Fenchurch Law opens new office in Leeds
Fenchurch Law, the UK’s leading firm of solicitors specialising exclusively in representing policyholders in insurance coverage disputes, is delighted to announce its further expansion with the opening of a new office in Leeds from 1 September 2020, which will provide improved access to policyholders in the North of England, and their insurance brokers.
Founded in 2010, Fenchurch Law was created to allow policyholders access to specialist and high quality insurance advice that insurers have received for decades.
Fenchurch Law is now the largest specialist team of solicitors in the UK dedicated to serving the needs of policyholders. We focus exclusively on representing policyholders in insurance coverage disputes, specialising in high value and complex disputes.
The firm comprises five main practice areas, each of them partner-led by lawyers with a reputation for innovation and excellent client care:
· Professional Risks
· Financial & Commercial Risks
· Construction Risks
· Property Risks, and
· Products & Environmental Risks
Whilst Fenchurch Law has always acted for policyholders across the UK, as well as internationally, we have recognised an increasing demand among policyholders based in the North of England to have access to solicitors who are based closer to them. Our Leeds office has been launched in response to that demand.
David Pryce, Fenchurch Law’s Managing Partner is excited about the next stage of the firm’s expansion:
“For some time we’ve recognised not only that policyholders outside London often like to be able to instruct solicitors who are based closer to them, but also that there is a great pool of talented insurance disputes solicitors who are based outside the City. The launch of our Leeds office is the first step in helping to connect policyholders in the regions with solicitors who are not only based near them, but are genuine insurance disputes specialists with deep insurance market knowledge and experience”.
The Leeds Office will be headed up by Senior Associate, Daniel Robin. Dan has wide ranging experience of the insurance market, having previously worked as a panel solicitor for insurers, as a broker, and as a claims handler for insurers. He now uses his knowledge of how insurers operate to help policyholders to achieve the best outcomes from their insurance disputes. Dan has a particular focus on professional liability, property and financial lines risks.
Working alongside Dan is Phil Taylor, Insurance Consultant. Phil joined Fenchurch Law after 15 years in Broking as Regional Claims Director dealing with a wide portfolio of Clients, major and complex losses, and coverage disputes on first and third party claims. Prior to Broking, Phil’s background was Liability Loss Adjusting specialising in EL, PL, Products and Professional Indemnity claims. Phil has 35 years of experience in the insurance industry, is ACII qualified, and holds Chartered Status with the CII.
Government to fund replacement of non-ACM cladding systems on residential buildings
On 11 March, the government announced that it would provide up to £1 billion in 2020/21 to fund the removal and replacement of unsafe non-ACM cladding systems on high-rise residential buildings.
Attitudes towards building safety have undergone a paradigm shift since the tragic events at Grenfell Tower. Since then, the government has introduced a wide-ranging package of measures to ensure that buildings, particularly those with Aluminum Composite (ACM) cladding, are made safe. Notably, the government last year introduced a fund of £600m for the replacement of unsafe ACM cladding from residential buildings, similar to the type that was in place on Grenfell Tower.
Although ACM cladding remains the government’s priority, it has now announced proposals to extend funding for the removal and replacement of non-ACM cladding, such as High Pressure Laminate panels (‘HPL’). The announcement follows the guidance issued by the government earlier in the year in its “Consolidated Advice Note on Building Safety”, and in particular, the views of its Expert Panel that HPL systems with a ‘C’ or ‘D’ (i.e. those with a medium or high contribution to fire) would not meet the requirements of the Building Regulations, and that owners of such buildings should replace those materials as soon as possible.
Funding will be available to both the social and private sectors. In the private sector, the fund will be for the benefit of leaseholders to ensure that their buildings are made safe; and in the social sector, where remediation costs would otherwise be too prohibitive.
What are the eligibility criteria?
As with the ACM fund last year, funding will be available for buildings that are 18m or above.
The government has also said that building owners will be required to pursue warranty claims and take “appropriate action against those responsible for putting unsafe cladding on these buildings, with any damages recovered paid to Government once recouped.”
What are warranty claims?
Warranty claims refer to claims made under latent defect insurance policies. Those policies provide cover for newly built properties in the event of an inherent defect that was not capable of being discovered through inspection before completion.
Typically, latent defect policies are triggered in the event of (a) a non-compliance with the relevant Building Regulations that applied at the time of construction/conversion; and (b) which causes a present or imminent danger.
Given the above, unsafe non-ACM cladding that has been installed in high-rise residential blocks is likely to meet those requirements.
What other claims might be available against those responsible for putting unsafe cladding on buildings?
Those involved with the original cladding installations may include Main Contractors, Architects, and specialist cladding subcontractors. The type of claims that can be brought against them will differ in each case, and will depend upon the nature of the relationships between the parties, and the specific work that was undertaken.
One route to making a recovery against those involved with the original cladding installation is under the Defective Premises Act 1972.
The Defective Premises Act imposes a duty on builders and any other professionals who take on work in connection with the provision of a dwelling. It requires the work to be done in a professional or workmanlike manner, with proper materials, and that the dwelling is for habitation when completed. The duty is owed to every person who acquires a legal or equitable interest in the dwelling.
Summary
The announcement of funding for the remediation of non-ACM buildings underlines the government’s ever-increasing commitment to building safety.
It is also likely to come as a blow to latent defect insurers, who may face a surge in the number of claims made under their policies. The potential for claims will be increased if, as expected, local authorities and Fire and Rescue Services are granted enforcement powers where building owners refuse to apply for funding, or otherwise refuse to remediate their buildings.
Alex Rosenfield is a Senior associate at Fenchurch Law
Covid-19 Business Interruption Update: Is another storm brewing?
With the FCA Test Case concluding last week, and judgment not expected until mid-September at the earliest, this blog looks briefly at what further tumultuous times may lie ahead for policyholders. Specifically, whether policyholders’ business interruption (“BI”) losses following COVID-19 will be aggregated.
Policyholders and their brokers will know that aggregation is not in the scope of issues that has been considered by the court in the FCA Test Case. There will therefore be no fresh judicial assistance available to insureds on this issue.
Given the significance of some policyholders’ losses, we anticipate that this will be a hotly contested battle with insurers that will yet need to be resolved post-FCA Test Case.
