The COVID-19 pandemic continues to cause unprecedented disruption to businesses and has seen widespread disquiet for insurers faced with challenges to cover interpretation and criticism of their response.
Central to the insurance claims landscape in 2020 was the business interruption test case brought by the Financial Conduct Authority which goes far beyond the technicalities of the selected policy wordings and which has presented a huge reputational challenge for the insurance industry as a whole.
Aside from issues over the construction of cover extensions, there are other both immediate and long term issues for insurers to grapple with as a consequence of COVID-19, which we examine below. To discuss any of the below issues and find out more about our team of experts, click here.
On 15 January 2021 the Supreme Court resolved the FCA’s high profile business interruption (BI) insurance test case substantially in favour of the regulator and the two policyholder groups involved. The outcome is obviously important for BI insurance and also highly relevant to policy interpretation and to causation of loss.
The Supreme Court adopted a somewhat different approach to that of the Commercial Court - there wasn’t a Court of Appeal decision here because the urgency and the importance of the case justified it being leapfrogged straight to the Supreme Court - but reached the same conclusion; that being that as a matter of principle, cover was in place for business interruption losses arising during the March 2020 lockdown. Lord Briggs was refreshingly clear about this: "all of the insuring clauses which are in issue on the appeal to this court … will provide cover for business interruption caused by the COVID-19 pandemic.”
He also added that “the trends clauses will not cut it [indemnity under the policy] down in the calculation of the amounts payable.” What he means here is that reductions in turnover sustained in the run-up to the lockdown (so-called pre-trigger losses) are to be disregarded when valuing BI claims sustained during the lockdown. A related point, also tending to favour increased indemnity, is the reversal of the Orient Express Hotels case. Overturning it means that wider effects of the cause of the particular insured business interruption are to be taken into account when valuing BI claims. In essence, the trading loss to be valued is based on what the business’s turnover would have been had it not been required to close and had wider lockdown measures not been in place.
As a result of the decision the FCA expects insurers to contact policyholders very promptly to progress their claims. Each of those will need to be assessed carefully on the bases set out in what is a hugely important judgment.
Un-occupancy and alarm warranties
Un-occupancy conditions are there to protect against such losses as freezing pipes, escape of water and theft incidents when the property is left unoccupied for (usually) 30-60 days. The usual requirements are that the property’s security and heating is maintained, and is attended during the unoccupied period.
In light of COVID-19, a lot of commercial and residential buildings have been continuously unoccupied for many months and freezing of pipes could soon be a reality for some, in addition to escape of water claims. This could lead to a consequential increase in the value of the claim where premises are unoccupied and the escape of water goes undetected for a considerable period of time.
Some of the conditions typically found in unoccupied premises conditions require there to be weekly visits to the premises, removal of combustible materials and, where vandalism/graffiti is found, to carry out repairs.
A number of policyholders may have found that their premises have been “unoccupied”, as per the policy definition, and so will have to continue to comply – and show they have complied up until this point - with the terms of any unoccupied premises condition.
Compliance may not always have been possible simply because of the Government restrictions on travel and the need for social distancing. A policyholder, finding that its premises is now deemed unoccupied for the purposes of its insurance policy, may not have been able to undertake the weekly inspections required by the condition, or repair any damage which has been sustained to the premises.
More fundamentally, a policyholder may not have removed combustible materials from the premises, or organise to have them moved, which may assist or have assisted in the start and spread of a fire. The policyholder may also not have been able to – or no longer be able to - pay for such materials to be placed in storage, especially if the policyholder is a business which has been badly impacted by the Coronavirus crisis.
For all such cases, what might the Financial Ombudsman Service (FOS) say is a fair and reasonable outcome in all the circumstances?
Intruder alarm conditions typically require keyholder attendance at a premises in the event of an alarm activation and now that so many commercial premises are closed for trading there is likely to be an increase in opportunistic thefts from such premises.
Failure to comply with the condition and attend an alarm activation could allow an insurer todecline policy liability in circumstances where the policyholder simply was unable to comply because of the Coronavirus restrictions.
Policyholders will therefore need to consult their policies to ensure compliance with conditions. Section 11 of the Insurance Act 2015 deals with terms tending to reduce the risk of losses and provides that claims should not be repudiated where the insured can show that non-compliance “could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred”. It seems likely that this dispute about unoccupied premises could see this provision being tested in the courts.
The core question remains whether an insured can satisfy the relevant policy conditions, although the practical effects of the various lockdowns throughout the UK and Ireland are obviously going to have some bearing on this.
It is worth noting here that some insurers publicly relaxed or suspended their un-occupancy conditions very early on at the onset of the pandemic and should be applauded for it.
The potential for fraud in “first party” property damage cases is ever present, but the current climate (as with any recessionary event) will encourage some insureds to fabricate claims or to exaggerate genuine claims, in the hope that claims handlers will not have time to give claims their usual scrutiny because of other distractions or because insurers will not be so resistant for fear of adverse publicity.
Most insurers will already have in place robust “red flag” indicators and counter-fraud resources to meet any increased influx of suspicious claims, but insurers may have to become accustomed to dealing with the less traditional areas of frauds, for example, fabricated flood/escape of water (already an area of growing concern for insurers pre-COVID 19 and one which we have explored further here) and supposed accidental damage - as opposed to arson and false thefts.
