Flaxmans take a look at the tricky issue of business interruption claims, some interesting arguments here;
“The seemingly ever-increasing variety of reasons given by insurers for not paying the BI claims was given a shot in the arm by the FCA’s recent announcement that it “intends to obtain a court declaration to resolve contractual uncertainty in business interruption (BI) insurance cover.”
The essence of the coverage disputes appears at first sight to be a matter of interpretation of the words, expressions and definitions in the several disputed policies. However, there is a separate issue that is emerging as the real problem. The word “Pandemic” is at the centre of the insurers’ quandary. What is its significance?
Broadly, insurers have typically offered, by extension to the typical policy Business Interruption policy, cover for loss caused by, amongst other things, a Notifiable Disease (ND). It appears that underwriters were happy to offer the cover in the expectation that the ND would occur locally to the Insured or within a radius of, typically, up to 25 miles. Insurers have been gradually broadening cover over the years and the presently disputed policies are the result of marketing for new business.
A case put forward by some underwriters for not paying out on the BI policies is evidently that the actions of the government in placing the country into lockdown are not an “insured peril”. But it also seems from other arguments advanced to date that had the lockdown been ordered by the Local Authority mentioned in the policy, cover would have been afforded. That raises the question of whether or not the government authority automatically trumps local authority? The court may address that question.
But is the argument in fact a smoke screen for the real underlying issue: the question of affordability of a “pandemic” loss; which was not apparently foreseen and not specifically addressed in the policy as being excluded?
A Gathering Storm
Speaking out Roger Flaxman Chairman of Flaxmans the Insurance Dispute and meditation said, “It’s a gathering storm, the “economy”, is not just a statistic broadcast every night in the News. It is our high streets and our local community infrastructure; for most people roughly in a 25-mile radius of wherever we live.”
That is what is at risk and what needs protecting from bankruptcy in the wake of a litigation festival, which is the “gathering storm between our valued customers and their insurers. Why does the industry want this to be its most prominent advertisement of the century?”
The Epidemic and the Pandemic risks
As with the risks of flood or terrorism, for example, the underwriting of a BI would be based upon a spread of risk assessed by the ordinary expectations of the ND occurring only in a relatively small area of the country at any one time; i.e. an epidemic.
What, apparently, has not been factored into the underwriting of the disputed policies was the occurrence of a ND affecting every policyholder in the country at the very same time. That would be a pandemic. The aggregation of the losses in that event could certainly be beyond the ability of a typical insurer, to pay.
If the real issue is that insurers cannot afford to pay the losses that are the result of the government’s decision to lockdown the nation, then that, in itself, is not a matter of policy/contract interpretation as between insurer and policyholder. Rather, it is a matter of the fundamental underwriting risks and controls exercised by the insurers; and is surely their risk.
The dilemma facing the insurers who have provided cover for business interruption by ND is that the policies have not expressed the limitation of cover being relied upon for the refusal of indemnity. Pandemic is a (disease) affecting persons over a wide geographical area and permanently present for a period of time. By contrast an Epidemic is, broadly, a (disease) affecting persons over a localised geographical area and may not be permanently present.
Insurers’ in dispute are saying that whilst they had intended to pay out for an Epidemic ND loss they had never intended to pay out for a Pandemic ND loss. The underlying logic is clear, for the reasons given above. A pandemic ND would not ordinarily be an insurable risk where the exposure of aggregation of risk would make it almost impossible to fund the totality of losses. The cost of cover would be prohibitive and unsellable.
An Insured who has a policy that appears to clearly say that business interruption by ND occurring within 25 miles of the premises is a covered risk can reasonably expect the insurer to pay upon proof of loss. The fact that the same loss has occurred multiple times all over the world will be of no concern to any Insured. The technical un-insurability of a pandemic risk is not a matter that concerns any policyholder and neither is the eventual cost to insurers of the aggregation of its losses. The public believes insurance companies know how to look after themselves.
In the present, very public debate, the issues of the risks to the insurance industry of paying out claims they did not expect or intend to pay, is being conflated with the interests of the nation’s thousands of business policyholders who are at risk of bankruptcy in the event that insurers do not pay. Is it better to save the insurers or save the nation’s economy? Or both?
An Alternative Solution
Roger Flaxman went onto say “There is a solution to this conundrum, even at this late stage and it lies in the hands of the leading insurers, collectively, whose future relationship with its market could be on a knife edge; the Chartered Institute of Loss Adjusters who have the resources and members’ willingness and ability to help in the crisis; the FOS in adjudicating decisions to avoid litigation; and the government which has the ability to protect the insurance industry from financial meltdown after honouring the policies that cover a BI by ND. The industry should not need to turn to courts to determine what is the right thing to do, in good faith.”