Aggregation
In summary, aggregation is a principle under which two or more separate losses are treated as a single loss because of a unifying or connecting factor.
For those policyholders that have multiple premises insured under a single composite policy, additional aggregation arguments may arise (subject to the specific policy wording).
Where the sub-limits relevant to these COVID-19 BI claims are often lower, any aggregation of claims may ultimately be the difference between claims of hundreds of thousands of pounds or multi-millions.
On that basis, it is inevitable that insurers will use any and all arguments available to them to limit the losses recoverable, presuming policyholders succeed at least in part on liability and are able to pursue the quantification of claims.
Key issues
Whilst insurers may well seek to aggregate the losses for those policyholders that have suffered large losses, there must be a proper legal and policy basis for doing so. We are not convinced that, market-wide, there is such a basis.
As a starting point, there are numerous BI policies that do not have any aggregation wording present at all. In those cases, policyholders can take some comfort depending on how the applicable limits and sub-limits are expressed.
There are others that may face arguments from insurers that suggest that throwaway comments such as “any one loss” amount to an intention to aggregate losses, even where the wording does not purport to be an aggregation clause. Such assertions are capable of being firmly rebutted.
Any application?
On one view, it might be that aggregating wording is not triggered in any event. If the wording responds in cases where there has been ‘Damage’ i.e. property damage, one might question the relevance of that wording to the non-damage linked extensions with which COVID-19 BI claims are principally concerned. If the definition of ‘Damage’ is not extended to include non-damage perils, then it may be arguable that any aggregating wording is limited to apply only to those damage-based claims.
Commercial intentions
Even if it is conceded that there is a hypothetical basis for aggregation wording applying to a BI policy, policyholders may wish to look for the commercial realities of the effect of aggregation.
Taking the example of multiple premises being insured under one policy, where the sub-limits of the non-damage BI extensions are often a lot lower than the sum insured, policyholders may reasonably arrive at the conclusion that the aggregation of its losses would result in a commercial absurdity. Policyholders might be left with entirely inadequate cover, which cannot have been what was intended by policyholders or their brokers when obtaining cover.
Policy construction and factual issues
Notwithstanding the primary arguments above, policyholders can take some comfort that there are likely to be good policy construction arguments available, which may well be supported by a proper application of the facts.
Each policy and claim will of course have to be assessed on its own merits and facts. That notwithstanding, we would encourage insureds and their brokers to very carefully consider: (a) the construction of the wording that the insurer wishes to rely on (where relevant); and (b) how the insured’s losses have actually arisen.
Close attention needs to be paid to the actual aggregating words used: clauses that purport to aggregate losses by ‘originating cause’, ‘event’, ‘occurrence’, or ‘claim’, will have very different effects, and despite a long line of case law considering the meaning and application of these terms to various facts and circumstances, their proper application in any given case remains perennially contentious.
No two losses will have arisen in the same way. Referring again to the example of a limit applying ‘any one loss’ in a policy covering multiple insured premises, it is likely implausible that the same losses will have arisen across multiple premises, at the same time, in the same way, and with the same consequences. Might the better analysis be that multiple losses and therefore claims have in fact arisen, which therefore do not fall to be aggregated?
Further Lockdowns
As we move into the next phase of the pandemic and a new era of local lockdowns and other containment measures, many recently re-opened businesses may find themselves shutting down once more. Do any losses arising as a result give rise to a new claim under the policy, or do they fall to be aggregated with any claim already submitted from the earlier national lockdown?
The answer will lie partly in the outcome of the FCA Test Case, which will give us clearer guidance on exactly how and when the various non-damage BI clauses respond, and partly on an analysis of the relevant aggregating language in the policy. No doubt further disputes will arise over whether local lockdowns and restrictions imposed in relation to localised COVID-19 outbreaks amount to independent ‘causes’, ‘events’, or ‘occurrences’, and again the outcome may make the difference between no cover and full cover for continuing losses suffered by many businesses affected by the progress of the pandemic.
In the meantime, any policyholder that is subject to new restrictions on their business that are likely to result in losses should make a fresh notification under their policy via their broker.
Comment
We remain hopeful that the judgment following the FCA Test Case will decide at least some of the issues in favour of policyholders so that claims in principle may yet fall to be indemnified. If that is right, policyholders will understandably wish to proceed as quickly as possible to the quantification, and recovery, of losses.
In circumstances where that point is nearing, and losses may begin to be crystallising as those shorter indemnity periods end, we would encourage policyholders to seek assistance from their professional advisers in presenting the losses in an accurate and appropriate way. Failure to take care in doing so only risks backfiring at a later stage.
If policyholders or their brokers would like advice on any of the issues discussed in this article, or COVID-19 BI claims generally, please do not hesitate to contact us. In addition to written material, our thoughts on these issues are also disseminated by webinar as part of Fenchurch Law’s The Associate Series.
COVID-19 Business Interruption Update: Further details of FCA Test Case
The FCA has now published details of its proposed test case in which it seeks to determine a number of coverage issues common to a majority of declined COVID-19 business interruption claims.
Insurers/Policy Wordings
Following consideration of over 1200 submissions to its preliminary policyholder consultation process, 17 Policy wordings have been selected as a representative sample covering the broadest spread of common issues.
At present the FCA has indicated that 16 insurers have issued policy wordings within the list identified, eight of whom have been invited to participate in the proceedings:
• Arch Insurance (UK) Limited
• Argenta Syndicate Management Limited
• Ecclesiastical Insurance Office plc
• Hiscox Insurance Company Limited
• MS Amlin Underwriting Limited
• QBE UK Ltd
• Royal & Sun Alliance Insurance plc
• Zurich Insurance plc
It is anticipated however that other insurers who have issued policy wordings materially identical will also be affected by the court’s finding, and the FCA intends to issue a comprehensive list of affected insurers in July.
Issues
As anticipated, the focus of the proceedings is on the coverage provided by ‘non-damage’ extensions to business interruption policies, including Non-Damage Denial of Access, Infectious Disease, and Public Authority clauses.
The key issues that have been determined to be common to a majority of disputed COVID-19 BI claims include the following:
• What is meant by ‘interruption or interference’ and is closure required in whole or in part?
• Does “notifiable disease” or “human infectious or human contagious disease” include COVID-19?
• If the disease is required to be in the “vicinity of the insured premises” what does this mean?
