Brokers need to beware ‘breach of duty’ risks arising from Covid-19 impacts

Brokers that do not advise their clients about the impacts of Covid-19 on insurable risks could face negligence claims if business losses ensue, according to a top commercial law firm.

Plexus Law associate solicitor Tamsin Hyland explained: “Brokers need to pay attention in this changing market.

“There is sufficient chatter now about the impact of Covid-19 on insurable risks that the failure to warn clients taking out insurance could constitute a breach of duty, which might sound as a negligence claim if losses arise.

“We saw [a] similar evolution of what is included in [brokers’] duty of care following recent large market events, like the Insurance Act and Brexit.”

Business interruption concerns

Hyland added that business interruption (BI) pay outs could also be detrimentally affected by coronavirus, even if the claim does not directly relate to situations arising from the disease outbreak.

“For example, if BI cover was payable as a result of fire damage, the forecasting of the lost turnover insured under the BI cover would probably be reduced to take account of the likely indirect impact that Covid-19 would have had on the business, but for the interruption,” she said.

Furthermore, Hyland explained that certain types of BI insurance would not even respond to coronavirus-related claims, such as contingent BI insurance, which is triggered by property damage.

She continued: “It is likely that contingent BI cover will not respond to cover interruption caused by a government mandated shut down because of the Covid-19 outbreak, precisely because in that scenario, there is unlikely to be any property damage that could trigger a claim under the main insuring clause.

“Insureds with this kind of cover are potentially exposed.”

Those with standalone BI policies, however, are more likely to be insured – but this will still depend on policy wordings.

With this type of BI cover, insurers will either list specific diseases by name that they will protect against, or policies will refer to classes of disease, such as notifiable diseases.

“Covid-19 was added to the list of notifiable diseases on 5 March 2020 and so provided the definition of notifiable diseases is not fixed to the list as at a particular point in time, the policy may well respond to provide cover in the event of subsequent losses,” Hyland added.

“Under [standalone] policies, insurers face exposure to considerable losses that they would not have fully anticipated at the time the policy was underwritten.”

‘Boiler plate’ clauses

Although the debate around insurance pay outs has centred on business interruption policies so far, Hyland added that the entirety of policy terms need to be considered.

She said: “In our view, it is the standard boiler plate clauses in insurance across all lines of business where we could see considerable impact arising from the Covid-19 outbreak.

“Indeed, it is these kinds of clauses that have given rise to the big ticket coverage disputes in recent years.”

This includes, for example, material alteration conditions. These clauses can vary in severity but, on the whole, they require policyholders to tell their insurer – sometimes irrespective of whether a claim has been triggered – if there has been a material change in the nature of the risk insured.

Hyland said that this could lead to separate terms and premiums being established to accommodate the changed risk, or some policies will even be automatically terminated.

“Insureds need to be careful to assess the nature of the risk being insured and if their business is fundamentally affected, directly or indirectly, by Covid-19, irrespective of whether those losses are insured or not, they may have a duty to notify insurers. Depending on the clauses, that could adversely affect all of the insurance cover available under the policy,” she added.

Defining a “material alteration” is tricky though. Hyland clarified: “The risk needs to change sufficiently to constitute a new one in the eyes of the underwriters. It needs to be a change that is more than simply an increase in the risk of claims arising.”

Aggregation clauses, which state that two or more claims are to be treated as a single claim when sufficiently connected by a unifying factor, could also be problematic.

“Aggregation clauses are often very different, but this outbreak potentially gives rise to a new kind of unifying factor that we will have to assess by reference to the mechanisms within these clauses,” Hyland said.

Also, “the duty to give a fair presentation of risk at inception or upon renewal will have a new focus” added Hyland.

The duty to give a fair presentation is a statutory obligation under the Insurance Act 2015, which requires insureds to disclose all material or sufficient information to put a prudent insurer on notice that further enquiries are needed.

Hyland explained: “A material fact is one which will influence the judgement of a prudent insurer in determining whether to take the risk and if so, on what terms. Covid-19 will be a new risk factor for most insureds in some way now and in future.

“Insureds will need to address that risk in the presentation of risk to insurers and they should be advised by brokers to that effect.”

Speed of claims

In addition, Hyland said that insurers could be facing increasing pressure to pay claims promptly where policyholders are struggling due to coronavirus-related cash flow constraints.

She said: “For policies incepted after 4 May 2017, insurers are under obligation to pay claims ‘within a reasonable time’ under section 28 [of the] Enterprise Act 2016.

“Where that obligation is breached, an insured can claim damages and so it is foreseeable in stricken economic times that complaints about delay and potentially claims for damages might increase.”