The impact of the coronavirus (COVID-19) pandemic has not been limited to any individual industry or location but, as the pandemic continues to unfold, the question of how much claim exposure insurance brokers may face due to the impact of the crisis becomes an ever more pressing concern. Speaking with Insurance Business, two senior members of the corporate and insurance law firm RPC outlined how insurance brokers may find themselves subject to litigation by policyholders in the aftermath of the virus.
The key risk being faced by brokers at this time, according to Tim Bull (pictured above), a partner at RPC, is that their clients will complain that the policies that their brokers placed on their behalf do not cover them for COVID-19 related losses. This risk is mostly going to be seen in the area of business interruption insurance which is usually contingent upon property damage, which has not been a side-effect of the virus. Clients may be looking for additional cover within a policy that will nullify the impact of the closedown of a business or the lack of access to business premises, though Bull noted it is still too early to know how great a concern this should be for insurance brokers specifically.
Senior associate at RPC, Richard Booth said that, perhaps of all the professional services, insurance brokers are uniquely placed and thus uniquely at risk during this time. Clients are incurring significant financial losses and many of them may expect that they have an insurance policy that will cover some of these losses. This is particularly pertinent to business interruption losses but also to travel cancellation policies and a variety of other contingency policies as well.
“Clients with these kinds of policies are now going to be turning to their broker and asking whether there is cover, and if there isn’t cover, why not?” Booth said. “The risk to the broker is that they will be exposed to criticism that they haven’t properly advised their clients about the scope of cover within the policies that they have, or indeed that they don’t have.”
“We are hearing at the moment, at least anecdotally, from our insurance company clients but also from the placing brokers we work with about a spike in contact, if not outright notification from brokers, who are being contacted by their clients who are asking whether they have certain cover,” Bull said.
Addressing whether or not brokers have a good understanding of the risks that they are facing when it comes to claims of negligence at this time, Bull said that many of the larger brokers seem to have a fully developed understanding. The big UK and global players have got very large risk management departments and in-house legal departments, he noted, so they have got access to insurance lawyers which has given them a broad understanding of the risk space.
“I think the smaller brokers are ones which may not fully appreciate that there is an issue,” Bull said, “but it’s wrong to generalise because I know some small brokers who are absolutely on top of these things. And brokers specialising in placing certain types of risk such as all-risks commercial policies, including property and business interruption, should be aware by now that there are potential issues arising out of the pandemic.”
A concern for some brokers is whether liquidators may take action against insurance brokers if many businesses are forced into liquidation as a result of the coronavirus but Bull noted that this greatly depends on the strength of the argument made that the broker was negligently deficient. At this specific moment, this is quite speculative litigation as several hurdles would have to be overcome to make a compelling case against an insurance broker.
“The liquidator will have to show that the broker was in breach of what a reasonable broker should have done at the time,” Bull said, “and also that the insurer and the cover were available. Were the insurers offering cover for pandemics or were there exclusions that did not include COVID-19, which arguably is a derivative of SARS, which was a general exclusion in many policies. And if the cover was available would the policyholder have bought it before they went into liquidation?”
Brokers at this time will likely be fielding a lot of queries, Booth said, but when examining the legal mechanisms of how these claims will play out, a lot of brokers will have defences. From a UK perspective, he believes that a lot of clients even if offered pandemic insurance would not have taken it out. He also highlighted the speed at which the pandemic has occurred and that while brokers might be exposed to some criticism that they should have acted quicker, realistically they had very little time to do so.
“Another key issue when claims start to be advanced will surround how to properly quantify a client’s loss,” Booth said, “there’s going to be a lot of debate around the government’s response and whether clients have mitigated their losses by taking the benefit of the different schemes available. So we must wait to see how these claims, as and when they arrive, will actually be formulated and how sustainable they are.”
Both Bull and Booth highlighted that while it is important that brokers are aware of these issues and expect a spike in notifications, and potentially some litigation if clients seek to make a claim for losses, brokers will likely have good defences to claims of negligence. Bull also stated that these losses will be incredibly difficult to calculate, particularly in the short term, as nobody quite knows what these losses will be, especially in the light of the government’s bailout schemes.
The focus for brokers at this time should be on what they need to do during and following the pandemic to mitigate against a similar event occurring in the future, Bull said, and he outlined how brokers should now be identifying those policies where losses could be claimed as a result of a pandemic. Beyond the obvious policies like business interruption and contingency risks, there may be other policies that brokers need to review to examine the coverage available or any relevant exclusions in the cover.
“What brokers should then do,” Bull said, “is consider if this can be improved upon, and discuss with the insurers that they place businesses with what can be provided. Insurers, of course, are going to start reviewing cover and the brokers have to try either individually, if they’re powerful enough, or in a coordinated fashion, to ensure that policy coverage is as wide as possible.”
If brokers are not successful in negotiating this broad coverage, he said, they must mitigate their own exposure by making sure that they advise their clients accordingly regarding both the full scope of the cover available and the price. The client must be fully appraised of the cover they will receive and Bull highlighted the importance of brokers clearly recording these conversations.
Broker files are often rather sparse when it comes to documentary evidence of discussions or advice given, but if they record all correspondence then it will be very difficult for a policyholder to hold a broker responsible for negligence, assuming that the advice given was correct. Bull detailed that even such simple risk management techniques can limit a broker’s future exposure to similar events.