• If the policy requires that the disease must exist within a geographical limit of the premises (e.g. 25 miles) what is required by way of proof?
• What is the meaning of an “occurrence” of notifiable disease or an “outbreak” of notifiable disease?
• What does a policyholder have to prove to show prevention or hindrance in access or use of premises?
• What is meant by “actions”, “advice”, “restrictions” imposed by government or other authority?
• What is meant by an “emergency likely to endanger life” (or similar)
• What is meant by “public authority” or “competent local authority”?
• What are the relevant causal links that must be established depending on the words used in the policy?
• Is there more than one potentially operative cause of loss, and if so what is the effect on recovery?
• What effect do any trends clauses have on the application of causation arguments?
• Do micro-organism, pollution or contamination exclusions act to exclude the losses?
Timeframe and Procedure
The FCA intends to file its claim on 9 June 2020, with Defences to be filed by 23 June 2020, and a final hearing is anticipated to be scheduled in the second half of July. In a Framework Agreement executed between the FCA and the participating insurers, it is expressly recognised that the FCA or any Insurer may appeal the decision of the court in relation to any particular issue, but the parties agree to explore the possibility of an expedited leapfrog appeal to the Supreme Court if necessary.
Further Documents
Alongside its announcement, the FCA has published:
• A proposed representative sample of 17 policy wordings;
• A preliminary list of affected insurers;
• Proposed Assumed Facts against which the determination will be made;
• Proposed Questions for Determination by the court arising from insurers’ reason fo declining claims; and
• Proposed Issues Matrix, showing which questions for determination by the court are engaged by each policy in the sample.
• The Framework Agreement agreed by the FCA and Insurers
All documents can be accessed at the FCA website https://www.fca.org.uk/firms/business-interruption-insurance
Consultation
Policyholders, insurance intermediaries, insurers and other stakeholders are invited to provide comments by 3pm on Friday 5 June, to biinsurancetestcase@fca.org.uk
Comment
Taken together, the FCA’s proposed sample of policy wordings, sets of assumed facts, and questions for the court amount to an ambitious and comprehensive set of issues for determination. With eight insurers invited to participate and make submissions across such a broad set of issues in such a compressed timetable, case management will be challenging. Nonetheless, if successfully completed, and not subject to a protracted appeals process, the exercise has the potential to provide insurers, policyholders and intermediaries with a welcome degree of certainty in relation to the vast majority of outstanding COVID-19 business interruption claims. Disputes over discrete issues such as aggregation and quantification of loss will remain, particularly in relation to those policyholders with significant and more complex losses, but even for these policyholders the FCA’s test case should narrow the issues in dispute and reduce the overall costs and time incurred in pursuing claims through formal proceedings.
COVID-19 Business Interruption Update: FCA Invites Policyholder Submissions
Further to its announcement on 1 May that it intended to seek a declaratory court ruling on common coverage issues arising in relation to COVID-19 business interruption claims, the FCA has now invited submissions from policyholders and intermediaries who would like their insurer to be considered for inclusion in the process.
https://www.fca.org.uk/news/statements/business-interruption-insurance-during-coronavirus
Policyholders and intermediaries are invited to submit:
• arguments why they consider cover should be available, together with details of policies that they consider have not responded appropriately to a claim; and
• brief relevant facts of the case.
Any material for consideration is to be emailed to biinsurancetestcase@fca.org.uk by Wednesday 20 May 2020.
The FCA has committed to engaging openly with policyholders and their representatives at key stages of the process, and a dedicated web page has also been set up to provide information, updates and access to documents including court pleadings:
https://www.fca.org.uk/firms/business-interruption-insurance
FCA Takes the Lead - Fenchurch Law Covid-19 Business Interruption Briefing Note
Since the designation of COVID-19 as a notifiable disease in England on 5 March, and the subsequent ratcheting of measures to slow the spread of the disease, business owners large and small have incurred catastrophic losses which, for the time being, continue to mount up on a daily basis.
Those with business interruption insurance have turned to their insurers for assistance, but have by and large been met with outright rejection of their claims.
Matters have escalated rapidly in the course of the last two weeks as thousands of declined claims pile up, with action groups being formed, ‘class actions’ announced, and regulators adopting an increasingly interventionist stance, culminating with the FCA’s announcement on 1 May 2020 that it intends to take legal action to obtain a court declaration on the disputed wordings.
This update takes stock of developments so far, considers the positions of the market and policyholders in relation to the disputed issues emerging, and sets out the options for policyholders wishing to pursue their declined business interruption claims.
What is the market’s position on COVID BI Claims?
ABI
As the representative body of insurers in the UK, the ABI has unsurprisingly sought to manage the expectations of policyholders and government as to the extent to which the insurance market can be expected to shoulder a share of the burden currently being suffered by the nation, stating that “no country in the world is able to provide widespread pandemic insurance, and the UK is no exception”, “only a very small number of businesses choose to buy any form of cover that includes business interruption due to a notifiable or infectious disease”, and “such policies often only apply when the disease is present at the premises.”
Insurers
Some insurers have taken an even more extreme approach than the ABI, announcing that “[our] policies do not provide cover for business interruption as a result of the general measures taken by the UK government in response to a pandemic”, and “these extensions are intended to cover danger and disturbance and are not expected to cover a pandemic (or similar) breakout of disease.”[1]
This has been reflected in insurers’ responses to claims notified, which have largely been to issue blanket declinatures using cut-and-paste standard responses, often with no apparent consideration of the facts of the claim submitted.
FCA
Unlike the steps being taken by regulators in some other markets, notably some US states, there has been no attempt by the FCA to mandate retrospective coverage for COVID-19 losses on existing policies. Taking a relatively measured approach, the FCA wrote a ‘Dear CEO’ letter to CEOs of London market insurers on 15 April 2020, specifically in relation to SME BI insurance, acknowledging that many policyholders would have no cover, but noting that some policies do give rise to a clear obligation to pay out, and encouraging insurers to comply with their legal and regulatory obligations to pay claims promptly. Following the escalation of the situation over the following fortnight, and the entrenchment of insurers’ coverage positions, on 1 May 2020 the FCA took the bolder step of announcing that it intended to “obtain a court declaration to resolve contractual uncertainty in business interruption (BI) insurance cover.”
