Matthew Ford, Head of Travel at BLM and Sarah Prager, Senior Travel Barrister at 1 Chancery Lane, examine the response of travel insurers to the disruption to holidays resulting from the Covid-19 pandemic in the first part of a two-part briefing on the issue.
Much has been written about the current unwillingness or inability of airlines, travel agents and tour operators to provide holidaymakers with refunds for holidays cancelled or otherwise affected by the Covid-19 pandemic, and the measures taken worldwide in response to it. Put briefly, where a flight is cancelled, pursuant to Regulation 8 of the Denied Boarding Regulations (EU Regulation 261/2004) the airline must provide the traveller with a full refund. Where a holiday is cancelled, tour operators owe an obligation under Regulation 13 of the Package Travel, Package Holidays and Package Tours Regulations 1992 (and now Regulation 13 of the Package Travel and Linked Travel Arrangements Regulations 2018) to refund holidaymakers’ money. There are good arguments in relation to the applicability of the earlier 1992 Package Travel Regulations in the current situation, because under Regulation 13(3)(b) no refund is due where the package is cancelled by reason of unusual and unforeseeable circumstances beyond the control of the tour operator, the consequences of which could not have been avoided even if all due care had been exercised. Arguably a global pandemic would satisfy even the most consumer-friendly reading of this provision. However, the later 2018 Package Travel Regulations, which apply to holidays booked after 1st July 2018, contain no such defence. Indeed, Regulation 14 goes further, and provides for a full refund to be provided to the traveller no later than 14 days after termination of the contract. It is this provision which is causing so much consternation within the travel industry. It is little comfort that Regulation 16(4)(c) provides that if the cancellation is due to ‘unavoidable and extraordinary circumstances’ no compensation is payable for loss of enjoyment of the holiday; the refund remains payable whatever the reason for the cancellation.
It is worth stressing one basic point here, which will be known to many reading this but lies at the heart of much confusion on the part of lay people. ‘Compensation’ is not the same as a ‘refund’; compensation is a form of damages to reflect your negative experience, whereas a refund as we all know is simply your money back. Compensation for loss of enjoyment, in this context, will typically be a much lower sum than the refund. Importantly, under the 2018 Package Travel Regulations it appears that in the context of Covid-19, although tour operators will probably not be obliged to provide compensation (Regulation 14), they will be obliged to provide refunds (Regulation 16).
In some cases a holiday may have been cancelled not because of the existence of an outbreak in any particular place, which would clearly prevent the package contract from being performed, but as a result of travel restrictions imposed by the destination in question. For example, New Zealand appears to have prevented the kind of outbreak seen in some of the European nations by imposing an early restrictive lockdown which made it impossible to fly to that destination. As a result, holidays to New Zealand due to take place after the measures were imposed have had to be cancelled. As indicated, however, the reason for the cancellation is irrelevant; if a holiday booked after 1st July 2018 is cancelled, the traveller must be given a refund, although in those circumstances it is clear that no compensation would be payable because the disruption would be related to the pandemic, albeit indirectly.
The World Travel and Tourism Council has predicted that the industry could shrink by 25% in 2020, with the loss of 50 million jobs worldwide, and small and medium sized companies in particular simply do not have the cash available to refund the thousands of holidays cancelled as a result of the pandemic. Not only do they have negative cashflow as a result of the fact that very few consumers have an appetite to book a holiday at this stage in the worldwide crisis, and that they are attempting to deal with the deluge of requests for refunds; but often suppliers have been paid in advance, and are refusing to provide refunds themselves, notwithstanding that they will not be providing the goods or services purchased.
Some consumers, and tour operators, may regard travel insurance as the solution to what currently appears to be an insoluble problem. The Association of British Insurers (“ABI”) has calculated that travel insurers in the UK could face at least £275 million of claims owing to coronavirus, for holidays and trips that could not be fulfilled because of cancellations or general travel restrictions. To put this into perspective the Eyjafjallajökull volcanic eruption in Iceland in 2010 resulted in a mere £62 million of payments, a record at that time.
Travel insurers point out, however, that their policies are not priced or intended to replace consumers’ legal rights against other parties; they are designed as a safety net rather than a consumer’s first port of call. Travel insurers see themselves as primarily offering a form of medical insurance with the additional costs of repatriation also covered; coverage for cancellation and curtailment is an additional advantage. Indeed, the Financial Conduct Authority might well take a dim view of an insurer which priced into its premium and sold to a consumer coverage for risks which are covered elsewhere; in this case, by virtue of the cancellation regulations referred to above, supplemented by the regime imposed by s.75 of the Consumer Credit Act 1974.
