Flaxmans in their latest Covid 19 Bulletin to the Broker Community examine why customer expectation ultimately determines the trust of the public in insurance and highlight why that fragile trust has been eroded yet again by the drastic reactions of the insurance industry to an unprecedented claims-pandemic arising from Covid 19.
If an insurance policy is called upon just once in the policyholder’s business career it is, at that time the most important thing to them, bar nothing. When they are told “sorry, but your claim is not covered on this occasion” ; “we are sure this is not what you hoped to hear and understand that you may be disappointed but …..” ; “is there anything we can help you with?” What is the lasting impression it will leave upon the policyholder?
So what can those on the ground of the industry do to help their customers recover and to regain trust in insurance policies? As Covid 19 claims are unprecedented and about to be litigated it is a good time to put the matter into perspective in relation to the industry’s overarching claims management cultures.
The essence of the contract
Most of the circa 300,000 people working in the insurance industry have little or nothing to do with writing a policy wording; its purpose, intentions, phrases, expressions, words or punctuation. That is left to the few that draft the policies and the lawyers that sign them off.
At one time not so long ago, the industry’s well-trained insurance personnel both underwriters and brokers, were encouraged, if not actually required, to also deal with the claims against the policies they sold. The inherent ambiguities and uncertainties that are present in almost any contract of insurance were swiftly remedied by practitioners’ experienced knowledge of the intention of the insurance, an application of common sense and underpinned by good faith towards the customer. That is, the essence of the contract.
That all changed thirty years ago for reasons of cost saving, outsourcing, streamlining, digitalisation and competition law and in its wake came the term
“underwriting after the event”. People who may have had no understanding or knowledge of how the policy came about, why the words comprising the terms were chosen and what the underwriter thought he or she was accepting as a risk, were given the authority to second guess the underwriting and good faith of the contract.
Every experienced insurance practitioner will understand that insurance policies are complex, and they cannot be bespoke to the precise and peculiar circumstances of every policyholder. Therefore, it is essential that the interpretation of the contract is done with the sensitivity and common sense of the good faith intentions of the insurer. Otherwise, insurance is fatally flawed.
The effects of law and process
In the late nineteen seventies and for over twenty-five years, the litigation of insurance contracts exploded to proportions that did the industry no favours. Partly, that is because the so-called USA style “compensation culture” migrated across the pond. It sunk its teeth firmly into a nation hungry for more rights and remedies in what was at the time still a dour post “two world wars” economy struggling to rebuild its future and to join and embrace Europe. But it was not just the compensation culture that changed the integrity of insurance. The process of law itself and the abrogation, by some of the industry, of responsibility for its own decisions in interpreting its own policies, has now brought us to a nadir of our insurance customer relationships at a time when our customers need us more than ever before.
The process of law is by definition adversarial; the competition between law firms to win a case “on points” is not unnatural. A court of law hearing a case concerning a contract of insurance is restricted by legal convention, precedent and practice to have regard to the ordinary plain meaning of the words in the contract but not to the intentions that may be behind them. In principle that is sound but if the policy wording is poorly drafted, ambiguous, or contains errors, then what is the judge supposed to do?
Non-Adversarial Dispute Resolution
In recent years mediation has become a pre-requisite of going to trial and it has an astonishingly high success rate of some 75% settling at mediation; with minimal distress and a financial outcome both parties can live with. “A result” one might say.
The CII has materially and successfully improved the culture of our industry by its extensive and ever -developing education and examination programmes. With possibly very few exceptions, every insurance company has skilled and qualified insurance practitioners entirely prepared, qualified and competent in making decisions about the payment of claims without the need to refer for advice and decision, to a lawyer. A legal interpretation of a contract should surely only be necessary on strict points of law; not on general commerciality and principles of good faith.
Roger Flaxman Chairman of Flaxmans said “ If an insurance policy reads, to an ordinary, reasonable policyholder, that it provides cover for example a Business
Interruption in the event of a Notifiable Disease coming within 25 miles of its business and the Local Authority authenticates it as such, surely it is reasonable for the Insured to believe they are covered for their provable loss? Or, should the policyholder be also required to read into the words, concepts of insurance practice known only to the experts in the business?”
This is the background to the imminent litigation of the Covid 19 cases that has so attracted adverse publicity that the FCA has intervened.
The FCA intervention
What can our customers expect from the FCA’s unprecedented initiative to refer to the High Court a selection of the Business Interruption policies that have denied liability for the claim?
The FCA has published its intentions and invited policyholders and brokers to submit cases they would like taken into consideration. There may be an expectation that the court will decide on these cases but that is unlikely because the intention is to opine on principles of the selection of the policies rather than the merits of particular claims.
Legal sources involved in the insurance sector are broadly expecting an Appeal to follow the High Court’s determination of its findings; which is said to be expected in July/August. That could add two or three months to the present expectation of a determination.
The next stage will be to apply the court’s determination to specific cases and that will take possibly a further month. Where the insurer then determines cover is provided by the policy, in principle, the next stage will be adjusting the loss.
Most policyholders have no skill, knowledge or experience of calculating a Business Interruption loss as defined by the policy. It is not the same as the calculation that may be done by the FD or the accountant. Therefore, brokers would be serving their client well if, in advance, they could prepare the policyholder for the information that will be required and the adjusting process to which they will be subjected, in due course.
Commenting further Roger Flaxman stated “It must be anticipated that losses will be less than expected by the Insured and of course there are unlikely to be many cases where the full sum insured will be payable. Managing the client’s expectations is crucial.”