That said, post-COVID-19, some unscrupulous insureds may also look to exploit currently non-trading commercial premises to “discover” thefts and fabricate other claims upon the return to work, especially if stock has become obsolete in lock-down periods or when staff are isolating and unable to attend work. Business interruption claims blamed on a non-COVID-19 related risk (and seemingly covered) will need to be scrutinised very closely as to the cause of the business interruption.
The position for those in alternative accommodation
An insured in alternative accommodation may find the period of their stay away from the family home extended if reinstatement of their home is delayed or where they struggle to arrange removal. That in turn leads to an increase in the cost of claims to insurers, who quite properly include these additional costs of alternative accommodation within the indemnity.
An issue perhaps to consider is, what happens where the period of alternative accommodation increases due to the lockdown and this in turn means an insured requires alternative accommodation beyond the period of cover or, alternatively, finds that the costs of alternative accommodation exceed the limit of indemnity under the policy, purely because of the lockdown preventing the insured from returning to their property sooner.
Recoveries have for some insurers taken a back seat but recoveries do not improve with age and should not be left. Whilst some cases may have postponed hearings, despite many courts operating remotely, limitation periods will still apply.
Insurers seeking recoveries are therefore encouraged to progress matters largely as usual and take steps to ensure that claims are issued within the limitation period. If delays are caused by hindered investigations, parties should be encouraged to agree a standstill agreement to allow these investigations to be completed after the lockdown and when insureds/suppliers are back to business as usual.
With claimants potentially now having more time on their hands, and with an expected decrease in the number of claims, claimants may be picking back up and pursuing existing cases more aggressively.
With the closure of offices / restricted access to offices, the continued furlough of staff and the general limitations on accessing files, etc., some insurers may face pressure on responding to claims efficiently. Insurers should be transparent and explain any reasons for delaying progress of cases and carrying out investigations, and this should be communicated as soon as possible so that any future requests or applications to be afforded more time can be supported.
Spike in home claims
Many homeowners and occupiers are using this time at home to carry out DIY, not only for jobs that have long been put to the bottom of the ‘to do’ list but also those jobs homeowners might attempt themselves for want of a specialist contractor. With time on our hands and the need to keep busy, we are seeing a spike in DIY related incidents, especially around escape of water as homeowners and occupiers feel confident to attempt their own small plumbing jobs but without, it seems, the actual ability to do so safely.
It was reported very early during the pandemic that crack and level monitoring of premises which are suffering from subsidence damage stopped because of the COVID-19 travel restrictions (unless the premises are being remotely monitored). This cessation of monitoring is likely to have had an impact on settling subsidence claims and pursuing mitigation and recovery.
Without sufficient monitoring evidence of vegetation-induced subsidence, a local council faced with an application to remove a Tree Preservation Order is more likely to reject the application outright. The same considerations will apply to the pursuit of recovery claims given that monitoring results form a key part of the evidence needed to succeed with such claims.
If the implicated trees are not removed because the tree owner – the neighbouring householder or the local authority – maintains that insufficient evidence of vegetation induced subsidence has been provided, what is the anticipated impact on the cost of the underlying insurance claim? It is likely that the value of the claim may increase as insurers come under pressure to underpin the premises in circumstances where the tree owner refuses to remove its tree until and unless evidence is submitted demonstrating vegetation-induced movement.
Another issue for insurers is whether or not they will be able to recover the cost of any increased/additional damage sustained to a policyholder’s premises because mitigation could not happen and/or it was not possible to complete repairs in the earlier phases of the pandemic because of the lockdown. It may well be the case that insurers may have to bear those additional costs themselves without being able to recover the additional costs from third parties, especially where the Coronavirus restrictions have prevented insurers from submitting persuasive evidence that a particular tree has caused the damage.
Requests for information under Third Party (Rights Against Insurers) Act
Insurers will already be familiar with, and have dealt with requests from third parties for policy information about their insolvent insureds. The scope of information under paragraph 1(3), Schedule 1 of the 2010 Act allows ‘relevant’ third parties to request details that a respondent insurer should have readily available.
Unless the insurer has been completely closed during the pandemic - although we know many people are working remotely - it is unlikely that they can refuse or delay in dealing with such requests. However, it is worth explaining to inquirers that office closures, furloughed staff and general restrictions to accessing information (in hard copy form in particular) will cause delay and thereby justify extensions being agreed.
Conversely, when insurers make requests for information against insolvent parties or linked companies e.g. insurance brokers and insolvency practitioners, the information may not to be readily available for similar reasons. In these circumstances, insurers may receive responses to say that satisfaction of the request will be severely delayed due to restricted access to offices/information, or that the notice had not been received as the respondent address was unoccupied.
These requests should also be issued by email as the expectation would be that an ‘out of office’ response could be triggered, thereby allowing applicant insurers to diarise appropriately. This also protects against arguments that notices were not served or received.
If you are concerned about your property damage claims portfolio and would like support from the team on the issues affecting insurers, brokers, property developers, property owners, as well as residential and commercial landlords within the property damage space, then please do get in touch.