Out-Law Analysis | 20 Apr 2020 | 4:16 pm | 11 min. read
Large numbers of companies will be claiming on their insurance in certain lines of business at the same time because of coronavirus, and the determination of insurers to reject claims in this environment is likely to come under a lot of scrutiny.
The Irish government, the Central Bank of Ireland (CBI) and consumer bodies have been applying pressure on insurers to manage claims arising from the coronavirus in a way that benefits consumers.
The CBI said in a Dear Chair/CEO Letter that if there is a doubt about the meaning of a term, the interpretation most favourable to the consumer should prevail; It expects chief executives of Irish authorised firms to take responsibility for how their firms manage whether coronavirus claims are covered or not.
This is placing responsibility for the response to claims arising as a result of the coronavirus squarely on the senior management team and in the boardroom of insurers. It cites the obligation on insurers "to act honestly, fairly and professionally in the best interest of consumers" which is one of the fundamental principles of the CBI's Consumer Protection Code. It is possible that the CBI may take enforcement action against insurers where rejections of claims arising as a result of the coronavirus are not appropriate or where conduct does not meets its expectations.
The CBI can bring an enforcement action through the administrative sanctions procedure (ASP). The ASP gives the CBI wide and extensive powers, particularly around provision of information and documents. The CBI is conscious, however, of its obligation to adhere to fair procedures in the ASP. Insurers should not underestimate the willingness of the CBI to engage in enforcement action through the ASP.
Directors and officers with responsibilities for an insurer's response to the coronavirus should familiarise themselves with their company’s director and officer insurance policy. Executives should familiarise themselves with the extent of the coverage provided for any legal costs and claims arising for them in their roles from any coronavirus related claims or regulatory investigations.
On 10 April, Insurance Ireland, the main representative body of the Irish insurance and reinsurance industry, announced forbearance and other measures most of its insurance members had signed up to and which are intended to benefit business customers and personal customers.
The Insurance Ireland announcement confirmed that the CBI's requirement that the benefit of the doubt should be given to customers when it came to business interruption insurance would be accepted by a number of the major insurers which had signed up to the principles. It also announced a range of measures it said would help business and consumer customers through the pandemic.
Insurance Ireland accepted that the Irish government's advice to close a business on account of the coronavirus is the same as a direction in this instance and will be recognised as such for business interruption insurance policies.
This is a welcome development for Irish business interruption insurance policyholders, but the announcement said that "each policy is different and there may well be other factors which lead to the adjudication of whether a claim is valid or not."This appears to be driving at the fact that a large proportion of business interruption insurance policies in the Irish market cover the risk of physical damage to premises or, through extensions, outbreaks of infectious diseases on the premises themselves.
The advised governmental closure being treated as a government-directed closure is unlikely to impact provision of cover in those policies. However, there are other business interruption policies, such as those which provide cover in the event of outbreaks of infectious diseases on business premises or within a certain radius of the premises, where there remain grey areas and policyholders may contest rejection of cover.
Policyholders are likely to challenge rejections of coronavirus claims. Irish policyholders have two main options: to initiate a claim before the Irish courts with the potential option of alternative dispute resolution, or to bring a complaint to the Financial Services and Pensions Ombudsman (FSPO).
Generally, large corporate policyholders with large scale claims use the courts because they want to take advantage of the procedures of the Irish courts such as discovery; they want to rely on rulings in past cases, and they want the issue to be determined by a judge with experience in considering large insurance claims. Court intervention can be useful for insurers themselves, in particular when insurers wish to obtain a determination as to the extent of cover which may clarify the limitation of that cover to a large number of policies.
Complaints to the FSPO may be less expensive and be dealt with more quickly than litigation, so this avenue is likely to be used by smaller policyholders. No body of precedent applies to FSPO decisions - each case is determined by the FSPO on its own merits. A decision of the FSPO is legally binding and may only be appealed to the Irish High Court. The FSPO may direct the provider to pay compensation to the consumer or may direct the provider to rectify or correct the issue in question.
Insurers should proceed cautiously when assessing whether to reject claims arising on foot of coronavirus if there is a grey area in policies and the issue is likely to be determined on the basis of interpretation.
