March 17, 2020
Coronavirus – Am I Covered? A Routemap to Recovery for Policyholders, Part 2
Part 1 of this review examined the availability – or otherwise – of cover for losses under Business Interruption and Event Cancellation insurance. With the UK government now moving to follow other countries in restricting, but not yet banning, mass gatherings and personal interaction, those policies remain firmly in the spotlight.
However, given the potential obstacles to recovery highlighted in Part 1, and the far-reaching consequences of the pandemic that are only just starting to become apparent, businesses will inevitably incur many other direct and indirect losses that will not fall for coverage under these first response policies. Part 2 of our review therefore investigates what coverage for COVID-19-related losses may be available elsewhere under a variety of other policies.
A general caveat is that these are specialty commercial lines of business, which are often highly bespoke and tailored to the risk in question. Whilst we have highlighted some of the issues that we anticipate arising, any question of coverage will be entirely dependent on a detailed review of the facts in the context of the policy wording.
What might be covered?
With global markets tumbling and the FTSE 100 at its lowest level since 2008 at the time of writing, the economic consequences of COVID-19 look set to be universally felt, and not just by front line industries such as travel, hospitality, entertainment and sports. As supply chains are disrupted and customer funds are squeezed, credit arrangements and solvency margins across all sectors will be severely stress tested.
Businesses with trade credit insurance may be protected from customer defaults within specified criteria, cushioning them from the indirect effects of COVID-19 on their cashflow.
What are the difficulties?
The cover here is narrow and limited specifically to customer defaults. Trade credit insurance will provide no protection for losses suffered as a result of supplier insolvency or a general downturn in the market.
A further issue is that coverage of customer defaults in COVID-19 circumstances may be affected by force majeure provisions in the underlying contracts, governmental actions in relieving contractors from their payment obligations in certain sectors, or (in common law jurisdictions) arguments of contract frustration. Where any of these mechanisms acts to relieve the customer of their contractual obligations, or extends payment periods, it may be arguable, depending on the policy wording in question, that there has been no default and that the policy does not therefore respond.
What might be covered?
Often setting side by side with trade credit insurance, political risk insurance can provide coverage for broader – although highly tailored – circumstances affecting a business’ investments, usually in cross-border circumstances, where the regulatory, economic or political environment is considered to be sufficiently volatile to require a degree of risk transfer. Political risk policies respond to specific triggers including expropriation, currency inconvertibility, and contract frustration.
Where trade credit policies fail to respond to defaults due to force majeure or frustration, political risk policies may potentially step in to bridge the coverage gap, particularly where payment defaults are the direct result of government intervention. For example, in China the Council for the Promotion of International Trade has already issued force majeure certificates worth over $53 billion to relieve businesses of specified contractual payment obligations at a local level. However, the effects of such actions on the underlying contracts will need to be analysed under local and applicable international laws in order to understand the impact on cover under any political risk policy.
Depending on how broadly the insuring clauses are drafted, other governmental edicts such as travel bans, restrictions on public gatherings, and closures of public places may also potentially trigger political risk coverage.
What are the difficulties?
Although there may be ‘silent’ cover to be found in political risk policies, the product is generally not designed specifically to protect businesses from pandemics or circumstances outside the control of government. Broadly drafted exclusions and narrowly drawn insuring clauses may therefore limit the recoverability of losses under the policy, even where losses may be linked to government actions taken in response to the COVID-19.
What might be covered?
Whilst standalone environmental policies are generally intended primarily to respond to cleanup costs and third party liabilities arising from pollution or contamination events caused by the insured business, there may be limited cover provided for disinfection or decontamination costs associated with an outbreak of an infectious disease at the insured premises.
What are the difficulties?
Again these policies are highly specialised, with significant variance and no standard coverage. Where coverage is provided for decontamination or disinfection of premises, the trigger is likely to require an outbreak on or near the insured premises; costs of prophylactic cleansing are unlikely to be covered. Some policies may only be triggered where decontamination is required by order of a competent regulatory authority.
Similarly to our earlier discussion of event cancellation and BI covers, the policy may provide an express list of covered or excluded infection diseases which will determine whether the policy responds to COVID-19.
Contaminated Products / Product Recall
What might be covered?
If a manufacturer of food & beverage or other consumer products suffers an outbreak of COVID-19 at their factory or elsewhere in the supply chain, leading to concerns over possible contamination, a decision may be taken to recall the potentially affected products. If Contaminated Products or Product Recall Insurance is in place, cover may be provided for the manufacturer’s own costs incurred in recalling the products, as well as costs of managing the reputational damage, and potentially cover for loss of profits caused directly by the recall.
What are the difficulties?
The policy trigger will usually require a reasonable expectation that the use or consumption of the products will cause bodily injury, sickness or death. In the case of a COVID-19, which appears to be transmitted by contact with infected persons rather than by consumption of contaminated products, it may be challenging for the insured to prove as a matter of fact that the coverage is triggered. The insuring clause will need to be examined carefully, as language such as ‘may cause’, ‘would cause’, or ‘likely to cause’ will all set different bars to be met. In any case, voluntary recalls carried out primarily as brand protection exercises, where there has been no actual contamination, will not usually be covered.
