The recent High Court judgment in the FCA Business Interruption (BI) test case (The Financial Conduct Authority v Arch and Others) has been the subject of extensive media coverage.
The background facts and the conclusions reached by the High Court will by now be familiar (see our note on the test case here), but consideration must also be given to the immediate consequences of the judgment and what action (if any) brokers and their clients should be taking pending the seemingly inevitable appeal.
Businesses across the UK (if not worldwide) have suffered massively at the hands of Covid 19; those businesses that carried BI Insurance have poured over their wordings and, in most cases, made claims, believing that this is precisely what this insurance was there to cover. The recent judgment in the FCA test case is likely to assist many of them in recovering some of their losses. However, that is unlikely to be the case across the board, and there will still be significant numbers of disappointed policyholders (particularly those whose non-damage BI cover only extended to denial of access, where the Court was slow to come to policyholders' aid) whose policies will stand up to scrutiny in resisting Covid 19 -related losses.
With some 700 types of BI policy and 370,000 policyholders potentially affected, brokers are naturally concerned about their own exposure to E&O claims in cases where their clients fail to secure a recovery. Indeed, the knee-jerk addition of blanket Covid-19 exclusions on newly incepting brokers' E&O policies has led to a similarly knee-jerk influx of block notifications to current PI insurers, such is the pace at which the situation is evolving and the uncertainty that it brings with it.
All of the above is set against the looming shadow of an appeal in the FCA's case. This may well take some time to be fully enunciated and then heard; the suggestion is that the Supreme Court has set aside some time in December to hear a 'leapfrog' appeal, but this has yet to be confirmed. And their decision – which will surely be reserved and take some additional months to be delivered – will then need to be scrutinised by the various insurers whose wordings are under the spotlight and applied to the facts of each individual notification. Whilst all of this is going on, businesses that have already incurred significant losses are continuing to feel the effects of the Government's social distancing measures. Trading losses are increasing. And pressure on brokers from agitated clients is mounting. Whilst it is tempting in this metaphorical limbo for brokers to advise their clients simply to sit tight and wait it out, this approach risks further losses, all of which may transpose into broker claims further down the line.
Brokers and their E&O insurers will be mindful that, in the event of a successful claim by a policyholder, their liability will not (as is typically the case) necessarily be limited to the amount that a differently worded BI policy would otherwise have paid out. As a result of the well-known judgment in Arbory Group Ltd v West Craven Insurance Services  brokers' liability in the BI context extends not just to the insurance payment that would have been made if adequate BI cover had been in place, but also to the consequential losses that the business has suffered due to its insurance arrangements being inadequate. This clearly puts insurance brokers in a very difficult situation in the current environment of enforced hiatus. In circumstances still shrouded by uncertainty, one thing is clear – it would be foolhardy to sit back and do nothing. Rather, it is important that brokers show their clients continued support even if, on the face of it, there may be little that they can do to influence the end result.
In light of the Arbory case, it is in brokers' interests to ensure that their clients are mitigating their position as fully as they can in respect of ongoing business losses. Clients should not be viewing pay outs from BI policies as a 'fait accompli' – the huge variation in policy extension wordings and the associated complexities renders the ultimate outcome far from certain. Even on a best case scenario outcome, where the BI policy responds, the insurance payment may only touch the surface of any consequential profit losses incurred, particularly in the light of the fact that we are typically looking at quite low policy sub-limits for both disease and denial of access covers. We would therefore encourage brokers to initiate communications with their clients. Are they fully aware of their policy sublimits? Are their BI claims properly substantiated and evidenced. What steps are they taking to limit ongoing losses, particularly in the context of anticipated further lockdown measures? Have they considered interim funding, perhaps by way of business loans, to ensure continued trade and, if so, on what basis? Are they taking full advantage of government assistance? The focus should definitely be on how best to protect trade and therefore profit in these difficult times.
But this approach is not itself without risk; typically we would advocate against the broker becoming consultant for its clients. Aside from needing a different skillset, a very careful line needs to be walked when advising clients to take particular actions in a situation where the brokers themselves may ultimate be in the firing line. Conflicts of interest abound, and the broker would do well to involve its E&O insurer at an early stage in ensuring that they stay the right side of the line in being helpful without unduly influencing.
On the subject of E&O insurers, we would encourage brokers to engage constructively with their insurers in carrying out a comprehensive review of all cases that have been notified and to categorise these according to the considered level of exposure to claims. In some cases it will be clear that the advice or service provided was flawed; perhaps where no BI cover is in place at all but ought to have been, or where the sub-limit for disease was lower than it ought to have been. Brokers should liaise with their insurers as regards potential liability in each case; in some limited cases where there is considered to be exposure to a claim, brokers and their insurers might consider making early payments so as to avoid the Arbory situation discussed above. And, in others, a reasoned denial would at least let the policyholder know that they ought not to be presuming that they will recover from somebody. But for the most part it will be a case of communicating effectively and often with the affected clients; keeping them informed of progress with their claims, being available and sympathetic whilst also reminding them that their policies were never drafted with COVID in mind. However, simply sitting back and waiting would not be sensible; in the words of William Shakespeare, "Nothing comes from doing nothing"....
Originally published by Beale & Co, October 2020
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