Coronavirus: Skincare salon misled by insurer over rejected BI claim

Aesthetics and skincare salon NuYu London’s director Samantha Larkin has been unable to futureproof her business with any confidence after MS Amlin took two months to reject her business interruption (BI) claim, despite the insurer initially telling the salon’s broker that the policy would pay out.

Larkin has had a surgery policy, sourced by specialist broker Hamilton Fraser, since she opened Primrose Hill-based NuYu London back in 2011.

As well as covering equipment and property, the policy also includes a business interruption extension, which she believed would come to her aid when she was required to close her business on 23 March due to the government imposed lockdown, implemented to mitigate the spread of the Covid-19 virus.

The policy, provided by MS Amlin and underwritten by R&Q, has an infectious diseases clause that includes coverage for “any occurrence of a notifiable disease within a radius of 25 miles of the premises” – the only exclusion pertaining to this section is for AIDS.

For Larkin, it is this clause that should have triggered her BI extension as NuYu London’s Camden location is within striking distance of the Royal Free Hospital, as well as St Thomas’s – where prime minister Boris Johnson was treated after he contracted Covid-19.

Liaising with Hamilton Fraser prior to the official lockdown, Larkin was confident of submitting her BI claim and receiving the sought after pay out. Hamilton Fraser had even queried the infectious diseases clause with the insurer and had confirmation that Larkin’s claim would be successful.

An email from the broker to Larkin read: “I confirm we have heard back from insurers regarding infectious diseases under the business interruption section of the policy.

“From a business interruption standpoint, our cover would respond as Covid-19 is deemed a ‘notifiable disease’, subject to conditions in the event your clinic was put into isolation, with the business subsequently being unable to trade.”

Larkin submitted her claim on 25 March; MS Amlin responded asking for the business’s 12-month and projected accounts, which Larkin forwarded immediately, and then it was a long two-month silence until the official rejection letter arrived on 26 May.

“It feels like they’ve said yes and then backtracked essentially,” Larkin said. “It would have helped us over the next six to 12 months, which I think is going to be very uncertain times for most businesses.”

Causation confusion

Part of the confusion for Larkin lies in pinpointing the exact reason why her claim was refused. According to a letter from Davies Claims Solutions, the claims handler acting on behalf of MS Amlin, Larkin’s BI claim was rejected because her financial losses were a result of the government lockdown as opposed to the coronavirus outbreak.

The letter stated: “Cover is not available for any losses due to the presence of SARS-Cov-2 or Covid-19 in the wider population or in the country generally.

“If the insured have suffered losses because of a general decrease in business which cannot be attributed to any localised incidence of SARS-Cov-2 or Covid-19 then the policy will not respond.

“It also follows that losses due to any restrictions imposed on the movement of the wider public by the UK government will not be covered.”

However, R&Q told broker Hamilton Fraser that the reason for rejection was due to an epidemic exclusion within the policy wordings.

The broker told Larkin: “Your insurers have confirmed to us they have reviewed the circumstances of your claim and it is apparent that the nature of the damage falls outside your policy coverage. While the reason is identified in the insurer statement, we would refer you to general exclusion 18.4 (a) on page 99 of the policy wording to note the exclusion of ‘epidemic’ within the context of the policy wording.”

Larkin maintained that her claim is still valid, as Covid-19 is a pandemic rather than an epidemic. She added: “One of the bits that I was reading in the synopsis part of the business interruption [policy], I thought it was quite ironic because it basically [said] to offer you that security when these kinds of things happen and I thought well that’s the last thing they’ve done because they’ve not dealt with it correctly.”

For Mark Copsey, associate director of the cosmetic division at Hamilton Fraser, policy documentation has a lot to answer for when it comes to divining wording clarity.

He said: “I’ve looked at the wording and there is an exclusion that is relevant as far as the claims are concerned. It’s grey, but there is an exclusion that excludes epidemics. The argument is that this was a pandemic, not an epidemic, but ultimately, I think that that would fall down into the same bracket.