What might be covered?
In the event that a contaminated product in the recall scenario considered above should actually infect consumers, this could obviously lead to personal injury claims that would fall for coverage under a product liability (or general public liability) policy. However, given the apparent mode of transmission of the virus, as well as the likely causation difficulties that would arise, the likelihood of these type of claims may be remote. Any significant exposure is more likely to lie with manufacturers of pharmaceutical, medical and sanitary products used to prevent transmission or treat the symptoms of the virus, which may be alleged to be defective in failing to prevent or treat the illness, or by causing side effects.
What are the difficulties?
As with public liability claims (which may be covered under the same general liability policy), pollution exclusions may be relevant. More importantly, coverage issues are likely to arise in respect of any claims regarding the products’ efficacy i.e. their ability to perform the intended task of preventing transmission or treat symptoms. Many policies will contain efficacy exclusions, meaning that only liability for injury or damage caused by the product would be covered, not for the product failing to fulfil its intended or advertised function. In that case, a claim for injury caused by side effects of a medicine or vaccine would likely be covered, whilst a claim that a vaccine or device had failed to prevent infection, or that a medicine had failed to treat or cure the illness, would normally not.
What might be covered?
In the face of direct operational restrictions, and in the shadow of an imminent recession, all businesses face stark choices about how best to continue trading and manage the myriad difficulties. As share prices tumble and markets contract, some businesses will inevitably fail to survive, particularly where insurance cover is absent or inadequate to cover losses caused directly and indirectly by the COVID-19 crisis.
Directors of companies may find themselves in the firing line for failing in their duties to manage the company for the benefit of the shareholders, or for misleading investors by failing disclose the nature and extent of the business’ exposure. In insolvency situations, D&O policy limits may be seen as a potential source of recovery for disgruntled shareholders and liquidators seeking to maximise assets for distribution to creditors.
What are the difficulties?
Most D&O policies will contain a bodily injury exclusion, the effect of which will depend on how broadly the exclusion is drafted. Those with ‘absolute’ wording (e.g. ‘based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving bodily injury’) may give rise to coverage challenges in the context of claims flowing from COVID-19, whilst those drafted on a narrow basis (‘for bodily injury’) are unlikely to act as a bar to recovery.
Similarly, pollution or contamination exclusions may come into play, depending on the facts of the claim and the wording of the exclusion. Although these exclusions were introduced primarily to avoid exposure to cleanup costs following environmental disasters, any exclusion using ‘absolute’ wording may potentially be argued to exclude follow-on claims arising from COVID-19-related losses.
Public and Employers’ Liability
What might be covered?
Any business with public exposure, and all businesses with employees, may have concerns over potential liability issues arising from an outbreak, particularly where a decision is taken not to cancel gatherings or events. Establishing causation will be a significant and perhaps insurmountable hurdle for any employee or member of the public seeking to establish liability for illness or even death caused by COVID-19, in that it seems unlikely to be possible to prove when and where the disease was contracted. Nonetheless, it is certainly conceivable that claims may be brought, particularly in more litigious jurisdictions. If so, defence costs at the very least should be covered under the appropriate public or employers’ liability policy.
What are the difficulties?
As in the case of D&O, public liability policies often include pollution exclusions which, if widely drafted, may potentially bar coverage of claims made in respect of COVID-19 contamination and infection. If excluded under a company’s public liability insurance, cover may instead be provided under any standalone environmental insurance that has been purchased.
As a compulsory insurance in the UK, Employers’ Liability cover tends to be more standardised and give rise to fewer coverage issues. However, potentially relevant exclusions include intentional or reckless acts, which might be invoked where an employer is accused of knowingly or recklessly exposing its employees to infection, or failing to protect them
This is a far from comprehensive review of the coverages that may or may not be available to meet the wide-ranging losses that may be suffered by businesses in connection with the spread of the COVID-19 virus, but it can be seen that all industry sectors and lines of insurance business are likely to be affected, with many potential overlaps and gaps in coverage.
As with the advent of any novel peril, there is no single insurance product designed to address the losses caused by the COVID-19 pandemic, and businesses should therefore consult with their advisors to investigate the availability of cover in their existing programs, and just as importantly to ensure that notification and other claims conditions are complied with in a timely manner.
Aaron le Marquer is a partner at Fenchurch Law
March 11, 2020
In its recent judgment in Endurance Corporate Capital v Sartex (05/03/20), the Court of Appeal confirmed that, absent any contractual provision to the contrary, the appropriate basis of indemnity in a property policy is the reinstatement basis – ie, the cost of repairing/replacing the damaged/destroyed building. The only exception is is where, at the time of the loss, the policyholder had been planning to sell the building, rather than continuing to use it.
