Insurance Times speaks to experts across the sector to find out how broker schemes will be affected by the recent test case verdict on the interpretation of business interruption policy wordings for Covid-19 claims

This September, Lord Justice Flaux and Mr Justice Butcher published their ruling for the FCA’s test case, heard virtually at the High Court at the end of July. The legal proceedings were designed to provide clarity on the interpretation of business interruption (BI) policy wordings when applied to claims caused by the Covid-19 pandemic.

The judges confirmed that they agreed with the majority of the regulator’s arguments surrounding the interpretation of BI coverage triggers for disease and hybrid clauses, certain denial of access and public authority clauses as well as supporting the FCA’s view on causation and trends clauses.

The verdict has sent waves across the insurance sector as those within the industry grapple with how to apply the ruling to their own wordings. This includes brokers that have partnered with insurers on broker schemes. The impact of the ruling on this niche in particular is “massive”, said Adam Harrison, business development manager at Aventus.

He continued: “It will have a massive impact on schemes. It’s likely that the implications will be similar to the rest of the market, but with schemes everything is amplified. Given the niche and specialist nature of schemes, brokers are expected to have granular understanding of their customer and the policy, both by the end customer and the carrier. If the spotlight was on scheme brokers before to perform, then it has certainly intensified now.

“Carriers will expect ever more granular data, actionable insight and effective, efficient reporting from brokers in order for them to maintain capacity.

“It will also lead to more referrals. For example, take the high street broker at the sharp end of schemes for restaurants and cafes; those businesses will want to be bullet proof, which will mean a closer scrutiny of the wording by them and the broker. Could it lead to having to sit down with an underwriter and thrash out bespoke policies for each business? That’s extreme, but in some cases quite possible.

“Increased referrals will all take time and massively slow the process if increased efficiencies aren’t sought elsewhere. It’s software providers who will lead the charge here in modernising processes to introduce those necessary efficiencies.”

Knee-jerk reaction

On the other hand, Peter Blanc, group chief executive of Aston Lark, believes the ruling will create a “knee-jerk reaction” from insurers to refuse broker wordings in the short-term.

He explained: “I suspect the big impact is going to be a bit of a knee-jerk reaction where insurers will just clamp down on wordings and say ‘right, that’s it, we’re not doing any more of this, no more broker wordings, we’re going to really look at what we’ve issued and understand what we’ve got’. They’ll then be looking at all their existing wordings and see how they can tighten things up.”

Ed Lewis, partner at law firm Weightmans, agreed with this view. He added that the “decision may serve to accelerate a trend we had already seen emerging across the industry over the last year of insurers scaling back delegated authorities and coverholder capacities by opting to ‘withdraw their pen’. This approach reduces their exposure to policy wordings that are not their own, with a key implication being a reduction in the choice of cover available to policyholders”.

Lewis thinks this could be a positive development. He continued: “Withdrawing the pen will help to bring about greater control and improved quality in the development and underwriting of policies, as insurers will be less likely to leave others to determine risk and the scope of cover.”

Case by case approach

For Romero Insurance Brokers, “it’s impossible to say whether schemes as a whole have failed or triumphed” as “the results of the test case were ultimately varied”. The firm added that “it’s a question of treating each case on its merits”.

Romero had a vested interest in the test case result, as a scheme operated by its hospitality arm NDML was placed under the microscope as part of the legal proceedings. The broker remains frustrated by the verdict however, as although associated Hiscox claims have been deemed legitimate, “the QBE result [is] still unclear”.

The broker continued: “What will occupy both brokers and insurers will be ensuring that their policy contains requisite clarity to avoid any potentially ambiguous areas of coverage.

“Whilst it would seem possible to achieve this clarity through simple terminology and construction, sadly a number of insurers seem to have adopted a ‘more is more’ approach and are attempting to address all possible eventualities.

“Insurers are unlikely to withdraw support for broker schemes as the function contains huge benefits for both insurers and customers. Similarly, it would be detrimental for clients to seek insurance on a more ‘general’ basis. A scheme can be extremely useful for clients seeking a more bespoke coverage, especially if they have unusual or specific risks, because the broker, their claims handlers and the policy wording will all be geared towards an appreciation of these idiosyncrasies. However, uncertainty within a contract can cause unforeseen issues when a claim comes in. To avoid this, both the brokers and the insurers must understand the meaning of terms and extent of coverage to limit the chance of future court action.”

Policy documentation

Linked to the possibility for further policy wording scrutiny is the role of policy documentation itself. For example, Andrew Crocombe, partner at Plexus Law, believes that one fallout from the test case result could be that “we may start to see longer, more detailed policy wordings, which would, we suspect, be seen as an unwelcome development in the market”.

Blanc agreed that this would be “disastrous”.

He continued: “If there’s one thing I really hope will come out of [the test case], it’s that it will make all of us look at the whole concept of wordings more closely, to think why do these wordings need to be hundreds of pages long? Can we not use this as an opportunity to make our wordings truly fit for purpose?

“We realise they’re legal documents and they have to work from a contract law perspective, but bearing in mind what we all know, which is that virtually no customers ever read these documents, then surely it’s on us as a profession to make them at least accessible. Whether that’s changing the style, whether it’s maybe converting policies, so you have a key summary and then there’s a video explanation of what is and isn’t covered. We’ve got to find a way of making these things accessible and understandable and truly transparent.”

A further industry challenge, according to Blanc, is around renewals and how quickly insurers are adapting their wordings to reflect the ruling’s findings.

He explained: “There is a bit of a challenge from a broker’s point of view right now that as policies are coming up for renewal, it would be really helpful if all the underwriters moved at a similar pace because we’re a bit worried now about what happens in a month or so’s time when we’ve got a policy that’s up for renewal and Insurer A has updated their wordings and has made it really, really crystal clear what is and what is not covered. Insurer B hasn’t quite updated their wordings yet and we think we can still get an angle of cover. So, are we going to move everything over to Insurer B knowing that they’re going to change their wordings, but they haven’t done [so] yet? It potentially puts brokers in a slightly awkward situation.”

Too many wordings

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For Peter Blanc, group chief executive of Aston Lark, the test case result has “highlighted just how many different wordings are knocking around in the market”.

He said: “One of the obvious fallouts of this is that it’s pretty clear that lots of insurers had – not lost control of their wordings, that’s maybe taking it a bit far – but it highlighted just how many different wordings are knocking around in the market, and of course version control was clearly all over the shop.

“Lots of insurers, when this first happened, the first few weeks [were] spent with insurers actually trying to suss out what was their exposure and how many of these different wordings did they have? You realise that from an underwriter’s point of view, that’s quite a worrying place to be, to realise that you’ve got – in some cases – hundreds of policy wordings out there, fundamentally all supposed to be covering the same risk and with pretty different interpretations of what should be a reasonably generic situation.

“When the pandemic struck, people suddenly realised we’ve got far too many wordings out there and we don’t know what’s what and we don’t know what our exposure is.”