In fact, most policies purchased prior to 1st March 2020 should cover cancellation or curtailment claims arising out of the pandemic and the measures taken to contain it, but only where the consumer has attempted to obtain a refund by the other routes available. A difficulty arises where an insured is offered by an airline or tour operator a voucher or credit note rather than a refund; some insurers assert that this is an acceptable option, and will not accept claims in these circumstances. ABTA’s position one this is that credit notes offered by package holiday operators are different to those offered by airlines, because the credit notes they propose do not replace a cash refund. The consumer’s right to a refund is preserved, and he or she will be entitled to his or her cash back either if the tour operator cannot honour the credit note, or if the consumer decides in the end not to use it. In these circumstances, a credit note does seem to the authors to constitute an acceptable alternative to cash.
However, in the opinion of the authors, there is a qualitative difference between a pure voucher, such as those offered by airlines, and a cash refund, and insurers should, at the very least, be accepting claims in the relation to that difference. Where, for example, an insured accepts a voucher from an airline which subsequently collapses and cannot honour the voucher, the insurer would be vulnerable to a claim. Similarly, it would seem inequitable for an insured to be forced into a position of either accepting an unwanted voucher or having to bring proceedings against an airline for a cash refund, when he or she is insured in relation to cancellation of the flights in question.
There have been reports, particularly from the USA, that insurers are attempting retroactively to alter the terms of ongoing insurance policies to exclude Covid-19 related claims. This is not permissible unless the consumer expressly agrees to it, and even then may be unenforceable for failure of consideration. It is also vulnerable to challenge under the Unfair Terms in Consumer Contracts Regulations 1999. In the authors’ opinion guidance is now urgently needed from the Financial Conduct Authority in relation to this and other issues arising out of insurers’ response to the pandemic. We have seen a collapse in public trust in the travel industry in recent weeks as a result of the refunds saga; a similar collapse in trust in the insurance industry would do long term damage to the sector. The ABI and ABTA are working closely together to avoid just such issues and ameliorate the damage already done by the various failures in communication on the part of the industry which have seen consumers passed from pillar to post in their search for a refund, which is, after all, their legal right.
A more nuanced issue arises where a policy provides for travel disruption cover, but where an optimistic would-be holidaymaker books a holiday for later in 2020, even though he or she is aware of the ongoing pandemic. Tour operators and airlines have launched their winter season offerings; but will it be possible to travel at that time? The answer, of course, is that nobody knows. At present the Foreign and Commonwealth Office is advising indefinitely against all but essential international travel, with the result that if a holidaymaker were to travel now, this would almost certainly invalidate his or her travel insurance policy, and would prevent him or her from making a claim against it. Whether or not making a booking now is a breach of any particular policy is of course a matter which can only be judged against the policy terms; but where a policyholder deliberately places him- or herself in position of needing to claim on a policy, it may be that this would constitute a deliberate and wilful act within the meaning of any exclusionary clause (and cf the decision of the Court of Appeal in Patrick v Royal London Mutual Insurance Society Limited  2 All ER (Comm) 344 in this regard).
To judge by social media, the response of the travel and insurance industries to the Covid-19 pandemic appears to have served only to enrage consumers already disappointed that their holidays have been cancelled. Many consumers are asking why they take the trouble to pay for ATOL protected packages and for insurance premiums if these safeguards are not made available to them when they are most needed. It is only right to make the observation that many tour operators and airlines are doing their level best to refund their customers’ money as quickly as they can, and bearing in mind the logistical restrictions within which they are working, they are doing an impressive job. Others, however, have taken a regrettably flexible approach to their obligation to inform their customers of their legal rights and to offer them, at least, the choice between a refund and a voucher. Some have entirely failed to communicate with customers at all. Similarly, some insurers have made heroic efforts to repatriate stranded customers and demonstrated an admirable willingness to consider claims not falling strictly within policy terms; but the two industries need to speak to consumers with one voice and one message, reassuring them that their money is safe.
A public relations charm offensive is clearly urgently needed; but it is now clear that the issues ventilated in this briefing will be litigated for some years to come.
About the authors
Called to the Bar in 1997, Sarah Prager has been listed in the legal directories as a Band 1 practitioner in travel law for many years. Together with her colleagues at 1 Chancery Lane, Matthew Chapman QC and Jack Harding, she co-writes the leading legal textbook in the area, and has been involved in most of the leading cases in the field in the last decade.
Matthew Ford has led BLM’s travel team, which consists of over 30 lawyers across 6 offices, since 2006.
BLM advises numerous leading tour operators, insurers and brokers on various travel issues, including claims, regulatory and risk management solutions.