The Court of Appeal rejected the Insurer’s case that, in order to be entitled to the cost of reinstatement (rather than merely the decrease in market value, where that was lower), the policyholder needed either to have already carried out the reinstatement itself or at least – as per Great Lakes v Western Trading (CoA, 11/10/16) – to have held a “fixed and settled intention” to do so. In a blow to property insurers, the Court of Appeal ruled that this requirement only applied in the very rare situation where the flood, fire, etc had increased the value of the building – as had occurred in the Great Lakes case (see https://www.fenchurchlaw.co.uk/ordinary-measure-indemnity-great-lakes-reinsurance-uk-se-v-western-trading-limited/).
In a further blow to property insurers, the Court of Appeal held that they cannot apply a blanket percentage discount (in practice, often as much as 30-35%) to the cost of reinstatement, to represent the alleged betterment where an old building was replaced using modern materials. A deduction for betterment will be permitted only where insurers can prove and quantify the lower running costs of the new building or, in the case of new plant & machinery, its greater efficiency.
Jonathan Corman is a partner at Fenchurch Law
March 6, 2020
Coronavirus – Am I Covered? A Routemap to Recovery for Policyholders, Part 1
As the spread of COVID-19 gathers pace, there is increasing concern over not just the potential public health impact, but the financial consequences anticipated by businesses within all sectors. Containment measures implemented by public authorities will hopefully manage the spread of the disease effectively and minimise the physical impact on public health, but may themselves lead to substantial economic losses across the economy.
Most businesses will have comprehensive insurance programs in place, but where should policyholders look for coverage of anticipated losses associated with the spread of the Coronavirus?
The first in this two-part series looks at the two primary policies which may respond to economic losses caused directly or indirectly by the COVID-19 virus – Business Interruption and Event Cancellation.
What might be covered?
Business Interruption cover for loss of profits and increased costs of working was traditionally attached to property insurance only, but can now be found in a variety of commercial policies. This will be a primary focus for businesses facing a reduction in income and increase in costs as they try to cope with containment measures in the first instance and, in the event of the escalation of a pandemic, potentially severe supply chain disruption and the mass absence of employees and customers.
What are the difficulties?
The first challenge to establishing a BI claim is the trigger for coverage. In a property policy, BI cover will usually only be triggered where covered property damage has occurred. That is unlikely to be relevant in the present circumstances, so policyholders will need to examine any extensions available, or the existence of standalone contingent BI cover. In some cases, express Infectious Disease cover may be provided. If not, other extensions, for example suppliers and customers, denial of access and loss of attraction covers may all be relevant, but the availability of cover will be entirely dependent on an analysis of the factual cause of the loss in the context of the specific wording.
Those policyholders with an express Infectious Disease cover or extension might appear to be well-protected, but the scope of cover tends to be very tightly drafted and may not extend to novel pathogens such as the coronavirus.
Some policies provide cover for losses caused by any ‘notifiable’ disease, which may give rise to difficulties in the case of a novel disease that does not become notifiable until some way in to the period of loss. A decision of the Hong Kong Court of Appeal in the aftermath of the SARS pandemic established that such a clause had the result of reducing the amount of loss covered in two ways. First, losses suffered before the date on which the disease became notifiable were not covered. The decision of a competent authority to make the disease notifiable did not act retrospectively. Secondly, the starting point for establishing the amount of profit lost was the period after the advent of the disease, but before the disease became notifiable, not the period before the first incidence of the disease. To the extent that the business’s profitability has already suffered before the disease becomes notifiable, this will therefore affect the amount the business is able to claim as loss of profit going forward.
COVID-19 became notifiable in Scotland on 22 February 2020, and in Northern Ireland on 29 February 2020, whilst in England the authorities only took the decision to make it notifiable on 5 March 2020. The wording of any policy will therefore need to be checked carefully to establish which date acts as an effective trigger for BI cover. If multiple triggers apply, calculating the amount of covered loss will be complex and no doubt contentious, given the staggered approach in different regions of the country.
Even where broad coverage for notifiable diseases is provided, policies frequently include an express list of excluded diseases. Whilst this is unlikely to include any reference to Coronavirus or COVID-19 specifically (unless issued very recently), it may include catch-all language such as ‘or any mutant variant thereof.’ We have already seen some suggestion that losses from COVID-19 are excluded as a mutant variant of ‘SARS or atypical pneumonia’ (which was itself a form of coronavirus) and the medical definition or categorization of the disease will no doubt give rise to disputes over coverage.
Conversely, some policies provide cover for a specified list of infectious diseases, rather than any notifiable disease. Such policies are unlikely to provide coverage from Coronavirus losses, unless it can be established, as a matter of scientific or medical fact, that the COVID-19 virus does fall within the list of defined diseases where ‘variant’ language is used, as in the case of excluded diseases.
Even where cover for BI losses is established, there will inevitably then be disputes over causation and measurement of loss. Where a business elects to implement or follow certain measures for the protection of its employees or customers, the position will be different from that where it is following mandatory orders from a public authority. Even where a business is forced to close or scale down its operations, there will be arguments over to what extent the losses are caused by the immediate effects on the business, rather than the effects on the wider marketplace and the absence of customers.