FOS
The Financial Ombudsman Service, which handles complaints for individuals and SMEs up to maximum claim value of £350,000 has also issued its own guidance in relation to the anticipated high volumes of disputed BI claims. On 14 April 2020 it indicated that it would “expect the insurers to think beyond a strict interpretation of the policy terms and consider carefully what’s fair and reasonable in each case, taking into account the unprecedented situation”. Interestingly that language has now been removed from the latest version of its guidance provided online.
What are the disputed coverage issues?
Damage
In the absence of extended cover, most policyholders will need to establish that any business interruption losses arise from insured damage to property. At first sight that may appear to have no relevance to COVID-19 BI claims, since there has been no obvious property damage that would trigger the cover. However, under English law, a number of cases have found that only very small changes in physical state can amount to property damage, leading to suggestions that viral contamination leading to loss of use can amount to damage. Much has been made of a recent decision in Canada, in which the court adopted a broader interpretation of the term physical damage, which incorporated such things as the loss of the function or use of a building, even if only temporary[2]. Whether this can successfully be argued under English law will depend in part on the definition of property damage in the policy (some policies refer to ‘physical’ damage, which requires a permanent and irreversible change in physical condition, while others refer only to ‘accidental loss or damage’, which extends to transient and reversible changes in physical condition), and the application of any contamination or pollution exclusions. Insurers will certainly resist paying any claims on this basis, but it is quite possible that litigation will be pursued on this point which, if successful, could dramatically widen the scope of cover under traditional BI policies.
Locality
Many policies that do contain extended cover for losses caused by infectious disease, prevention of access, or public authority action, under which cover is now sought, will include some form of reference to an occurrence of the insured peril on the premises, in the vicinity, or within a specified radius, commonly 1 mile or 25 miles.
Insurers’ response has broadly been that these provisions mean that the extensions will only respond to localized incidences of disease, and not to widespread epidemic or pandemic circumstances where the whole country (or in this case the world) is affected.
Policyholders on the other hand might reasonably question why, in the absence of any pandemic exclusion, the presence of the disease elsewhere can have any effect on the local coverage provided by their policy. Perhaps insurers’ decisions on coverage are being driven by concerns over their likely overall exposure rather than the actual cover provided by a policy? The correct answer will as ever lie in the drafting of the policy wording in question, but this is set to be one of the key contested issues.
Causation
The second broad category of issues on which disputes will turn are various forms of causation argument. Insurers are arguing that, even if the relevant policy trigger can be demonstrated to have occurred, the losses suffered by the policyholder are not caused, or are not solely caused, by the insured peril.
Although such arguments may be couched in various different terms, they all effectively seek to apply the controversial principle established in the case of Orient Express Hotels v Generali, in which the losses of an insured hotel in New Orleans following Hurricane Katrina were found not be insured because they were caused not by the relevant trigger (property damage), but by damage to the wider area, i.e. the losses would have happened anyway even if the insured property damage had not occurred.
Again the outcome of such arguments will depend on application of the policy wording, including the relevant causation language in the insuring clause, and any ‘Trends Clause’ to the facts of any given claim. Causation arguments are generally complex and difficult to generalise in relation to multiple claims, and we can expect to see some hard-fought litigation in this field.
Aggregation
A perennial issue that is not unique to COVID-19 claims is whether losses suffered at multiple insured locations should be aggregated for the purpose of applying limits of liability and deductibles. As a general rule, the cover provided by the non-damage BI extensions tends to be sub-limited to a level which may be a small fraction of the total policy limits. Whether policyholders may claim for multiples of the specified sub-limit will depend on the existence of any express aggregation clause, and whether for example the sub-limit is expressed as applying to any one ‘loss’, ‘occurrence’, ‘event’, or arising from the same ‘originating cause’. For those policyholders with multiple locations insured under the same policy, for example restaurants, pubs and shops, this issue may determine whether whether a claim is worth £1 million or £100 million (and beyond), and as such will no doubt give rise to some hotly contested claims.
What happens next?
Policyholders whose BI claims have been rejected have various options open to them at this stage, and it is important to note that there is no one-size-fits-all solution for all policyholders.
Negotiation
As a general starting point, negotiations through open dialogue with the insurer are always advisable, either directly or through a representative such as a broker or lawyer. For the many thousands of SME businesses this is unlikely to be a realistic option at this stage, but for those larger businesses with more significant losses reaching seven, eight, or nine figures, insurers are more likely to be willing to engage in constructive discussions.
FOS
For eligible policyholders, the FOS provides a cost-free and fair solution to resolving disputed insurance claims. However, the prescribed timescales may frustrate some policyholders in the current situation, since they are required to make a complaint following an insurer’s rejection of any claim, following which the insurer has eight weeks to each a ‘final decision’. Only then may the policyholder refer the matter to the FOS. Following those timescales, policyholders are prevented from taking any action for the next two months unless the insurer agrees to issue an expedited ‘final decision.’
Arbitration
Any policyholder with an arbitration clause in their policy will be required to pursue private arbitration proceedings to resolve their dispute, unless they are FOS-eligible. This may be an appropriate option for some larger policyholders with bespoke coverage issues, and the resources to pursue lengthy and expensive arbitration proceedings, but for many smaller policyholders the prospect of having to arbitrate will be a significant barrier to pursuing their claim. Further difficulties with arbitration in the present situation are the absence of effective procedures for aggregating claims, and the lack of any system of binding precedent.
Group Litigation
There has been much talk of ‘class actions’ or other group litigation being pursued against certain insurers, and several action groups have been formed for this purpose. Whilst this remains a possibility, there are significant downsides to policyholders in attempting to pursue their claims as part of a group, not least that each of their claims will have factual, if not legal, issues that are specific to their own circumstances. The ability of group legal proceedings to determine large numbers of complex BI insurance claims is doubtful, and the procedural complexities and timescales are unlikely to be attractive, not to mention the funding necessities that will see policyholders sacrificing a significant proportion of any damages in return for representation as part of the group. Moreover, this option may now have been rendered largely redundant by the FCA’s announcement of its own legal action.
FCA legal action
The FCA’s proposal to seek a ruling on the disputed coverage issues is an unusually interventionist but potentially welcome step. The action sensibly stops short of over-reaching the FCA’s remit, and preserves the role of the English courts as the proper arbiter of matters of contractual interpretation. The FCA has indicated that it intends to invite the participation of a select group of insurers in the process by 15 May 2020, and further details are awaited on the proposed process.