“The issue I had with the wording is that there is this section within the first [25 pages] that is suggesting that cover is in place if you have an occurrence within 25 miles of your premises of a notifiable disease, and then there is one word 70 pages later on towards the end of the document [that contradicts this]. That is my main concern.

“Obviously, an insured customer should read the whole policy wording, but to pick up one word 70 plus pages later – is that clear? My main concern is the clarity as opposed to whether it is covered or not.”

Garon Anthony, partner at law firm Squire Patton Boggs, identified a further two issues – around the definitions of pandemics or infectious diseases, and the fact that more than one causation has always been problematic legally.

“Some policies do and some policies don’t actually state what they mean by a pandemic or infectious disease,” he explained. “Some of them refer specifically to things like SARS or bird flu, avian flu, but some of them don’t and just refer to it quite neutrally.

“[An] area for debate will be whether or not Covid-19 would fall within either the definition or the non-definition of a pandemic or an infectious disease.”

He continued: “There are always issues over whether there were one or two causes for a particular insurance incident and if there was, which is insured and which is uninsured?

“Whilst it may seem that the issue of what’s causing the loss here, Covid-19 or the government lockdown, is novel for the purposes of this particular set of circumstances, which it is, the issue of causation in the context of insurance policies isn’t necessarily a new one and has been something that has given rise to court litigation over the past 20 or 30 years.”

Business impact

Larkin told Insurance Times that failing to get the BI claim pay out could be detrimental for her business’s future as she looks ahead to the autumn and winter months.

“From the day we closed to the present day, we’ve had zero turnover,” she explained – this is despite having the same overheads day-to-day, including pre-paying quarterly payments to external suppliers just prior to the lockdown.

NuYu London has also been unable to benefit from the online boom that restaurants converting into takeaways have been able to achieve, as its treatments are centred around specialist in-person services, such as dermal facial fillers, laser hair removal and chemical peels.

“We’ve not been able to operate as a business. Because we are a face-to-face treatment place, we’ve not been able to do anything online,” Larkin added.

Although Larkin is aiming for a 4 July opening date, she does not predict being able to recoup her prior business success immediately. This is in part due to the government’s conditions for opening, which means she will only be allowed to have one customer in the salon at a time and extra expense and time will also need to be spent on cleaning facilities and equipment in-between clients.

Larkin said: “We believe we will be busy, but we will be at least at half capacity as to what we could see to fit within the guidelines that’s safe for us and for our customers.”

Larkin’s business will also depend on how comfortable her customers feel with attending appointments in general due to the social distancing measures that have so far been in place. The treatments offered by NuYu London require close contact and some of her customer base, especially more vulnerable individuals, may not wish to continue their appointments immediately.

Luckily, Larkin was the recipient of a government grant, which she received on 1 April. Although this has helped tide the business over in the short-term – plus Larkin has furloughed one staff member – this funding will run out by the autumn, meaning a second coronavirus wave could prove fatal for the salon.

She said: “God forbid if there was a second wave, and [the salon’s opening date] got moved to September, October – my answer [of whether the business can stay open] could be extremely different because the grant would pretty much have been used and without the insurance, you’d be getting your business into tens of thousands of pounds worth of debt and I just don’t think that that’s a good way to run a business.

“That’s why you have insurance, is to make sure you’re futureproofing, so it gives you that level of security for the next six, 12 months.”

Insurer service

For Copsey, the amount of time Larkin had to wait for a response to her claim is “not normal at all” and is “just not acceptable” – he has even been in conversation with R&Q’s managing director to vent his frustrations.

Anthony agreed that he has not “seen delays of that magnitude” either.

Copsey said that delays, such as the two-month wait experienced by Larkin, demonstrates poor service from insurers to their broker partners, which could have a detrimental knock-on effect on brokers’ relationships with their clients.