We can therefore anticipate ‘wide area damage’ type arguments being raised by insurers, relying on the principle in the Orient Express case, where a hotel in New Orleans was prevented from recovering its lost profits following Hurricane Katrina, on the basis that damage to the wider area meant that even if the hotel had been able to continue operating, it would have had no custom anyway.
The insuring clause, formula and any trends clause will need to be examined very carefully in order to understand whether such principles have any application to a claim for BI losses in the aftermath of a COVID-19 outbreak.
What might be covered?
Where business interruption cover is unavailable, or inadequate to meet losses suffered, policyholders in certain industries may be able to turn to event cancellation policies to protect them for some of the same losses. These policies cover losses caused directly by the cancellation of a specific event as a result of one of a list of specified perils (or alternatively by any cause not expressly excluded), and where triggered are intended to compensate the business for its lost profits and increased costs as the result of the cancellation.
Event cancellation policies provide coverage for a wide variety of losses suffered by the organiser of the event following cancellation. Cover is not provided for the losses of attendees of cancelled events, who will need to rely on the terms and conditions of the relevant ticketing, travel and accommodation providers, as well as any applicable statutory provisions, to recover their lost costs as a result of the cancellation.
What are the difficulties?
The terms of cover provided in event cancellation policies are highly bespoke and there is no standard approach. Some event cancellation policies may simply not provide – or may exclude – cover for cancellation caused by infectious disease. For those that do, the cover may only extend to an outbreak on the insured premises or within a specified radius, and may exclude pandemic circumstances. The reverse can also be true, in that an exclusion may only preclude cover of cancellations due to local outbreaks. As ever, the policy wording is determinative.
Mandatory or voluntary cancellation
The decision to cancel an event is not taken lightly. Even so, insurers may argue that cancellation of an event was not ‘necessary’ or ‘unavoidable’ (depending on the specific policy wording in question) in the absence of any direction or recommendation from a competent authority. Similarly, coverage is unlikely to be provided if a decision is taken to cancel simply because of low ticket sales caused by COVID-19 concerns.
Infectious diseases – excluded, specified, or notifiable.
The comments above in relation to business interruption losses apply equally to event cancellation cover, which may contain broadly equivalent definitions and trigger provisions. The notifiable date of the disease becomes even more critical in the context of event cancellation cover, since any event cancelled before the disease became notifiable will simply be uncovered. The divergent dates on which COVID-19 became a notifiable disease in Scotland, Northern Ireland and England may therefore become particularly relevant to claims in this area.
It can be seen that whilst most businesses face potentially significant, but as yet unknown financial losses flowing from the impacts of the spread of COVID-19, the availability of insurance coverage for such losses is far from certain and likely to be contested. Public comments by insurers indicating that they consider their aggregate exposure to be low, and that most losses will be excluded, confirm this to be case.
Business Interruption and Event Cancellation insurance may not respond at all, or may not be adequate to meet the actual losses suffered by the business. Part 2 of this series will therefore examine potential coverage for specific losses which may be available under a wide range of other existing policies.
Aaron Le Marquer is a partner at Fenchurch Law
February 27, 2020
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #8 (The Good). Thornton Springer v NEM Insurance Co Limited
Welcome to the latest in the series of blogs from Fenchurch Law: 100 Cases Every Policyholder Needs to Know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#8 (The Good)
The next case selected for consideration from our collection of 100 Cases Every Policyholder Needs to Know is Thornton Springer.
This case covered the issue of Defence Costs, and more particularly an insurer’s liability for Defence Costs which relate to both insured and non-insured claims, and which are incurred in successfully defending those claims.
Thornton Springer was a firm of accountants which sought a declaration that its professional indemnity insurer was liable to indemnify it in defending a claim by a client, who alleged that one of Thornton Springer’s partners had given negligent advice in relation to a company in which that partner had an interest. The client sued both Thornton Springer and the partner. The claim against Thornton Springer was dismissed on the basis that the partner had advised in a private capacity, and not as a partner in Thorton Springer. The issue in the subsequent coverage dispute was whether Thornton Springer could recover the costs it had incurred in defending the claim from its professional indemnity insurer NEM.
The relevant clauses in the NEM Policy were:
• The Insuring Clause, which provided that NEM agreed:
“To indemnify the Assured against any claim or claims first made against the Assured during the period of insurance as shown in the Schedule in respect of any Civil liability whatsoever or whensoever arising (including liability for claimants’ costs) incurred in connection with the conduct of any Professional Business carried on by or on behalf of the Assured …” (our emphasis);
• Special Condition 1 which provided that:
“Underwriters shall, in addition, indemnify the Assured in respect of all costs and expenses incurred with their written consent in the defence or settlement of any claim made against the Assured which falls to be dealt with under this certificate …”.