Where there is a grey area and the insurer is minded to settle a claim in favour of the policyholder, insurers should review the terms of their reinsurance policies to determine whether recovery by them from the reinsurer will be possible
Insurers should undertake a diligence of their existing policy terms and determine whether cover for coronavirus and any other pandemics should be specifically provided for as covered or specifically excluded going forward.
The UK's Financial Conduct Authority (FCA) has said that it understands the importance of general insurers seeking to manage their coronavirus exposures. However it said in guidance on 19 March that customers are likely to exhibit behavioural changes due to the coronavirus and that general insurers should therefore "consider very carefully the needs of their customers and show flexibility in their treatment of them".
The FCA also warned insurers that they should have plans in place to manage and mitigate the operational impact of the coronavirus. Firms therefore need to consider the impact of staff absences, as well as the importance of ensuring staff wellbeing, to provide continuity of service, which would also include claims handling. Where firms identify gaps that will, or could, cause harm to consumers, they should notify the FCA. Such expectations rest squarely in line with the FCA's proposals on operational resilience.
The FCA also expects general insurers to have a senior manager "responsible for business continuity and for managing the impact of coronavirus". Dual-regulated insurers have been subject to the senior managers and certification regime since 10 December 2018, and the rest of the industry since 10 December 2019. These rules are designed to increase individual accountability within the financial sector.
It said that in relation to travel insurance insurers should clearly communicate any policy exclusions that result from the coronavirus to existing customers who are affected by the pandemic, such as an exclusion of cover for future travel booked before the outbreak.
If a claim arises after the renewal date, the FCA expects insurers to treat customers fairly, taking individual circumstances into account. This includes where the policyholder was given a reasonable expectation that cover would continue. Where it is appropriate, the FCA expects firms to consider claims under the terms of the original policy wording for such travel arrangements.
For motor and home insurance the FCA said that insurers should be mindful of consumers following government advice and changing how they use their vehicle and their home address. Insurers should not reject claims because of such understandable temporary changes.
Motor insurers should continue to provide cover for consumers’ car, motorcycle or van insurance due to their temporary situation, in line with UK government policy of not needing a new MOT certificate.
Medical insurers should communicate effectively, timely and compassionately on delays to non-urgent private medical treatments provided under an insurance policy, where the private hospital providing the treatment is required to support the NHS.
On 15 April the FCA issued a Dear CEO letter about business interruption cover of SMEs. The FCA acknowledged that most basic business interruption policies do not cover pandemics and said it would not intervene in such circumstances. However, where coronavirus claims are covered by a business interruption policy, insurers should pay out as quickly as possible. The FCA envisages that there may be reasonable grounds to pay part of a claim on an interim basis. Where a firm decides not to adopt this approach the FCA expects firms to explain their thinking on this to the regulator and this will be used to assess the firm's culture.
Where firms to do not follow FCA guidance, they will not be entitled to rely on the "safe haven" of doing so. In such circumstances, firms could be exposed to regulatory enforcement or enhanced supervision, and be required to remediate affected customers for unpaid claims. The upshot therefore is that claims may end up being paid in any event, and an offending firm would likely also be exposed to regulatory action, negative PR and increased costs and management time.
The Association of British Insurers (ABI) has said that "no insurance market provides widespread insurance coverage for pandemics and the UK is no exception" but goes on to say that insurers' main priority in these 'unprecedented times' is, where there is cover, to "make sure customers can continue to have their claims paid in this challenging environment".
The UK government has not intervened to compel insurers to pay claims where there is no cover and so insurers will continue to assess coverage based on the application of specific policy wordings in line with relevant FCA guidance. Prime minister Boris Johnson may have created some confusion when he said in a press conference that insurers had agreed to "step up to the plate and understood that they have to pay out" because – absent government intervention - coverage will continue to be assessed on a case by case basis.
Two particular areas where insurers are seeing high claims volumes are travel insurance and business interruption insurance. Many travel insurers have said they are committed to supporting customers and have made specific pledges to their policyholders, including relaxing rules around the evidence needed for medical certification and helping customers to consider options for transferring insurance to cover new destinations.
