With the news that a judgement in the Financial Conduct Authority's business interruption insurance test case is due handed down on Tuesday 15th September 2020, Stewarts Partner Clive Zietman, Senior Associate Alex Lerner and Senior Paralegal Punam Shah look ahead to a potential second wave of insurance-related litigation claims focusing on the role of insurance brokers:
The Covid-19 crisis has led to widespread business disruption. A substantial number of businesses, both large and small, have sought to claim under their business interruption insurance policies only to find that their policies are inadequate or that their claims are being rejected.
The FCA has brought a test case against eight insurance companies seeking urgent court declarations aimed at resolving contractual uncertainty arising from selected business interruption insurance policies. It is not yet known when the court will give its judgment.
Yet the FCA test case represents only the first wave of insurance-related claims destined for the High Court in the coming years.
It is only a matter of time before prospective claimants begin to give serious consideration to negligence claims against their insurance brokers, either in addition to or as an alternative to any claims they may have against their insurers.
Basis for claims
An insurance broker is an individual or company that arranges and negotiates insurance on behalf of clients. Typically, a negligence claim against an insurance broker arises from a broker’s failure to insure specific risks, to provide adequate insurance cover, to report risks to an insurer, to renew relevant policies and/or to set policies up correctly and in time.
The fall-out from the Covid-19 crisis is likely to give rise to a number of such instances. In particular, we anticipate that policy-holders may seek to bring claims arising from the following scenarios:
- where business interruption insurance is inadequate, and a client believes they were not properly advised of the restrictions to their coverage
- where a client did not have any business interruption insurance at all and believes their broker ought to have advised them to obtain coverage
- where a client instructed an insurance broker to obtain business interruption insurance and the broker failed to obtain such coverage
- where an insurance broker made representations about the “all-embracing” nature of a business interruption insurance policy only for a claim under the policy to be rejected by the insurer
A duty to recommend business interruption insurance?
Insurance brokers owe their clients a duty to ascertain their insurance needs by taking instructions and considering available information about a client’s business. Does that duty include a duty to recommend business interruption insurance?
Inevitably, much will turn on the facts of a particular case, the balance of expertise between the broker and the client regarding the client’s insurance needs and the instructions given by the client to the broker. However, in principle, the scope of an insurance broker’s duty can include recommending business interruption insurance.
Although it is not easy to derive a definitive answer from the case law, much would seem to turn on whether a particular client (a) knew what insurance they wanted and gave their insurance broker specific instructions to obtain such insurance, or (b) relied on an insurance broker to advise on what insurance their business ought to obtain. So, for instance, claims may arise if a client asked its insurance broker to procure “full cover” or “pandemic cover”, but the insurance broker did not do so.
Conflicts of interest: why an insurance broker may have failed to advise on business interruption insurance properly
In addition to simply failing to take proper care, recent trends and developments in the insurance market may explain why certain insurance brokers have failed to advise their clients properly regarding business interruption insurance.
Clients generally pay a fixed fee to their insurance broker, and the broker acts as their agent to obtain appropriate insurance cover at the best price. However, some insurance brokers may also receive payments from insurers upon placement of a client’s insurance. Certain insurance brokers are, therefore, faced with conflict of interests: their duty to act in the best interests of their clients is in conflict with their own financial interests.
To put the scale of the issue into context, a recent report from the Mactavish Group, a leading independent expert in the field of risk analysis, estimated that brokers may be being paid three to four times more remuneration by insurers than they are paid by their clients.
In the wake of the Covid-19 crisis, a client that finds its business interruption insurance policies are inadequate or that its insurance claims have been rejected or, worse still, that it did not have any business interruption insurance at all, may legitimately begin to question whether their insurance broker:
a. placed their insurance policy against their best interests, and/or
b. obtained the best possible price and terms for their business interruption insurance policy.
Did the broker’s breach of duty cause your loss?
To bring a claim successfully, a client will need to be able to show that but for its insurance broker’s negligence it would have had taken out business interruption insurance that would have covered it in respect of losses arising from the Covid-19 crisis.
This raises two potential difficulties. The first difficulty is availability. Specifically, was coverage that would have been responsive to the Covid-19 crisis available in the market at the time the relevant policy was taken out? In this respect, much depends on the outcome of the FCA test case and whether it finds, in effect, that only highly bespoke policies would have been responsive. If it does, it will have implications for potential claimants trying to demonstrate that relevant insurance was available to them at the time they obtained their policies.
The second difficulty is the cost of obtaining such insurance (assuming it was available). Premiums for pandemic coverage were high before the crisis and so a client will need to be able to show (without the benefit of hindsight) that it would have been willing to pay a high premium to insure the risk.
Claimants that can overcome these difficulties may have valuable claims against their insurance brokers.