NEM contended that, as the claim against Thornton Springer had been dismissed, it did not fall within the Insuring Clause and therefore Thornton Springer was not entitled to recover Defence Costs (i.e. the obligation to pay Defence Costs, said NEM, only applied to successful claims, not to ones which failed).
Thornton Springer disagreed. It argued that Speical Condition 1 extended to the costs of successfully defending a claim, provided that the claim was one which in substance could fall within the Insuring Clause.
In addition, even if Thornton Springer’s argument were upheld there remained a dispute over the apportionment of defence costs between the claims against the partner (which were not covered under the Policy) and the claims against Thornton Springer (which it alleged were covered under the Policy).
The decision, and the implications for policyholders
The Court found that, while the Insuring Clause itself was not engaged given the dismissal of the claim against Thornton Springer, Special Condition 1 did not require any actual liability on behalf of Thornton Springer. All that was required was for the claim against it to be one which in substance was capable of falling within the Insuring Clause.
In addition, the Court held that, if the work by Thornton Springer’s solicitors had a dual purpose (i.e. it related both to the claim against Thornton Springer and the claim against the partner), the indemnity for defence costs extended to the dual purpose work, and not just to the work which was exclusively for the defence of the claim against Thornton Springer. This followed the principle in New Zealand Products Limited v New Zealand Insurance Co . Therefore, Thornton Springer was entitled to an indemnity for all the Defence Costs, save where NEM was able to identify work which related exclusively to the claim against the partner.
The Court’s finding in respect of the Defence Costs for a claim which was ultimately unsuccessful is very helpful for policyholders. However, whether or not it applies in a particular case, will depend on the wording of the specific policy in question.
Perhaps of more significance is the Court’s comments regarding the apportionment of defence costs for insured and non-insured claims, and in particular the burden it places on an insurer to show that any costs which it does not wish to pay must relate exclusively to the non-insured claims.
February 20, 2020
Ciara, Dennis and Ellen – an ABC (and CDE) of BI Claims
As storms Ciara, Dennis and now Ellen batter extended parts of the UK, with some areas suffering the worst floods in 200 years, insured losses have already been estimated at £200M and will continue to rise. For individuals whose homes are damaged the effects can be devastating, but effectively addressed by adequate property insurance. Businesses may face more complex insurance issues in order to recover losses arising not just from damage to property and machinery, but to the business itself, whose turnover and profits may be reduced or even eliminated in the immediate aftermath of a flood or other severe weather event. Whilst revenue may take an immediate hit, wages and other overheads must continue to be paid, and in the absence of timely and sufficient financial support, the business’s ability to continue trading may be threatened.
Business interruption cover is therefore an essential component of any business’s property insurance programme. But claims for loss of profit, which must be calculated on a hypothetical basis with many variables, are inevitably complex and drawn out, making Business Interruption claims fertile ground for disputes.
What issues do businesses and their brokers need to consider in order to make sure they are adequately covered and their claims are paid in full?
Wide Area Damage
The notorious issue of wide area damage, following the decision in Orient Express Hotels Ltd v Assicurazioni Generali SPA is a recurrent headache for any insured bringing a BI claim following a catastrophic weather event, and particularly affects those operating in the hospitality industry or other sectors relying on customer footfall. We have previously discussed the merits of the Orient Express case as part of our series “The Good the Bad & the Ugly: 100 cases every policyholder needs to know” but in summary, the claim was brought by a hotel in New Orleans, which suffered significant damage from Hurricane Katrina, leading to its closure for a period of two months. The surrounding area was also devastated by the storms, with the entire city shut down for several weeks. The court found that the hotel was prevented from recovering its business interruption losses on the basis that they were not caused not just by the damage to property, but by the damage to the wider area. Even if the hotel had not been damaged, it would have suffered the same loss of profits since New Orleans was effectively closed for several weeks due to widespread flooding.
In our view the approach taken in the Orient Express case is wrong in principle, and represents an unmerited windfall to insurers in catastrophic event circumstances: the more severe the event, the less insurers pay. However, until challenged in the higher courts, it remain a potential trap that must be addressed. Insureds and their brokers should therefore ensure that they have a clear understanding of how any business interruption coverage will respond in the event of a catastrophic weather event that will affect not just the insured property, but the area at large. It is important to ensure that the insuring and trends clauses are drafted as broadly as possible, so as to respond to losses caused by an insured peril, not just those arising directly from damage to insured property. Where possible, Denial of Access, Suppliers and Customers, and Utilities extensions (also known as contingent business interruption cover) should be incorporated – without sublimit – to ensure that loss of profits remains insured even where the business itself suffers no damage to property.