It is not known at this stage whether policyholders or their representatives will have any opportunity to make submissions or representations in the proceedings, or what procedural mechanism will be followed, although a claim for a declaratory ruling under CPR Part 8 seems likely. Provided that the right issues are put before the court, supported by appropriate representations on both sides of the fence, this may well be the most cost-effective and efficient way to resolve the common issues. The proceedings will not and cannot provide an answer to all of the questions, and some disputed claims will inevitably still proceed to litigation or arbitration. But for a large majority of policyholders, particularly those whose claims do not justify the pursuit of independent legal proceedings, this development may provide the best opportunity to overturn the rejection of their claim, without requiring any active participation on their part.
Next Steps
For most policyholders, a wait-and-see approach is likely to be advisable at this stage. Any attempt to negotiate with insurers or take more formal steps such as commencing arbitration or litigation is unlikely to produce results until all parties have a better understanding of the proposed FCA legal action, including the likely timetable and the scope of the issues for determination.
For now, policyholders’ focus should therefore be on ensuring that effective notification has been given to insurers in sufficiently broad terms (usually via brokers), taking steps to mitigate losses where possible, and keeping records of any costs reasonably and necessarily incurred in doing so.
[1] https://qbeeurope.com/media/8685/covid-19-qbe-faqs.pdf
[2] MDS Inc v Factory Mutual Insurance Company (1 April 2020)
Coronavirus – Am I Covered? A Routemap to Recovery for Policyholders, Part 2
Part 1 of this review examined the availability – or otherwise – of cover for losses under Business Interruption and Event Cancellation insurance. With the UK government now moving to follow other countries in restricting, but not yet banning, mass gatherings and personal interaction, those policies remain firmly in the spotlight.
However, given the potential obstacles to recovery highlighted in Part 1, and the far-reaching consequences of the pandemic that are only just starting to become apparent, businesses will inevitably incur many other direct and indirect losses that will not fall for coverage under these first response policies. Part 2 of our review therefore investigates what coverage for COVID-19-related losses may be available elsewhere under a variety of other policies.
A general caveat is that these are specialty commercial lines of business, which are often highly bespoke and tailored to the risk in question. Whilst we have highlighted some of the issues that we anticipate arising, any question of coverage will be entirely dependent on a detailed review of the facts in the context of the policy wording.
Trade Credit
What might be covered?
With global markets tumbling and the FTSE 100 at its lowest level since 2008 at the time of writing, the economic consequences of COVID-19 look set to be universally felt, and not just by front line industries such as travel, hospitality, entertainment and sports. As supply chains are disrupted and customer funds are squeezed, credit arrangements and solvency margins across all sectors will be severely stress tested.
Businesses with trade credit insurance may be protected from customer defaults within specified criteria, cushioning them from the indirect effects of COVID-19 on their cashflow.
What are the difficulties?
The cover here is narrow and limited specifically to customer defaults. Trade credit insurance will provide no protection for losses suffered as a result of supplier insolvency or a general downturn in the market.
A further issue is that coverage of customer defaults in COVID-19 circumstances may be affected by force majeure provisions in the underlying contracts, governmental actions in relieving contractors from their payment obligations in certain sectors, or (in common law jurisdictions) arguments of contract frustration. Where any of these mechanisms acts to relieve the customer of their contractual obligations, or extends payment periods, it may be arguable, depending on the policy wording in question, that there has been no default and that the policy does not therefore respond.
Political Risk
What might be covered?
Often setting side by side with trade credit insurance, political risk insurance can provide coverage for broader – although highly tailored – circumstances affecting a business’ investments, usually in cross-border circumstances, where the regulatory, economic or political environment is considered to be sufficiently volatile to require a degree of risk transfer. Political risk policies respond to specific triggers including expropriation, currency inconvertibility, and contract frustration.
Where trade credit policies fail to respond to defaults due to force majeure or frustration, political risk policies may potentially step in to bridge the coverage gap, particularly where payment defaults are the direct result of government intervention. For example, in China the Council for the Promotion of International Trade has already issued force majeure certificates worth over $53 billion to relieve businesses of specified contractual payment obligations at a local level. However, the effects of such actions on the underlying contracts will need to be analysed under local and applicable international laws in order to understand the impact on cover under any political risk policy.
Depending on how broadly the insuring clauses are drafted, other governmental edicts such as travel bans, restrictions on public gatherings, and closures of public places may also potentially trigger political risk coverage.
What are the difficulties?
Although there may be ‘silent’ cover to be found in political risk policies, the product is generally not designed specifically to protect businesses from pandemics or circumstances outside the control of government. Broadly drafted exclusions and narrowly drawn insuring clauses may therefore limit the recoverability of losses under the policy, even where losses may be linked to government actions taken in response to the COVID-19.
Environmental Risk
What might be covered?
Whilst standalone environmental policies are generally intended primarily to respond to cleanup costs and third party liabilities arising from pollution or contamination events caused by the insured business, there may be limited cover provided for disinfection or decontamination costs associated with an outbreak of an infectious disease at the insured premises.
What are the difficulties?
Again these policies are highly specialised, with significant variance and no standard coverage. Where coverage is provided for decontamination or disinfection of premises, the trigger is likely to require an outbreak on or near the insured premises; costs of prophylactic cleansing are unlikely to be covered. Some policies may only be triggered where decontamination is required by order of a competent regulatory authority.
Similarly to our earlier discussion of event cancellation and BI covers, the policy may provide an express list of covered or excluded infection diseases which will determine whether the policy responds to COVID-19.
Contaminated Products / Product Recall
What might be covered?
If a manufacturer of food & beverage or other consumer products suffers an outbreak of COVID-19 at their factory or elsewhere in the supply chain, leading to concerns over possible contamination, a decision may be taken to recall the potentially affected products. If Contaminated Products or Product Recall Insurance is in place, cover may be provided for the manufacturer’s own costs incurred in recalling the products, as well as costs of managing the reputational damage, and potentially cover for loss of profits caused directly by the recall.
What are the difficulties?
