Read below for highlights from our session on Business Interruption.
Damien Glynn, Sedgewick; Catherine Dixon, Allianz; Ed Lewis, Weightmans; David Williams Axa and session Chair, Vivienne Hexter, Aon
BI is a vital cover that brings resilience to businesses, but does it do what it says on the tin? A spotlight has been shone on BI cover following the coronavirus pandemic and this session will look at how business interruption can best serve the needs of customers going forwards, have more identifiable triggers and be easier to understand. Our panel of leading experts debate the issues.
VH opened with talking about the elephant in the room – Covid and the FCA’s BI test case was it needed?
EL Yes absolutely the test case was needed – yes abs we did!
No one has seen anything like this in our lifetimes – the modern world now allows disease to spread fast and far as we cross borders all the time. Spanish Flu was more than 100 years ago and is the only thing anywhere close to this pandemic. So, when we try and understand the risk concept [of pandemic] opinions were bound to be divided. And insurance wasn’t written with the risk of pandemic in mind.
Did we need the test case when really these are matters of contract? Yes, because there was widespread uncertainty and inconsistency, so we needed certainty. There were particular inconsistencies in non-damage BI (NDBI) and there were thousands of complaints about cover in just a few weeks so a test case bringing together the key considerations was the only way forwards.
VH Some contend the case hasn’t been definitive
EL It is definitive in many important contexts. In term of causation which is often the most difficult aspect to determine and that’s what the test case sought to grapple with, Lawyers often use what we call the But For test to consider causation which has produced inconsistent results. It is explained by the example:
Two hunters accidentally shoot a hiker at exactly the same time and both hit them in the head and the hiker dies. Either bullet on its own would have killed them. The ‘But For’ test gives the perverse outcome that that neither is responsible. Because the premise is that without the alleged cause would the claim have been suffered [i.e. the single bullet being the cause].
So, what about a disease clause operating in a defined area? Because Covid was prolific, though some occurrences were outside a policy’s defined area, Government’s response was a complete shutdown [including in the defined area]. The debate was does that create causation as the insurers could argue that but for the Government shutdown there was no causation under the policy as the disease wasn’t in the defined area. So, a test case was necessary, and the case did determine that.
But there were other issues on quantum such as grants and furlough payments. Government has been emphatic that deductions should not be made from claims as these came to help in times of acute crisis. The ABI and FCA have been emphatic on applying principles and on treating customers fairly. Clearly there cannot be double indemnity. If a business’s finances have been made whole by grants or furlough payments then they should not be allowed to also claim for losses that have already been made up because they have not then suffered a loss.
The dividing line is that Covid grants were not given for a precise reason they are not part of revenue, but furlough payments are there to cover wage costs. Therefore, it would be wrong to include wage costs covered by furlough payment in a claim.
VH Yes there have been thousands of complaints what are your thoughts on reputation?
DW It hasn’t been good reputationally and we thought the case would bring clarity quickly that was the reason for the industry supporting it. Insurers have behaved differently Axa have paid out £70 m already. We want certainty – Axa and others have issued a letter to this effect we want to settle claims – but a lot of businesses have been badly affected and some had no BI some clearly had exclusions and when desperate companies are approached by those advertisingthat they can get them cash then businesses will be tempted to use them if their insurer is not being clear.
VH We are a year down the line so obviously its complex but there were issues before it got to Covid, for example where the words on the page of a policy didn’t meet the intent. Have all those issues gone away?
DG Nothing is sorted! A report in 2021 from CILA and CII identified key areas where wordings could be tweaked to give clarification. A basic mechanism but this would address a practical problem and the change [in wordings] this would bring about would be minimal.
Take the phrase Gross Profit – in the BI section we give it a technical definition and then object when people get it wrong claiming “not a fair presentation”! In addition, reporting on the application of insurance has been unhelpful from the start and also after the test case where there was too much focus on the Orient Express Hotels case.
VH Will changes occur because of the setting aside of the Orient Express Hotels case
CD Probably not yet at the top of lists yet but there are lots of lessons and insurers are taking stock. Is our cover intent matched by application is a big learning and there is work to be done in reviewing outcomes and learning lessons from that and on considering what might be done? Is there a mind to simplify? – We’ve reached the stage that one of the BI policy’s strengths is its weakness. Its structure is flexible with many different models that apply to different businesses. A broker explores and arranges cover in line with their client’s needs do it is a needs-based policy, but it is criticised then for being too complicated.
