Challenging times for Zurich: insurer ordered to pay out on Covid 19 claim

World Challenge Expeditions Limited v Zurich Insurance Company Limited [2023] EWHC 1696 (Comm)

The court has held that, having operated a business travel policy in a certain way for nearly four years, Zurich was estopped from denying that it provided cover on that basis.

An estoppel by convention had arisen such that it would be inequitable for Zurich to resile from the common assumption between the parties as to the operation of the policy.

As such, the successful policyholder, World Challenge (represented by Fenchurch Law), was entitled to an indemnity of almost £9m, being the amount of refunds paid to its customers following the cancellation of its global programme of expeditions necessitated by the pandemic.

The court further criticised Zurich for its handling of the claim and the time that it taken to clarify its position.  This was a matter of utmost importance and urgency in circumstances where it was critical to World Challenge’s business and customer relations that it was able to confirm whether it had a covered claim.  Mrs Justice Dias commented that: “This is not an impressive performance even in the difficult circumstances of early 2020 and ordinary policyholders might well be appalled to think that a reputable insurance company could treat a long-standing and supposedly valued customer in this way”.

A full copy of the judgment can be found here.

Background

The policyholder, World Challenge, provides adventurous, “challenging” expeditions worldwide for secondary school students, or “challengers”.  As a result of the pandemic it was obliged to cancel nearly all of its booked expeditions for 2020.

The insurer, Zurich, provided World Challenge with wide ranging cover including cover for cancellation of trips by the challengers.

Prior to the pandemic, Zurich had handled and approved more than one hundred cancellation claims since 2016 in the amount of the refund paid to challengers. The amount of the refund, less an administration fee, was recorded against the aggregate deductible in the event of a trip cancellation. Prior to the onset of Covid-19, that aggregate deductible was never exhausted.

When the pandemic struck in early 2020, Zurich faced substantial claims for refunds to challengers for trips that would be cancelled in the coming months, and which would significantly exceed the aggregate deductible. World Challenge’s position was that Covid-19, and the mass trip cancellations which could eventuate, was precisely the type of ‘black swan’ event that it thought it had insurance cover for.  It sought confirmation of that cover from Zurich prior to cancelling the relevant trips and exposing itself to the millions of pounds of refunds to its customers that it would need to make as a result.

In light of the significant losses it now faced, Zurich, after an extended period of delays in confirming its position, in a complete volte-face sought to depart from the “common assumption” of cover for refunds and instead informed World Challenge that it only had cover (and only ever had cover) for irrecoverable third party costs (for example, hotel or airline costs which World Challenge had paid out and was unable to recover).

The claim

The issue before the court was the correct construction of the policy and whether Zurich was precluded by estoppel or collateral contract from denying that the policy provided the cover that World Challenge thought it had.

Mrs Justice Dias concluded that, although the policy in fact only covered irrecoverable third party costs,  Zurich’s previous conduct in agreeing claims in the amount of the refunds and setting them against the deductible had clearly conveyed to World Challenge that they shared its assumption as to the scope of cover and World Challenge was strengthened and confirmed in its own reliance on that assumption.

Zurich’s argument that the subjective understanding of its claims handlers was insufficient to establish any assumption on the part of the company was rejected.

Further, the court found that the delays in cancelling trips caused by Zurich’s delay in confirming its position on cover caused World Challenge to lose its opportunity to explore other avenues in order to maintain customer goodwill and manage its exposure.

It was therefore inequitable for Zurich to resile from the common assumption. Zurich had every opportunity to correct the error in handling claims, but took no steps to do so until such time as it became apparent that the aggregate deductible would be exceeded.

Conclusion

This judgment provides a welcome reminder to insurers about the importance of handling claims in a timely manner that responds to the needs of its customers, particularly in the face of a devastating loss with significant repercussions for the continued operation of its business.

Also welcome is the confirmation that the conduct of claims handlers in approving or rejecting claims will bind an insurer as they are the people charged with handling the claims on the company’s behalf.

From a legal perspective, in addition to being essential reading for anyone interested in the requirements of a variety of types of estoppel, practitioners will do well to take note of the comments made about the witness evidence and the dangers of putting forward statements that are inconsistent with the contemporaneous documents.  This made for an uncomfortable time for Zurich’s witnesses in the box, and should be a salutary tale, particularly given the spotlight on witness evidence in light of the recent changes to the rules in respect of trial witness statements.

Authors:

Joanna Grant, Partner

Rob Goodship, Associate Partner

Anthony McGeough, Senior Associate