The policy trigger will usually require a reasonable expectation that the use or consumption of the products will cause bodily injury, sickness or death. In the case of a COVID-19, which appears to be transmitted by contact with infected persons rather than by consumption of contaminated products, it may be challenging for the insured to prove as a matter of fact that the coverage is triggered. The insuring clause will need to be examined carefully, as language such as ‘may cause’, ‘would cause’, or ‘likely to cause’ will all set different bars to be met. In any case, voluntary recalls carried out primarily as brand protection exercises, where there has been no actual contamination, will not usually be covered.
Product Liability
What might be covered?
In the event that a contaminated product in the recall scenario considered above should actually infect consumers, this could obviously lead to personal injury claims that would fall for coverage under a product liability (or general public liability) policy. However, given the apparent mode of transmission of the virus, as well as the likely causation difficulties that would arise, the likelihood of these type of claims may be remote. Any significant exposure is more likely to lie with manufacturers of pharmaceutical, medical and sanitary products used to prevent transmission or treat the symptoms of the virus, which may be alleged to be defective in failing to prevent or treat the illness, or by causing side effects.
What are the difficulties?
As with public liability claims (which may be covered under the same general liability policy), pollution exclusions may be relevant. More importantly, coverage issues are likely to arise in respect of any claims regarding the products’ efficacy i.e. their ability to perform the intended task of preventing transmission or treat symptoms. Many policies will contain efficacy exclusions, meaning that only liability for injury or damage caused by the product would be covered, not for the product failing to fulfil its intended or advertised function. In that case, a claim for injury caused by side effects of a medicine or vaccine would likely be covered, whilst a claim that a vaccine or device had failed to prevent infection, or that a medicine had failed to treat or cure the illness, would normally not.
D&O
What might be covered?
In the face of direct operational restrictions, and in the shadow of an imminent recession, all businesses face stark choices about how best to continue trading and manage the myriad difficulties. As share prices tumble and markets contract, some businesses will inevitably fail to survive, particularly where insurance cover is absent or inadequate to cover losses caused directly and indirectly by the COVID-19 crisis.
Directors of companies may find themselves in the firing line for failing in their duties to manage the company for the benefit of the shareholders, or for misleading investors by failing disclose the nature and extent of the business’ exposure. In insolvency situations, D&O policy limits may be seen as a potential source of recovery for disgruntled shareholders and liquidators seeking to maximise assets for distribution to creditors.
What are the difficulties?
Most D&O policies will contain a bodily injury exclusion, the effect of which will depend on how broadly the exclusion is drafted. Those with ‘absolute’ wording (e.g. ‘based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving bodily injury’) may give rise to coverage challenges in the context of claims flowing from COVID-19, whilst those drafted on a narrow basis (‘for bodily injury’) are unlikely to act as a bar to recovery.
Similarly, pollution or contamination exclusions may come into play, depending on the facts of the claim and the wording of the exclusion. Although these exclusions were introduced primarily to avoid exposure to cleanup costs following environmental disasters, any exclusion using ‘absolute’ wording may potentially be argued to exclude follow-on claims arising from COVID-19-related losses.
Public and Employers’ Liability
What might be covered?
Any business with public exposure, and all businesses with employees, may have concerns over potential liability issues arising from an outbreak, particularly where a decision is taken not to cancel gatherings or events. Establishing causation will be a significant and perhaps insurmountable hurdle for any employee or member of the public seeking to establish liability for illness or even death caused by COVID-19, in that it seems unlikely to be possible to prove when and where the disease was contracted. Nonetheless, it is certainly conceivable that claims may be brought, particularly in more litigious jurisdictions. If so, defence costs at the very least should be covered under the appropriate public or employers’ liability policy.
What are the difficulties?
As in the case of D&O, public liability policies often include pollution exclusions which, if widely drafted, may potentially bar coverage of claims made in respect of COVID-19 contamination and infection. If excluded under a company’s public liability insurance, cover may instead be provided under any standalone environmental insurance that has been purchased.
As a compulsory insurance in the UK, Employers’ Liability cover tends to be more standardised and give rise to fewer coverage issues. However, potentially relevant exclusions include intentional or reckless acts, which might be invoked where an employer is accused of knowingly or recklessly exposing its employees to infection, or failing to protect them
Comment
This is a far from comprehensive review of the coverages that may or may not be available to meet the wide-ranging losses that may be suffered by businesses in connection with the spread of the COVID-19 virus, but it can be seen that all industry sectors and lines of insurance business are likely to be affected, with many potential overlaps and gaps in coverage.
As with the advent of any novel peril, there is no single insurance product designed to address the losses caused by the COVID-19 pandemic, and businesses should therefore consult with their advisors to investigate the availability of cover in their existing programs, and just as importantly to ensure that notification and other claims conditions are complied with in a timely manner.
Reinstatement re-stated
In its recent judgment in Endurance Corporate Capital v Sartex (05/03/20), the Court of Appeal confirmed that, absent any contractual provision to the contrary, the appropriate basis of indemnity in a property policy is the reinstatement basis - ie, the cost of repairing/replacing the damaged/destroyed building. The only exception is is where, at the time of the loss, the policyholder had been planning to sell the building, rather than continuing to use it.
The Court of Appeal rejected the Insurer’s case that, in order to be entitled to the cost of reinstatement (rather than merely the decrease in market value, where that was lower), the policyholder needed either to have already carried out the reinstatement itself or at least - as per Great Lakes v Western Trading (CoA, 11/10/16) - to have held a “fixed and settled intention” to do so. In a blow to property insurers, the Court of Appeal ruled that this requirement only applied in the very rare situation where the flood, fire, etc had increased the value of the building - as had occurred in the Great Lakes case (see https://www.fenchurchlaw.co.uk/ordinary-measure-indemnity-great-lakes-reinsurance-uk-se-v-western-trading-limited/).
In a further blow to property insurers, the Court of Appeal held that they cannot apply a blanket percentage discount (in practice, often as much as 30-35%) to the cost of reinstatement, to represent the alleged betterment where an old building was replaced using modern materials. A deduction for betterment will be permitted only where insurers can prove and quantify the lower running costs of the new building or, in the case of new plant & machinery, its greater efficiency.
https://www.bailii.org/ew/cases/EWCA/Civ/2020/308.html
Jonathan Corman is a partner at Fenchurch Law
Coronavirus – Am I Covered? A Routemap to Recovery for Policyholders, Part 1
As the spread of COVID-19 gathers pace, there is increasing concern over not just the potential public health impact, but the financial consequences anticipated by businesses within all sectors. Containment measures implemented by public authorities will hopefully manage the spread of the disease effectively and minimise the physical impact on public health, but may themselves lead to substantial economic losses across the economy.