An apparently straightforward issue, but one that leads to significant reduction of BI recovery perhaps more than any other, is underinsurance. Reaching the correct value for the sum insured is not a straightforward matter, and is often misunderstood. For example, Business Interruption losses are often insured on a Gross Profit basis, but care needs to be taken to ensure that the Gross Profit declared to insurers is calculated according to the gross profit definition in the policy wording, which is likely to differ significantly from the method of calculation used by businesses in their internal or published accounts. In particular, wages are not normally included in an accountant’s gross profit figure, but should be included in the insurable Gross Grofit. However not all cover is written on a Gross Profit basis, and alternative specifications (methods of calculation) include Turnover, Gross Revenue, and Increased Costs of Working. Each of these specification categories appears in many varieties with subtle differences. A detailed understanding of the cover provided by the insuring clause and specification is therefore vital in order to calculate the correct sum insured, and the advice of insurance brokers in making sure that cover is tailor-made to the business is crucial.
Underinsurance in BI claims can arise not just from an inadequate sum insured, but from selecting an insufficient indemnity period. Businesses must ensure that they insure for an indemnity period that is long enough for the business to recover in catastrophic circumstances. This will depend on the nature of the business of the question, but will often extend beyond the standard 12-month indemnity period. Likewise, the insured should be aware that any specified waiting period i.e. the period immediately following the insured event, will act as a deductible and remain uninsured.
Delays in Payment
When a business suffers business interruption losses from a catastrophic weather event, time is of the essence in seeking insurers’ immediate engagement with the adjustment of the claim. Whilst complex business interruption claims may take many months or even years to crystallise, it is critical that interim payments are sought from insurers at the earliest stage. Without financial support at the time when they most need it, many businesses will struggle to recover. Additional losses suffered as a result of late payment may now form the basis of a damages claim under the Enterprise Act 2015. If the business is likely to suffer further loss if insurance proceeds are delayed (whether that be because the business is forced to borrow at high interest rates, or loss of growth or investment opportunity) brokers and insured should ensure that insurers are aware of this as soon as possible in the claims process. It may affect the behaviour of insurers who wish to avoid potential liability for damages in excess of policy exposure.
Whilst businesses might feel confident that they are fully covered for any BI losses suffered as a result of increasingly frequent flooding and other extreme weather events, there is a complex matrix of issues affecting the recoverability and valuation of losses under the policy, and careful attention needs to be paid to these potential pitfalls by businesses and their brokers both at the time of seeking cover and in the preparation of any claim.
Aaron Le Marquer is a partner at Fenchurch Law, a leading insurance law firm acting exclusively for policyholders against insurers. He practiced for eight years in Southeast Asia, where he acted on many contested BI claims arising out of the 2011 catastrophic Thai floods, with total value over $700m.
February 18, 2020
Fenchurch Law expands property coverage disputes team
Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes, has appointed Nicola Bowen as an associate in its Property Risks practice group.
Nicola has spent a number of years working in insurance litigation with a specific focus on property related matters. She has acted for leading insurers on first party and liability claims disputes and complex defendant matters. She has also acted jointly for insurers and their insureds in a number of large subrogated recovery actions.
Nicola joins Fenchurch Law from BLM, where she was a solicitor in their property damage team and was previously a property damage solicitor with DAC Beachcroft.
Joanna Grant, partner and head of the Property Risks group practice at Fenchurch Law, said: We are delighted to welcome Nicola whose dedicated property damage litigation experience expands the coverage disputes capabilities the team can offer our clients.”
Nicola Bowen is an associate at Fenchurch Law
February 5, 2020
Fenchurch Law celebrates a hat-trick!
Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes has received its third consecutive ‘gold’ award from customer experience experts, Investor in Customers (IIC).
There were many complimentary comments from their happy clients, some of which included:
• “Fenchurch provide myself, my team and my clients with an excellent service and give an honest and balanced response. I rate them as the best in the business.”
• “Service focused, excellent knowledge, great at communicating sometimes difficult points.”
• “I believe the firm offers a unique service in this market and hence is vital to a number of clients.”
• “The service we receive from Fenchurch Law is second to none so we would have no hesitation whatsoever in recommending them to any client – in fact we actively do recommend them.”
• “They offer offer a service that is quick, personable and professional. I would add that they know my industry back to front.”
IIC is an independent assessment organisation that conducts rigorous benchmarking exercises. These exercises determine the quality of client service and relationships across several dimensions, including how well a company understands its clients, how it meets their needs and how it engenders loyalty. IIC also compares the internal views of staff to identify how embedded the client is within the company’s thinking.
Sandy Bryson, Director at Investor in Customers commented: “I am absolutely delighted for the whole Fenchurch Law team. They are rightly thrilled and proud to have achieved a third consecutive IIC Gold award, evidencing that they continue to provide their clients with an exceptional experience. The firm clearly cares deeply about its clients and its employees. The Fenchurch Law management team has embedded a culture of continuous improvement within the firm and they are passionate about making the marginal improvements identified within the IIC report to improve further still. They are a genuine pleasure to work with.”
David Pryce, Managing Partner of Fenchurch Law added: “Providing an exceptional level of client service is something that the whole team at Fenchurch Law cares deeply about. But we know we can always do better, and Investor in Customers give us the insights and the tools to help us keep improving our clients’ experience”.