“Will I look at our partners in the future? Absolutely. I’ve got no problem in saying that I will look at that. The service that we have got in response ultimately has just not been acceptable,” he said.

“First, two, three, four weeks, I get it. When you are seeing thousands of claims come through, I understand it. But when you go beyond that, then it starts to grate. I’ve said to them if we lose business in the future, it won’t be because the claim was declined, because most of the claims are declined. The reason we will lose business is because of the service we have received in constantly telling people ‘it’s coming next week, it’s coming next week’ and it didn’t.

“It’s not acceptable. I’ve made it clear that we will be carrying out a full review once we are in the post-Covid era.”

Copsey added that his firm has seen around 90 BI claims submitted by their clients rejected by R&Q.

However, “there is scope for legal remedy” against lengthy insurer delays, said Anthony. Here, insureds could make use of the 2016 Enterprise Act, which became effective in 2017 as part of the Insurance Act 2015.

“What it says is that insurers must start paying claims within a reasonable period of time and what you’ve got is ability now for insureds to claim damages in addition to the sum insured and in addition to interest that they might be able to claim on the policy,” Anthony explained.

“This new law says that every contract of insurance contains an implied term that the insurer will pay the claim within a reasonable time.”

Anthony warned that there is “room for legal debate here” however. He continued: “From my perspective, there’s room for legal debate here over what does reasonable time mean, applying that to the particular facts of the case, did the insurer take a reasonable time or an unreasonable period of time to reject the claim?

“Then the insured will have to show that it has actually suffered additional losses by reason of the fact that the insurer hasn’t paid out the claim in a reasonable time.”

A further service issue lies in the fact that MS Amlin “backtracked” on its initial communications that it was going to pay Larkin’s claim.

Anthony added that although these communications most likely contained enough provisional statements to prevent any successful court action, the Financial Ombudsman Service (FOS) would probably take a different view in favour of the policyholder.

He said: “I suspect issues like being told the claim is covered one week and being told it’s not the next may well have resonance for the FOS because the FOS doesn’t necessarily just look at legal rights and wrongs when it comes to its analysis; it also looks at wider concepts of fairness and reasonableness and I suspect issues like being told on the one day that the claim’s covered and on the next day it’s not covered probably will play out with slightly more force before the FOS than they would before the court.”

FCA test case

The confusion around BI policy wordings has led to the involvement of the FCA – it has begun work on obtaining a court declaration in order to clarify BI wordings. MS Amlin is one of the 16 insurers whose policy wordings will be evaluated – six of its wordings in particular have been flagged on the regulator’s provisional list of policies that may be impacted by the court findings.

Copsey told Insurance Times that Larkin pressed for her case to be featured in the FCA’s action – he wrote to R&Q on her behalf, but they did not respond in time for her situation to be included.

A spokesperson at MS Amlin said: “We are not able to comment on individual claims, but we take our responsibility to support our policyholders extremely seriously and understand the unprecedented challenges they and businesses up and down the country are facing as a result of Covid-19.

“The FCA has announced that MS Amlin has agreed to be one of the eight participating insurers in the FCA test case court action, aimed at seeking legal clarity on business interruption insurance.

“We are pleased to be working closely with the FCA and wider industry to find a solution to this important issue, with the shared objective of gaining certainty, swiftly for everyone involved.

“We support the FCA’s move to collaborate with the industry and progress with the test case to lift the deadlock and uncertainty surrounding the payment of business interruption claims under these unique circumstances.”

Although he “will not shed a tear” if the FCA case rules against MS Amlin, Copsey did concur that BI insurance is not designed for a pandemic situation.

He said: “Ultimately, the principle of business interruption is not for a global pandemic that shuts every single business and that needs the government to step in with the biggest peace time aid package. But, at the same time, if a wording is incorrect and that is the basis of a contract, then the insurer will obviously have to face the consequences.”