and litigation about denied coronavirus business interruption claims. But lawyers say changes will not necessarily be straightforward.
Although some business interruption wordings are clear-cut on whether they will respond to the pandemic, others are less so, and several industry leaders have predicted that policies will change in response to the disputes and lawsuits seen in the U.S., U.K. and elsewhere after insurers declined to pay out.
Stephen Hester, CEO of U.K.-based RSA Insurance Group PLC, admitted on a May 7 earnings call that because of the wide range of business interruption wordings, "all insurers will think that maybe we haven't been quite as disciplined as we should have [been] in applying the same high standards of clarity on our wordings in every case."
He added that the situation would lead to "greater concentration" of wordings and companies trying to introduce some standardization to avoid "some of the more ambiguous situations which cause heartache not just for us but for our customers."
And, speaking to S&P Global Market Intelligence in May, Paul Brand, co-founder and deputy CEO of new insurer Convex Group Ltd., said that although the industry had been emphasizing contract certainty, "it needs to redouble those efforts." He added: "Having clear, indisputable language in policies I think is not an unreasonable thing for customers to expect."
The gray areas in business coverage likely arose in part because insurers had simply not envisioned the current pandemic and the resulting government responses when writing their policies. Lydia Savill, a senior associate in the commercial litigation, product liability and insurance team at law firm Hogan Lovells, said in an interview that had insurers considered such a situation, "I think some, at least, of the wordings would have been materially changed, which is probably now what is going to happen in the future."
Ironically, some of the confusion may have been caused by efforts to make policies easier to read, according to Aaron Le Marquer, a partner at Fenchurch Law, which represents policyholders in claims disputes.
He said in an interview that in the past 20 years there has been "quite a strong push" to use plain English in insurance policies and contracts, which had "generally been viewed as quite a positive direction to go in." But he added that in some cases, "some people may identify that as having gone too far."
But David Williams, managing director of underwriting and technical services at Axa Insurance UK, said during an S&P Global Market Intelligence webinar June 30 that the confusion around wordings and the need for the U.K. Financial Conduct Authority to launch a business interruption test case are "by and large down to insurers not heeding their own warnings" and continuing to use "old, archaic wordings that go back decades and just weren't fit for purpose."
Fenchurch Law's view, Le Marquer said, is that although policy language may not revert to its archaic roots, there may be a shift to "more complex and detailed, structured policy wordings which set out more clearly the exact coverage that is and isn't being provided."
The move to greater standardization suggested by RSA's Hester "would be helpful if that can be done," Le Marquer said, cautioning that it would be difficult in the U.K market in particular, where regulators do not need to approve wordings and some companies see their differential wordings as a competitive advantage.
Le Marquer said "it's quite possible" there would be some efforts initially to agree standard wordings to deal with the current situation but that "I think it won't be long before we start to see very quick divergence from that again, and I think we'd end up in the same position quite quickly."
Cutting it out
Alternative policy structures might provide a solution. Savill noted that policy wordings tend to focus on the cause of the loss, whereas for certain types of claim policyholders are more concerned with simply having coverage. Policies with parametric triggers, however, pay out automatically when certain thresholds are met, and could, for example, be structured to pay out on reduced footfall at a business.
"That, to my mind, would be one potential way of offering BI cover for these and other sorts of events that cause you to have a reduction in footfall, but without getting into the details of what caused it," Savill said.
But arguably the most straightforward way to clarify policy language is for insurers to expressly exclude what they do not intend to cover. The U.K. FCA's test case involves eight insurers and is aimed at settling disputes over coronavirus-related non-damage business interruption claims.
Adopting the policyholders' position for the purpose of testing the insurers' wordings, the regulator has argued that there were "no express or implied exclusion for pandemics" in the clauses under consideration in the case, even though other types of cover do contain such exclusions.
Some insurers in the case have disputed this position, with Hiscox saying coverage arguments based on the absence of an exclusion are "always weak and usually ... circular."
Even so, lawyers believe exclusions would help.
"The simplest way is probably just to exclude the thing that you don't want to be covered and leave the rest of the wording as it is," Savill said, adding that she had seen policies come up for renewal where business interruption wordings had remained the same, but exclusions had been added.
Le Marquer agreed, adding: "I would expect to see much wider use of pandemic exclusions, and then if people want to purchase the pandemic cover they can have a buyback by which the exclusion is written out of the policy."