January 8, 2020
Fenchurch Law expands coverage dispute team with Le Marquer appointment
Fenchurch Law, the leading UK firm working exclusively for policyholders and brokers on complex insurance disputes, has appointed Aaron Le Marquer as partner expanding its capabilities and international expertise.
Aaron specialises in insurance disputes for policyholders with a focus on product liability and recall and complex international losses. His experience extends to all commercial lines of business and he has handled many significant London market losses and represented manufacturers and insurers in high-profile cases in the tobacco, automotive, consumer electronics, pharmaceutical, and medical device sectors.
He joins Fenchurch Law from Tilleke & Gibbins, a leading Southeast Asian regional law firm, where he established a leading insurance practice and subsequently became a partner based in Thailand. Previously, he was assistant general counsel for Asia Pacific with AIG in Singapore. He originally trained and practised as an insurance and product liability lawyer with City and US firms based in London.
Managing Partner of Fenchurch Law, David Pryce said: “The start of 2020 marks a period of growth in our capabilities. Aaron is recognised for his insurance disputes work in Asia and now brings this substantial experience acting for policyholders and brokers on large scale and complex claims disputes together with strong insurance industry expertise and multi-jurisdictional experience. There is no doubt both Fenchurch Law and our clients will benefit significantly from his appointment. We will be making further announcements about the expansion of our team in the coming weeks.”
January 7, 2020
Unoccupied Buildings conditions – a trap for the unwary
Properties become unoccupied in a number of different scenarios. In a residential context, this might be because the home is not the policyholder’s main residence, or because the policyholder is going on an extended holiday. Similarly, for buy-to-let landlords, a property may become unoccupied for lengthy periods between tenancies.
This short article will explore the requirements that insurers impose where a property is left unoccupied, and how those requirements have been interpreted by the courts.
Standard home insurance policies exclude claims where properties are left unoccupied for extended periods. The rationale is simple: an unoccupied home represents a greater risk as it is more likely to attract thieves, vandals or squatters. Equally, there is a greater chance of structural damage in an unoccupied home because no one is available to deal with, say, a burst pipe or a fire. For those reasons, home insurance policies usually require policyholders to tell their insurers if the property is/becomes unoccupied.
“Unoccupied” is typically defined as: “not being lived in.” The case law suggests that this means actual use as a dwelling. So, in Simmonds v Cockell  1K.B. 843, a warranty requiring a property to always be occupied did not mean that there would always be someone present, but rather that it would be used as a dwelling house.
Most policies say that the cover will cease if the property is not being lived in “for more than  consecutive days” (although the precise number of days will vary from policy to policy). As long as the property is regularly being occupied, temporary unoccupancy will not invalidate the cover. Therefore, in the case of Winicofsky v Army & Navy General Assurance , a condition requiring premises to remain “occupied” was not breached where the policyholder sought temporary refuge in a shelter during an air raid.
Once an insurer is told that a property is unoccupied, it will, if the change is accepted, be entitled to vary the premium and terms, and may raise a small administration charge for the variation. If the change is not accepted, the policyholder will need to arrange specialist unoccupied property insurance.
In commercial insurance, unoccupied buildings conditions take on a different character. Commercial policies usually impose a number of obligations, some of which may be quite onerous, which must be complied with if cover is to remain in force despite the property becoming unoccupied.
For example, landlords may be required to ensure that an unoccupied property, or a part of it, is inspected once a week (often with a requirement that a record of the inspection is kept), secured against illegal entry, kept free of combustible material, and disconnected from any mains services. The consequence of a failure to comply with the condition depends on whether it is expressed as a condition precedent to the insurer’s liability. If it is, the condition must be complied with absolutely, and any breach will entitle the insurer to deny liability for the claim. If it is not, the position will turn on whether the insurer has suffered prejudice.
A common scenario is that a property becomes unoccupied without the policyholder’s knowledge. This might occur in a landlord’s policy, where, say, a tenant vacates the property without giving notice. Commercial policies usually cater to that scenario by including “non-invalidation clauses”. These are terms which provide that cover will not be invalidated in the event of any act, omission or alteration which is either unknown to the policyholder or beyond its control. To gain the benefit of those clauses, the policyholder will be required to notify its insurer immediately of the act, omission or alteration.
Application of Section 11 of the Insurance Act
Section 11 of the Insurance Act is intended to prevent an insurer from disputing a claim for non-compliance with a term which is unconnected to the actual loss. The Law Commission has said that a causation test is not required; rather, the test is simply whether there is a possibility that the non-compliance could have increased the risk of loss.
Since Section 11 is capable of applying to Unoccupied Buildings conditions, how might it apply in this context?
Let us suppose that a landlord owns a property which has two floors, and the upper floor is unoccupied. A fire then starts on the ground floor, which spreads to the upper floor. Insurers then discover that the landlord breached the Unoccupied Buildings condition by failing to keep the building free of combustible materials, and refuse to pay the claim. There are not yet any authorities on the meaning and application of Section 11.