Most businesses will have comprehensive insurance programs in place, but where should policyholders look for coverage of anticipated losses associated with the spread of the Coronavirus?
The first in this two-part series looks at the two primary policies which may respond to economic losses caused directly or indirectly by the COVID-19 virus – Business Interruption and Event Cancellation.
BUSINESS INTERRUPTION
What might be covered?
Business Interruption cover for loss of profits and increased costs of working was traditionally attached to property insurance only, but can now be found in a variety of commercial policies. This will be a primary focus for businesses facing a reduction in income and increase in costs as they try to cope with containment measures in the first instance and, in the event of the escalation of a pandemic, potentially severe supply chain disruption and the mass absence of employees and customers.
What are the difficulties?
Coverage Trigger
The first challenge to establishing a BI claim is the trigger for coverage. In a property policy, BI cover will usually only be triggered where covered property damage has occurred. That is unlikely to be relevant in the present circumstances, so policyholders will need to examine any extensions available, or the existence of standalone contingent BI cover. In some cases, express Infectious Disease cover may be provided. If not, other extensions, for example suppliers and customers, denial of access and loss of attraction covers may all be relevant, but the availability of cover will be entirely dependent on an analysis of the factual cause of the loss in the context of the specific wording.
Those policyholders with an express Infectious Disease cover or extension might appear to be well-protected, but the scope of cover tends to be very tightly drafted and may not extend to novel pathogens such as the coronavirus.
Notifiable Diseases
Some policies provide cover for losses caused by any ‘notifiable’ disease, which may give rise to difficulties in the case of a novel disease that does not become notifiable until some way in to the period of loss. A decision of the Hong Kong Court of Appeal in the aftermath of the SARS pandemic established that such a clause had the result of reducing the amount of loss covered in two ways. First, losses suffered before the date on which the disease became notifiable were not covered. The decision of a competent authority to make the disease notifiable did not act retrospectively. Secondly, the starting point for establishing the amount of profit lost was the period after the advent of the disease, but before the disease became notifiable, not the period before the first incidence of the disease. To the extent that the business’s profitability has already suffered before the disease becomes notifiable, this will therefore affect the amount the business is able to claim as loss of profit going forward.
COVID-19 became notifiable in Scotland on 22 February 2020, and in Northern Ireland on 29 February 2020, whilst in England the authorities only took the decision to make it notifiable on 5 March 2020. The wording of any policy will therefore need to be checked carefully to establish which date acts as an effective trigger for BI cover. If multiple triggers apply, calculating the amount of covered loss will be complex and no doubt contentious, given the staggered approach in different regions of the country.
Excluded Diseases
Even where broad coverage for notifiable diseases is provided, policies frequently include an express list of excluded diseases. Whilst this is unlikely to include any reference to Coronavirus or COVID-19 specifically (unless issued very recently), it may include catch-all language such as ‘or any mutant variant thereof.’ We have already seen some suggestion that losses from COVID-19 are excluded as a mutant variant of ‘SARS or atypical pneumonia’ (which was itself a form of coronavirus) and the medical definition or categorization of the disease will no doubt give rise to disputes over coverage.
Specified Diseases
Conversely, some policies provide cover for a specified list of infectious diseases, rather than any notifiable disease. Such policies are unlikely to provide coverage from Coronavirus losses, unless it can be established, as a matter of scientific or medical fact, that the COVID-19 virus does fall within the list of defined diseases where ‘variant’ language is used, as in the case of excluded diseases.
Causation
Even where cover for BI losses is established, there will inevitably then be disputes over causation and measurement of loss. Where a business elects to implement or follow certain measures for the protection of its employees or customers, the position will be different from that where it is following mandatory orders from a public authority. Even where a business is forced to close or scale down its operations, there will be arguments over to what extent the losses are caused by the immediate effects on the business, rather than the effects on the wider marketplace and the absence of customers.
We can therefore anticipate ‘wide area damage’ type arguments being raised by insurers, relying on the principle in the Orient Express case, where a hotel in New Orleans was prevented from recovering its lost profits following Hurricane Katrina, on the basis that damage to the wider area meant that even if the hotel had been able to continue operating, it would have had no custom anyway.
The insuring clause, formula and any trends clause will need to be examined very carefully in order to understand whether such principles have any application to a claim for BI losses in the aftermath of a COVID-19 outbreak.
EVENT CANCELLATION
What might be covered?
Where business interruption cover is unavailable, or inadequate to meet losses suffered, policyholders in certain industries may be able to turn to event cancellation policies to protect them for some of the same losses. These policies cover losses caused directly by the cancellation of a specific event as a result of one of a list of specified perils (or alternatively by any cause not expressly excluded), and where triggered are intended to compensate the business for its lost profits and increased costs as the result of the cancellation.
Event cancellation policies provide coverage for a wide variety of losses suffered by the organiser of the event following cancellation. Cover is not provided for the losses of attendees of cancelled events, who will need to rely on the terms and conditions of the relevant ticketing, travel and accommodation providers, as well as any applicable statutory provisions, to recover their lost costs as a result of the cancellation.
What are the difficulties?
Trigger
The terms of cover provided in event cancellation policies are highly bespoke and there is no standard approach. Some event cancellation policies may simply not provide – or may exclude - cover for cancellation caused by infectious disease. For those that do, the cover may only extend to an outbreak on the insured premises or within a specified radius, and may exclude pandemic circumstances. The reverse can also be true, in that an exclusion may only preclude cover of cancellations due to local outbreaks. As ever, the policy wording is determinative.
Mandatory or voluntary cancellation
The decision to cancel an event is not taken lightly. Even so, insurers may argue that cancellation of an event was not ‘necessary’ or ‘unavoidable’ (depending on the specific policy wording in question) in the absence of any direction or recommendation from a competent authority. Similarly, coverage is unlikely to be provided if a decision is taken to cancel simply because of low ticket sales caused by COVID-19 concerns.