Business interruption insurance has been under the spotlight given the sudden loss of revenue faced by many businesses. The ABI has been pragmatic and has said that only a very small number of businesses will have bought any form of cover that includes business interruption due to a notifiable or infectious disease. In addition, very few of those extensions are likely to respond to revenue losses caused by government intervention related to this pandemic.
The ABI say "such policies often respond only when the disease is present at the premises as they cover the interruption to trade caused where business premises have been infected by an illness such as Legionnaires’ disease or norovirus and where the building needs to be closed and cleaned to deal with the specific incident".
Even if policy terms are to be interpreted in favour of the insured where the wording is ambiguous there may well be difficulties in ensuring these policies respond. For example some wordings require loss of revenue to be linked to a specific occurrence of the disease at or near the premises, rather than a government-mandated lock-down. The ABI, on behalf of UK insurers, has indicated that underwriters were unlikely to have had in mind pandemic-related risks when this cover was written or charged a commensurate premium.
Policyholders may seek to contest their unpaid insurance claims in court. Alternatively, consumers and certain SMEs may seek to take their unpaid insurance claims to the Financial Ombudsman Service (FOS).
Court action in the UK can be slow and expensive and many businesses need cash quickly in order to remain viable. Large corporate policyholders may be able to use their own commercial leverage or that of their broker to begin on the road towards a commercial settlement with insurers and avoid litigation.
For SME businesses we have already started to see the emergence of claims management companies in the UK and some law firms providing dedicated declinature services. For example, it has been reported that a number of unhappy insureds are threatening possible class action or group FOS complaints following reports that some insurers are refusing to pay business interruption claims for coronavirus related losses.
Until recently, the FOS has been relatively restrained in its comments on the coronavirus crisis compared to the FCA. We would expect the FOS' "fair and reasonable" decision-making powers to be stretched even further in respect coronavirus-related complaints.
The FOS' chief ombudsman has said: "This extraordinary situation requires an extraordinary effort to support the tens of millions of customers who’ve been affected – in some cases very seriously – by the crisis. From an ombudsman’s perspective, this goes to the heart of what it means to act fairly and reasonably, taking individual circumstances into account. Twenty years after we were established, the significance of these principles has never been more apparent."
There has been some indication of this approach being applied in the context of business interruption cases, for example, where the FOS has noted that insurers should not only consider a strict interpretation of the policy terms, but what’s fair and reasonable in the particular circumstances. Like, the FCA, the FOS has said that insurers might wish to consider if there’s scope to make interim payments earlier than they might otherwise do.
Similarly, in respect of travel insurance the FOS has reminded firms to take a pragmatic view of consumers' decisions not to travel or to curtail a trip. Whilst the FOS recognises the challenges of validating some claims, it expects consumers to be treated fairly and encourages insurers to give careful consideration to the available evidence including credible consumer testimony.
On this basis, the FOS system may allow eligible policyholders to benefit from a forum which is not bound by law or regulation and must simply consider a matter on what is fair and reasonable in the circumstances. Conversely, insurance firms will need to be alive to the fluid nature of the FOS decision making approach and this into both their claims and complaints handling processes.
There has been some suggestion that legislation retrospectively ensuring cover for coronavirus claims may be considered in Ireland and the UK, particularly in respect of business interruption insurance.
Legislators in New Jersey, Ohio, Massachusetts and New York have introduced bills to prevent insurers denying certain claims for business interruption insurance on account of the coronavirus regardless of what the policy terms and conditions said. These bills are all likely to be subject to constitutional challenge if enacted. In an Irish context, legislation or binding guidelines seeking to retrospectively include or impute business interruption insurance cover would also likely be subject to challenge under the Irish Constitution.
A much more likely solution will be the creation of a pandemic insurance pool through the co-operation of the state and the insurers which would allow pandemic risk to be underwritten. This would be similar to the approach undertaken by the UK in respect of terrorism risk (Pool Re) and flood risk (Flood Re). However, this approach has never been adopted in Ireland so it is not clear whether governmental support would be forthcoming.
Even if a pooling of pandemic insurance risk were agreed between the state and insurers, this would relate to future pandemic risks and not impact on this outbreak of the coronavirus. Therefore, large numbers of insurance coverage disputes arising from coronavirus claims appear inevitable in both Ireland and the UK.