On an orthodox interpretation of section 11, it would not be open to the policyholder to argue the upper floor would have caught fire in any event, even if the condition had been complied with. However, on a non-orthodox interpretation, section 11 should arguably come to the policyholder’s rescue: the fire started on the ground floor, which was occupied, and compliance with the condition would not have made a difference to the loss.
Almost all property owners, whether acting as private homeowners or in a commercial context, will need to consider the implications of unoccupied buildings conditions at some point.
We would recommend that policyholders check the fine print of their policies in order to understand (a) when they need to notify their insurers if a property becomes unoccupied; and (b) the steps which need to be taken in order to comply with Unoccupied Buildings conditions. A failure to do so may be the difference between an insurer paying, or refusing to pay, a claim.
Alex Rosenfield is a Senior Associate at Fenchurch Law
December 19, 2019
Appeal Courts Triumph for Structural Defects Policyholders: Manchikalapati v Zurich
Leaseholders of flats in a development in Manchester have secured a major victory against Zurich Insurance under a standard form defects policy, in a case with significant implications for new build home owners affected by inadequate construction works. Following a long running Court battle over claims first notified in 2013, policyholders have been awarded approximately £11 million to rectify failures by the insolvent developer to comply with technical requirements and building regulations.
Residents moved into New Lawrence House from 2009 but were forced to leave following a prohibition notice issued shortly after the Grenfell Tower disaster in June 2017, in view of structural deficiencies including missing lifts and balconies, a collapsing roof deck and complete lack of fire stopping measures. The Court of Appeal judgment handed down last week essentially upheld the decision of HHJ Davies, requiring Zurich – through run-off insurers East West – to pay out under the Standard 10 New Home Structural Defects Insurance Policy (the Policy), aside from overturning the maximum liability cap of around £3.6 million applied below.
The development contains 104 flats and the Claimants between them own only 30, with many others left empty. The Policy limited Zurich’s liability for new homes forming part of a continuous structure by reference to “the purchase price declared to Us”, which had been construed as restricting the Claimants’ recovery to the combined sums paid for their own flats. The Court of Appeal disagreed and recalculated the cap based on the total purchase price of all flats in the block, since the Policy enabled a single leaseholder to recover the entire cost of rectifying a danger to the health and safety of occupants and the previous approach would prevent them from doing so. The Policy wording was ambiguous and should be construed “in a manner which is consistent with, not repugnant to, the purpose of the insurance contract”.
Zurich advanced a number of grounds of appeal relating to interpretation of the Policy, all of which were rejected. Lord Justice Coulson found that:
“what [Zurich] suggest as the proper interpretation of the words used in their own policy is, on analysis, nothing of the kind, and is instead a strained and artificial construction (often requiring the interpolation of words not present) with the result that it becomes impossible to see any circumstances in which [Zurich] would ever pay out under the terms of the policy.”
In particular, the Court of Appeal decided:
1. It is not necessary for the costs of rectification work to have been incurred before a claim can be made under the Policy – otherwise insurers could take advantage of leaseholders’ impecuniosity to avoid liability altogether;
2. The fact that funds recovered would in part be used to pay the Claimants’ lawyers and funders was irrelevant. An insured can apply the insurance proceeds as they wish and it would be unjust to hold otherwise, penalising the Claimants merely because they do not have pockets as deep as Zurich’s. The legal and funding costs would never have been incurred had Zurich acknowledged their proper liabilities at the outset;
3. The Policy does not require the insured to sue any third parties against whom the insured might have a possible claim before pursuing Zurich under the Policy;
4. The underground car park and balconies at the development fall within the scope of cover;
5. The condensation exclusion in the Policy does not apply where the condensation which causes damage is caused by a defect. The proximate cause of damage is the defect, not condensation.
6. The trial judge’s application of Policy excess provisions could not be challenged on appeal.
New build developments are usually constructed by single-purpose corporate entities with limited assets, and purchasers of defective properties have restricted rights of recourse against those responsible for the construction or building control approval process in the absence of contractual claims under collateral warranties (Murphy v Brentwood DC  1 A.C. 398, Herons Court v Heronslea Ltd  EWCA Civ 1423). The decision in this case is an important step forward in protecting the interests of new build home owners, in light of wider concerns about regulatory oversight and industry standards under contractor-led procurement methods.
The Zurich Policy was a standard wording indirectly descended from the original NHBC scheme and widely used across the country at the relevant time, with the intention of providing peace of mind for the purchasers and mortgagees of new build properties. The policyholder-friendly interpretation upheld by the Court of Appeal serves as a welcome reminder of this commercial context, limiting the extent to which insurers can seek to rely upon unrealistic arguments to avoid liability or delay payment for outstanding claims. Home owners with the benefit of structural defects policies should notify potential claims as soon as possible, to maximise the prospects of effective recoveries.
Manchikalapati & others v Zurich Insurance plc & others  EWCA Civ 2163
Amy Lacey is a partner at Fenchurch Law