Brokers beware! Businesses left disappointed with lack of interruption cover for COVID-19
COVID-19 has bought severe disruption to both our business and social lives – bringing unusual and unexpected consequences.
Many businesses have been hit hard by the interruption to their business and are now turning to their insurers to pay out on the losses caused.
But insurers will only pay out for what they have actually covered and will take a narrow view on what that is. Many businesses have been left disappointed and wondering why, after all those forms, brokers and premiums, their insurer is now denying cover.
What is business interruption insurance?
Many organisations will have business interruption (BI) cover as part of their suite of insurance policies. This is designed to protect against certain disruptions to their business. BI cover is often sold with property insurance and replaces income lost due to significant events. It should return the insured to a position “as if” the loss caused by the interruption had not occurred, subject to the extent of cover.
Determining whether an interruption caused by COVID-19 is an insured event can be a complex issue. The wording of the policy must be considered carefully and in the context of the claim at hand.
Typically, BI cover will include physical damage, such as fire or other natural disaster, to business property. But basic policies may not cover interruption which is caused by anything beyond physical damage, such that the loss caused by a COVID-19 closure isn’t covered. Even extended policies can have exclusions for pandemics: Some may only cover loss where a business is directly affected, for example the workplace is quarantined or closed by law; others may go further to cover losses caused by breaks in supply chains. Things are rarely as straightforward as you may have thought when you signed on the dotted line.
What if cover is denied?
If you have been denied cover, or the existing cover offered is not a broad as you expected, it may be worth seeking independent advice on the wording of your policy, the presentation of your claim and on the advice received at inception.
Those businesses who are surprised to find themselves with inadequate or even non-existent BI insurance cover will want to know why. The first place to look may be the broker and to ask whether they have been negligent.
When is a broker negligent?
Negligence is the breach of a duty of care. Insurance brokers owe professional duties to their clients to understand their clients’ business, advise on suitable cover and recommend insurance to meet a client’s requirements. The extent of that duty depends both on the client’s business and also the instructions given to the broker. In some cases a client will rely on their broker to broadly advise on what they need or what they have missing from their coverage. In others, clients know exactly what they want and provide more specific instructions.
Whether a broker’s duty extends to giving advice about BI cover will depend on the facts: It might arise from a general instruction to “obtain full cover” or an explicit instruction to “cover me against pandemics”. It could also arise out of a general instruction to reduce existing cover to make it cheaper which triggers the need to advise on what insurance is desirable and why. Where BI cover is obtained, more specific duties may also arise, such as the need to establish the type of cover required and to ensure that the client understands the extent of the cover.
The next issue is whether the broker has actually breached its duty. You cannot presume that all brokers are negligent. Far from it; most are competent and many are excellent. A broker’s conduct will be judged against the standard of a competent insurance broker.
The broader the duty, the harder it will be to prove negligence. The breach will often depend on the facts and the client’s business. For example, an insured who instructed a broker after the COVID-19 outbreak in 2020 to obtain suitable pandemic BI cover would find it easier to show a breach than an insured who gave a general instruction to a broker to arrange basic cover. However, every situation will be different and will be judged on its facts.
Has the negligence caused your loss?
It’s not enough to show that a broker has been negligent. You also have to show that this has caused a loss. This can involve some very complicated factual and legal issues (and is fascinating to lawyers). The question has several layers: First, what should the broker have advised; second, what would the insured done if it had received that advice; third, what would the insured’s current position be if it had taken that step.
A broker might argue that the type of BI cover sought by their client for COVID-19 was not available in the market or that their client would not have taken such insurance (for example, due to cost) in any event. Or, if a business was failing prior to COVID-19 or had breached policy conditions, a broker might say that BI cover would not have paid out in any event. Alternatively, a broker may allege that a business has contributed to its own loss (for example, by choosing not to open the business or failing to follow advice).
Why should you claim?
If the insured can surmount these obstacles, it should be able to recover the loss caused by the broker’s actions. That would generally be the sum that should have been paid out if appropriate BI cover had been in place.
In other words the loss they could have collected from the insurer had the broker not been negligent. This will of course subject to deductions such as the premium saved by the client and any excess.
Professionals generally carry professional indemnity insurance to cover them and their clients in the event of mistakes. It is to be expected that even a negligent insurance broker will have adequate cover in place against which a claimant can claim.
Clarke Willmott has a highly regarded professional negligence practice and is well placed to advise clients on any issues arising from insurance coverage and negligent advice from brokers.