As commercial customers and insurers draw battle lines over business interruption claims, Insurance Times looks at whether brokers could get caught in the crossfire

The FCA recently announced that it intended to obtain a court declaration to clarify and resolve the key contractual uncertainties within business interruption (BI) policies. It is an issue that has been thrust into the spotlight as SMEs across the UK face potential permanent closure due to rejected BI claims that are linked to the current coronavirus outbreak and associated lockdown regime.

For Branko Bjelobaba, principal at general insurance compliance consultancy Branko, the FCA’s actions here present yet another layer of concern for brokers – many of whom may already be looking over their shoulders for professional indemnity or negligence accusations as their small business clients fail to receive their expected BI claim pay outs.

Bjelobaba highlighted a particular paragraph from the FCA statement as a warning to brokers. This read: “In some cases where there is no cover provided under the policy, there is a gap between firms’ and customers’ understanding of what they thought was covered by the policy. If the BI cover provided is not consistent with what the customer requested or instructed, or with what the customer was informed was being provided, then customers may raise these concerns as a complaint with their insurer or intermediary.

“Some customers may believe they have been mis-sold their BI policy by their insurer or intermediary. Where this is the case, customers can make a complaint if they are not satisfied with the product they have purchased or the outcome of their claim, and if they remain unsatisfied they can complain to the Financial Ombudsman Service.”

Bjelobaba advised that “now is the time to pull out those files” and review the information and advice provided, as rejected BI claims could present “the next PPI mis-selling scandal for insurance brokers”.

He continued: “This will impose a lot of stress on brokers, who will need to ensure that the sales that have been made included a proper assessment of a client’s demands and needs and a detailed explanation as to why the proposed policy met those [criteria].

“In addition, if professional indemnity insurers exclude Covid-19 advice cover post renewal, and the policy is written on a claims made basis, brokers’ financial viability will be at risk as the policy won’t cover them.”

With this in mind, how exposed are brokers to the ongoing storm surrounding business interruption claims, particularly for SMEs, and is there the potential for them to get caught in messy disputes between policyholders and insurers?

Charles Manchester, chief executive at Manchester Underwriting Management (MUM), emphasised: “One of my worries is that brokers are going to be in the firing line when insurers don’t pay.

“This is an unprecedented situation and with hindsight, customers are going to be expecting brokers to have advised them on something that has never happened before.”

No exposure

Neil Frankland, partner at law firm Mills and Reeve, who deals primarily with broker disputes, believes that although brokers aren’t exposed to the coronavirus BI claims fallout, “there’s every chance that brokers may get dragged into things”.

He continued: “I suspect that there will be times that brokers get caught up in it, just because you’ll have an insurer that just steadfastly refuses to move and then the client may well feel that he’s got to go against both targets, but there’s a cost challenge to the client who does that because they’ve then got to pay for the legal fees of pursuing both. I would like to think that the broker is not that exposed on these sorts of issues.

“The broker is going to end up, on occasions, being piggy in the middle but it’s difficult to see how you actually fix the broker with a liability.”

Frankland explained that brokers’ low exposure risk is because of the needs and demands process that they undertake when sourcing insurance policies for their clients; very few clients would have specifically requested pandemic insurance, unless they operated in certain industry sectors, such as travel, leisure, entertainment and hospitality – in these cases, industry specific risks would have been considered and advised upon.

“We think it is highly unlikely that the vast majority of brokers would have ever asked questions of their clients about how they would respond to or cope with interruption to their business due to a pandemic, advised that the majority of policies would not provide cover for interruption without physical damage, [or] provide advice to their clients about pandemic risks or ever offered policies which may cover losses arising from them, to the extent such policies existed,” Frankland said.

In addition, pandemic insurance is considered to be expensive, so even if brokers did offer this cover to their clients, business owners still may not have purchased it due to the cost. For example, the All England Lawn Tennis Club (AELTC) was paying around £1.5m a year for its pandemic insurance, covering tennis championship Wimbledon.

For SMEs, this is a particular hurdle, added Manchester.

“Realistically, how many insureds when they bought insurance thought ‘I need to be covered for a pandemic’?” he asked.

“[SMEs] won’t even buy cyber cover, they won’t buy critical illness cover, they won’t buy income protection cover and these are real risks that happen all the time. There’s a high proportion of SMEs that get hit all the time by cyber attacks and if they’re not buying those insurances, why would they spend a hundred times as much on a pandemic cover?”

“[Insurers are] between a rock and a hard place and of course the brokers will now be in the firing line if the insurers avoid paying, which most of the time they will. People blame the brokers for not discussing it in the demands and needs period.”

Frankland added: “The higher the cost, the less likely claimants are going to be able to establish they would have purchased cover, particularly when doing so would have very much been an exception to the general rule.”

Proving negligence

The test for brokers’ negligence, said Frankland, is based upon what would be considered the typical actions of a broker with the same levels of knowledge and experience as the one being accused of negligence.

He said: “The test for brokers’ negligence is what the reasonably competent broker would have done and I think if you went out and did a straw poll of brokers, you’d find that none of them were advising clients to take out pandemic insurance. I just don’t think it was on the radar at all. This is one of those things where you’re closing the door after the horse has bolted in terms of thinking about claims against the broker.

“Most combined commercial brokers are looking at is the factory going to burn down, what happens if your machinery breaks and so on. Nobody had in mind that this type of pandemic that’s followed.

“I think it would be harsh for the broker to get clobbered with the liability here.”

In the firing line?

If, however, a broker is established to have been negligent, then it is up to the claimant to prove causation, which can be difficult.

Frankland continued: “Claimants must prove causation. If the needs and demands process was properly completed would the insured have actually still taken out the cover: the main issues being that if advised about the risk of pandemic, was there a market of products available and, if so, what would have been the cost of premiums? Would policyholders have purchased cover? Would policies have paid out?”

Frankland added that brokers may be in the firing line only if they failed to advise their clients on business interruption insurance, rather than pandemic insurance.

On the whole, however, Frankland predicted that brokers “ought not to be facing significant exposures”.

He said: “Given the significant impact which Covid-19 has had on the UK and global economies, the fact that the majority of policyholders will have no cover for financial losses and the fact that the concept of the need for damage to be necessary is often not appreciated, we think brokers are likely to receive claims and complaints will be made in connection to it.

“However, claimants will face significant hurdles to establish that brokers have been negligent and that they truly had a ‘need and demand’ for [pandemic] cover, and that they would actually have bought it. Each case would be fact specific, but properly analysed, the broker market ought not to be facing significant exposures.”