There may be ways to simplify the cover but that might make it less flexible and with narrower cover. Maybe that is OK. Customers might prefer simpler, narrower covers rather than uncertainty.
Another idea is splitting damage and non-damage. Damage is well understood but NDBI much less so with different ways of selling it and including it in a policy meaning there may need to be detailed discussions about needs when a policy is taken out.
VH What about the traction on parametrics a simple trigger that creates an instant pay out. Is that the way to go?
CD It is worth considering, It would lead to fast claim payment but some customers would be under indemnified and some would be over indemnified – is that a good customer outcome? Some would argue yes if it is understood and expectations are met then that is OK
ICOW (increased cost of working) and AICOW (additional increased cost of working) could be doing that job but that might not be understood and again it’s about understanding how a policy can be structured and having a discussion to make sure it meets needs and expectations.
DG I think its important to have AICOW. ICOW allows a business to mitigate loss – but we have economic policy limits so we might say spend £10m in advertising then we’ll see what your turnover is in a year and then tell you if you will be paid! The before mentioned report suggested that a business case is put forward outlining what is being spent and the expected benefit which everyone signs off on. – Parametrics could be a solution in a commercial combined cover for example in flooding it works – but not to cover interruption if contents or stolen so it could sit alongside traditional covers.
People need to understand what they are buying Sedgwick has a pictorial way of showing this.
VH PRA says policies have to be clear about how much cyber cover is in a policy which seems to have resulted in the hacking out of cyber cover in a BI policy – so even if there is fire or perils result of a cyber incident there is no cover – is that what was intended?
DW This was not the intention but there needed to be clarity. We need to look at wordings and not at test cases like Orient Express. We need to get into the head of our customers and create policies so that they know what they are covered for.
Cyber is in a transformation stage, there is a whole variety of cover. Removing silent cyber shouldn’t be bad for the customer we should be looking to see what can be covered. The balance of cover should be picked up by the fire and perils insurer – but incidents such as hacking and wiping should be in a cyber cover.
There has been a knee jerk reaction [to removing silent cyber] with endorsements that are too broad brush. At Axa we aim not to provide cyber cover under our material damage policies but we want to make sure that within the defined perils the right cover remains because that is what should be covered under a material damage BI policy.
CD The intention was not to strip cover but was to clarify in the areas where cyber was silent.
VH Some insurers picked out LMA clauses is that because insurers were too cautious to draft for themselves?
DW. AXA generally does not use LMA clauses. Big insurers are expected to come up with their own wordings. Smaller insurers may use LMA clauses if they do not have in house expertise. The LMA created too many clauses and it was difficult to see which were intended for which purpose.
VH Is BI broken?
DG It needs tweaking; it doesn’t need a major fix. Core cover has worked for many decades -In terms of innovation were that has been tried for example, supply chain cover – it hasn’t always been taken up. When Pandemic cover was available it wasn’t bought – and it would be interesting to see how many buy it going forwards
EL the principle of BI is sound, but there is a need to be clear on the perils it responds to. On physical perils the cover has worked very well – on non-physical perils it’s interesting to look at the Government’s national strategy doc in 2010 where there were 3 areas of focus
Pandemic fell off the radar – the focus was on the first two, but still very few businesses buy cyber insurance.
The Supreme Court emphasised that when you read a policy if you are an SME you want to make sure you understand what is being said and for it to be relatively easy to navigate the policy to aid understanding. Customers will not look at a policy through the eyes of a pedant lawyer so if you are going to give cover you want to be clear about the cover you are giving and if you are going to take it away you say so on the same page – not 34 pages later! That’s not fair and not reasonable.
We want to see a much better way in which policies are worded and drafted and lawyers have a big role to play in that – and we need to do that through the eyes of the people buying the policy.
DG This would be good news – I have been involved in a few wording reviews and these are not in my experience about restricting cover. There are two stages to review: 1 what is the intention of cover, and that needs input from claims people. 2 move on to the lawyers for the words that speak of the intention. Going out to brokers before legal drafting would be good and not doing so is a missed opportunity
VH We have some questions about policies regarding under insurance with businesses starting up again and what should they be declaring – are insurers looking at that?
CD Yes we are working with brokers to help their customers get their policies adjusted back to where they need to be – so they have the cover they need.
VD What about confidence in the product – is it down to individual insurers or collaborative?
DW I think we need collaboration and that would give clear messages and avoid confusion
We have quite a bit more work for all of us to do and the more we discuss and think about clients, insurers and brokers debating together.