Implications of coronavirus (COVID-19) for brokers’ professional indemnity insurance

Implications of coronavirus (COVID-19) for brokers’ professional indemnity insurance

Insurance & Reinsurance: Alaina Wadsworth and Sophie Newman, partner and associate respectively at CMS, discuss the implications of the coronavirus (COVID-19) pandemic on insurance brokers' professional indemnity insurance.

What risks do insurance brokers face in relation to (lack of) cover offered?

The losses stemming from coronavirus are unprecedented. Insureds will do all they can to seek compensation and there is a risk that insureds will pursue brokers for the losses they have incurred in circumstances where cover has been declined. There may be little merit in these actions, given the unprecedented nature of the coronavirus pandemic, but this will not stop actions being brought as insureds are desperate to minimise their losses.

Many insureds are facing cash flow issues and will seek fast and effective assistance from their brokers. The reasons for insurers’ declinatures are likely to be complex and different depending on the type of cover and there is a risk that insureds pressurise brokers to advise on the merits of their coverage position and it may be easy for brokers to overstep their role.

Brokers might also become overwhelmed by the coverage issues faced by insureds and have insufficient time to dedicate to their other duties and clients as a result. This will be exacerbated by the day-to-day difficulties many brokers already face from working from home, such as managing childcare commitments or dealing with IT issues.

Brokers’ commercial relationships may also be affected by the lack of cover being offered. Even if there is no allegation of an error or omission on the broker’s part, an insured may blame a broker for the lack of cover and decide to place its business elsewhere.

Can brokers take comfort in light of insurers’ assertions that business interruption (BI) does not cover pandemics, rather it is intended for infectious diseases, such as legionnaires?

The extent to which brokers can take comfort from insurers’ assertions depends on the policy wording and the fairness of the insurer’s approach.

Most business interruption policies will not respond to coronavirus, as traditionally cover is contingent upon and triggered by property damage. Business has been interrupted due to a government order mandating closure of the premises, rather than any physical damage to the property. This will provide comfort to brokers in some instances because most business interruption policies were never intended to cover losses that did not stem from property damage.

Certain business interruption policies have specific extensions that may provide cover, such as Denial of Access, or Notifiable/Infectious Disease extensions, but insureds face a number of hurdles before cover is likely to be confirmed. First, in many cases, these extensions only provide cover for a list of specified diseases, of which coronavirus is not one. Second, they often require proof that the disease has manifested itself at the insured’s premises. Third, and perhaps most crucially, in order for cover to be available, the insured’s losses need to be caused by coronavirus itself rather than by the government’s order to close or restrict use of the insured’s premises. It is nearly always the latter that has prompted the insured to cause loss.

Overall, these extensions may cause more confusion than comfort. Insureds may be under the impression that cover should be provided, and brokers may face probing questions and challenges as a result.

It is worth noting that business interruption policies are not the only policies that potentially respond to coronavirus losses. There are a number of other types of policies, such as contingency policies written for event cancellation risks where insureds may be able to recover significant sums depending on the policy’s terms and conditions.

What practical guidance can be offered to brokers for new/renewing business?

Brokers should be mindful (and should ensure that insureds are aware) that the placement and renewal process may take longer than usual and should therefore set ample time aside. Requesting short extensions of cover may give both the insured and the insurer breathing space to prepare and consider the proposal. In addition, insurers may be using new technology in placing risks electronically and may require greater detail in responses to their questions.

The delays in the placement and renewal process increase the risk that brokers will fail to place sufficient cover in time (as insureds and brokers may not have enough time to discuss the details of risks fully), which subsequently exposes brokers to potential claims later down the line. Brokers should therefore ensure that detailed notes are taken of all conversations with insureds that reflect the urgency of any instructions and the reasonable steps taken to elicit information.

It is vital that insureds are reminded that their duty to disclose material information—which may include full details of the damage caused to their business by coronavirus—is an ongoing one and there are serious consequences of failing to do so.

Insurers’ forecasts have been disrupted by the crisis and underwriters are likely to be facing escalating demands and restrictions internally, which in turn may limit the coverage offered. New policies are highly likely to specifically exclude losses arising from coronavirusand any future strains of coronavirus. Furthermore, coronavirus will now be treated as a ‘known event’ and will therefore not be covered. Brokers must also be aware of their duty to ensure that policyholders are aware of this and of any new onerous or unusual terms, or significant changes in their policy wording, which may have an impact on the scope of cover.

In equal measure, brokers should consider whether any extensions are necessary in the light of any emerging risks. There may be increased appetite for ‘premium’ policies offering pandemic cover, particularly in light of analysis suggesting that pandemic outbreaks may become a regular occurrence.

Interviewed by Tom Inchley.

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