Legal Focus: Brokers do not need to fear the outcome of FCA’s BI test case

Judgment day in the UK’s Financial Conduct Authority (FCA) test case on business interruption and Covid-19 duly arrived. For brokers, there is now legal clarity about the issues that had been much debated beforehand as the market tried to predict which way the judicial wind would blow.

There are many questions brokers will be asking as the judgment is digested but the principal one is should they fear a legal exposure to any policyholders or insurers who may be financially disappointed by the outcome of that case?

I would suggest brokers need not be overly concerned about the September 15 ruling, even though this is not a slam dunk win for each and every policyholder affected, as different conclusions were reached in respect of each wording considered: to remind, there were 21 sample wordings before the court.

Much focus has quite rightly been placed on the principal findings in favour of the FCA and policyholders on the majority of the key issues, particularly in respect of the coverage triggers under most disease and “hybrid” clauses, specific denial of access provisions, as well as ruling a simplistic causation and “trends” clause application approach should be applied: the difference between pre-Covid-19 trading and Covid-19 impact.

The effect of this judgment  (and by extra­polation, other similar policy wordings not before the court but circulating the market) is the court has essentially ruled these policies generally do in principle offer Covid-19 pandemic cover

But not all policyholders are in an equal box seat against their insurers depending on what wording they hold and their factual circumstances. If a policyholder is required to engage a denial of access trigger, this may be more difficult and they may not get a claim paid. The disappointment at the judgment in this case is not going to be the sole preserve of insurers but will also be shared by a number of policyholders.

Brokers often bemoan just how regularly courts will determine a broker is legally culpable where insureds’ (or insurers’) coverage expectations are not met by a court judgment. However, there are reasons to suppose it is unduly pessimistic to suppose that a court would consequentially order brokers to compensate insurers and policyholders financially disappointed by the final outcome of this court process.

Effect of judgment

The effect of this judgment is the court has essentially ruled these policies generally (and by extra­polation, other similar policy wordings not before the court but circulating the market) do in principle offer Covid-19 pandemic cover. On this hypothesis, the broker has put in place a policy of substantive value for those insureds. No policyholder can complain his or her broker did not procure business interruption coverage in principle for Covid-19 losses. This will be so even if the ultimate quantum assessed in accordance with appropriate legal principles may not be so straightforward.

Equally, in such an outcome, there seems no realistic basis for any insurer complaint against a broker. Brokers acting for policy­holders do not owe duties to insurers to look out for their interests when negotiating and agreeing policies for policyholders.

Possibly some brokers may have been commissioned to assist insurers to devise or advise on policy wordings, but insurers ultimately should expect to take ownership of wordings they issue and in reality any input given by a broker would surely be subject to insurer independent review and decision.

Short of a broker in fact then assuring insurers the specific coverage position under a specific policy was not as the court rules, I suggest there will be much sympathy with the submission a broker should not be criticised legally for not predicting Covid-19 in any wording drafting, how this would interplay with how society and the government in fact interacted.

Nuanced ruling

However, the outcome of the judgment is more nuanced than simply “policyholders win, insurers lose” because the court has been clear to delineate limitations in the coverage responsiveness for policyholders in the different coverage triggers.

This, unfortunately, generally looks fact-specific but to take one specific example, some insureds will be in a better position to quantify and recover losses if they can engage wider disease wording, where evidence of Covid-19 nationally will suffice, as opposed to relying on what the court has ruled may be more limited coverage that engages an event, where identifying loss from a specific localised outbreak or lockdown, with consequent authority action, may be necessary.

It is apparent from this judgment some policyholders will lose out if they happen to have been issued with a particular wording from a particular insurer instead of receiving another insurer’s wording. It would, though, I suggest, still be a legal stretch then to say a broker must compensate a policyholder that did not hold one of the responding covers, because the broker should have selected a different one from the market.

A finding a policy wording does not cover Covid-19 does not mean the policy as a whole is not fit for purpose in the marketplace. Further, provided a broker did not warrant or assure a policyholder a particular policy wording, wrongly, as the court may rule, would cover the type of Covid-19 situation now faced, to say a broker should have selected a different insurer’s product would ascribe to that broker a measure of foresight and prediction about the Covid-19 impact no other category of person in the world clearly had.

Assuming an appeal follows, we must await how the courts – likely the Supreme Court – finally rules on these issues. Absent, as mentioned, any promise or assurance by a broker the coverage outcome was not as the courts finally determine, brokers may be reasonably comforted they and their errors and omissions insurers will not easily become the deep pocket of last resort for those affected parties financially dissatisfied by the court’s rulings on these issues.

Stephen Netherway is a partner and leader of the insurance practice at Devonshires