Infectious diseases – excluded, specified, or notifiable.
The comments above in relation to business interruption losses apply equally to event cancellation cover, which may contain broadly equivalent definitions and trigger provisions. The notifiable date of the disease becomes even more critical in the context of event cancellation cover, since any event cancelled before the disease became notifiable will simply be uncovered. The divergent dates on which COVID-19 became a notifiable disease in Scotland, Northern Ireland and England may therefore become particularly relevant to claims in this area.
COMMENT
It can be seen that whilst most businesses face potentially significant, but as yet unknown financial losses flowing from the impacts of the spread of COVID-19, the availability of insurance coverage for such losses is far from certain and likely to be contested. Public comments by insurers indicating that they consider their aggregate exposure to be low, and that most losses will be excluded, confirm this to be case.
Business Interruption and Event Cancellation insurance may not respond at all, or may not be adequate to meet the actual losses suffered by the business. Part 2 of this series will therefore examine potential coverage for specific losses which may be available under a wide range of other existing policies.
Aaron Le Marquer is a partner at Fenchurch Law
Ciara, Dennis and Ellen – an ABC (and CDE) of BI Claims
As storms Ciara, Dennis and now Ellen batter extended parts of the UK, with some areas suffering the worst floods in 200 years, insured losses have already been estimated at £200M and will continue to rise. For individuals whose homes are damaged the effects can be devastating, but effectively addressed by adequate property insurance. Businesses may face more complex insurance issues in order to recover losses arising not just from damage to property and machinery, but to the business itself, whose turnover and profits may be reduced or even eliminated in the immediate aftermath of a flood or other severe weather event. Whilst revenue may take an immediate hit, wages and other overheads must continue to be paid, and in the absence of timely and sufficient financial support, the business’s ability to continue trading may be threatened.
Business interruption cover is therefore an essential component of any business’s property insurance programme. But claims for loss of profit, which must be calculated on a hypothetical basis with many variables, are inevitably complex and drawn out, making Business Interruption claims fertile ground for disputes.
What issues do businesses and their brokers need to consider in order to make sure they are adequately covered and their claims are paid in full?
Wide Area Damage
The notorious issue of wide area damage, following the decision in Orient Express Hotels Ltd v Assicurazioni Generali SPA is a recurrent headache for any insured bringing a BI claim following a catastrophic weather event, and particularly affects those operating in the hospitality industry or other sectors relying on customer footfall. We have previously discussed the merits of the Orient Express case as part of our series “The Good the Bad & the Ugly: 100 cases every policyholder needs to know" but in summary, the claim was brought by a hotel in New Orleans, which suffered significant damage from Hurricane Katrina, leading to its closure for a period of two months. The surrounding area was also devastated by the storms, with the entire city shut down for several weeks. The court found that the hotel was prevented from recovering its business interruption losses on the basis that they were not caused not just by the damage to property, but by the damage to the wider area. Even if the hotel had not been damaged, it would have suffered the same loss of profits since New Orleans was effectively closed for several weeks due to widespread flooding.
In our view the approach taken in the Orient Express case is wrong in principle, and represents an unmerited windfall to insurers in catastrophic event circumstances: the more severe the event, the less insurers pay. However, until challenged in the higher courts, it remain a potential trap that must be addressed. Insureds and their brokers should therefore ensure that they have a clear understanding of how any business interruption coverage will respond in the event of a catastrophic weather event that will affect not just the insured property, but the area at large. It is important to ensure that the insuring and trends clauses are drafted as broadly as possible, so as to respond to losses caused by an insured peril, not just those arising directly from damage to insured property. Where possible, Denial of Access, Suppliers and Customers, and Utilities extensions (also known as contingent business interruption cover) should be incorporated - without sublimit - to ensure that loss of profits remains insured even where the business itself suffers no damage to property.
Underinsurance
An apparently straightforward issue, but one that leads to significant reduction of BI recovery perhaps more than any other, is underinsurance. Reaching the correct value for the sum insured is not a straightforward matter, and is often misunderstood. For example, Business Interruption losses are often insured on a Gross Profit basis, but care needs to be taken to ensure that the Gross Profit declared to insurers is calculated according to the gross profit definition in the policy wording, which is likely to differ significantly from the method of calculation used by businesses in their internal or published accounts. In particular, wages are not normally included in an accountant’s gross profit figure, but should be included in the insurable Gross Grofit. However not all cover is written on a Gross Profit basis, and alternative specifications (methods of calculation) include Turnover, Gross Revenue, and Increased Costs of Working. Each of these specification categories appears in many varieties with subtle differences. A detailed understanding of the cover provided by the insuring clause and specification is therefore vital in order to calculate the correct sum insured, and the advice of insurance brokers in making sure that cover is tailor-made to the business is crucial.
Indemnity Period
Underinsurance in BI claims can arise not just from an inadequate sum insured, but from selecting an insufficient indemnity period. Businesses must ensure that they insure for an indemnity period that is long enough for the business to recover in catastrophic circumstances. This will depend on the nature of the business of the question, but will often extend beyond the standard 12-month indemnity period. Likewise, the insured should be aware that any specified waiting period i.e. the period immediately following the insured event, will act as a deductible and remain uninsured.
Delays in Payment
When a business suffers business interruption losses from a catastrophic weather event, time is of the essence in seeking insurers’ immediate engagement with the adjustment of the claim. Whilst complex business interruption claims may take many months or even years to crystallise, it is critical that interim payments are sought from insurers at the earliest stage. Without financial support at the time when they most need it, many businesses will struggle to recover. Additional losses suffered as a result of late payment may now form the basis of a damages claim under the Enterprise Act 2015. If the business is likely to suffer further loss if insurance proceeds are delayed (whether that be because the business is forced to borrow at high interest rates, or loss of growth or investment opportunity) brokers and insured should ensure that insurers are aware of this as soon as possible in the claims process. It may affect the behaviour of insurers who wish to avoid potential liability for damages in excess of policy exposure.
Whilst businesses might feel confident that they are fully covered for any BI losses suffered as a result of increasingly frequent flooding and other extreme weather events, there is a complex matrix of issues affecting the recoverability and valuation of losses under the policy, and careful attention needs to be paid to these potential pitfalls by businesses and their brokers both at the time of seeking cover and in the preparation of any claim.