The Perils of Insurance – Has the Clock Struck Thirteen?

The Perils of Insurance – Has the Clock Struck Thirteen?

Overview

In the first four months of 2021 the United Kingdom Supreme Court delivered judgment in two insurance contract disputes. These were The Financial Conduct Authority & Ors v Arch Insurance (UK) Ltd & Ors [2021] UKSC 1 (15 January 2021) and Burnett v International Insurance Company of Hanover Ltd (Scotland) [2021] UKSC 12 (23 April 2021).?

Question

What if anything can reasonably be concluded from this? Were the insurance contract clauses reasonably in dispute or is a position evolving whereby insurers are more readily prepared to challenge the interpretation of policy wordings in an effort to avoid their contractual obligations??

Background

The New Generation Group, Society of Insurance Broking has recently produced a research report titled The importance of ‘trust’ in the SME insurance sector where they “publish their research findings and supporting case study on how the insurance sector could refocus its efforts towards building trust with its customers, particularly SMEs”?

The report recognises “Trust is a mammoth challenge in the insurance sector. It has a significant impact in how insurance is purchased and serviced. Without trust, customers cannot be confident in what they are paying for and are not forthcoming with accurate information which damages all parties involved.

Customers find it difficult to see the value of insurance until they have a claim. The media portrays insurance in a negative light that affects all areas of the sector equally. Therefore, any organisations avoiding or incorrectly paying claims are destroying the progress of their peers who are working hard to rebuild trust.

In an everchanging world the insurance sector should keep up with client expectations and understand their needs. Brokers can add huge value to SMEs and be confident in explaining how they do this to combat price sensitivity. Trust destroyers such as dual pricing and an unreasonable unwillingness to pay claims should be reassessed across the sector so that a future of trust and understanding between parties can blossom.

Research indicates trust can be achieved by improved efficiency, competency and transparency. Relationships with SMEs can be built by offering realistic solutions and keeping promise”

Clearly a willingness to pay claims and deliver on a promise is central to creating and maintaining trust in the insurance sector and therefore the attendant publicity attaching to high profile Supreme Court judgments is likely to be viewed as a “trust destroyer” This will be especially so if it might be inferred, that despite the insurance industries “trust ”ambitions, the judgments are viewed as simply a precursor to an overall hardening of insurers attitudes in relation to the payment of claims.?

The Supreme Court

The case of The Financial Conduct Authority & Ors v Arch Insurance (UK) Ltd & Ors [2021] UKSC1is probably one of the most high profile cases involving the insurance industry with its outcome influencing how policyholders claiming losses for business interruption arising from the COVID-19 pandemic and public health measures were to be treated. The proceedings were brought by the Financial Conduct Authority under the Financial Markets Test Case Scheme and there were some eight insurance companies parties to the action. The backdrop of many businesses suffering significant financial losses arising from the pandemic is readily accepted and undoubtedly, despite government financial support, such businesses had an expectation that their insurance policies would respond and cover their losses. The outcome of the case was eagerly awaited by insurance companies, policyholders and insurance brokers and the final judgment which substantially found in favour of the Financial Conduct Authority has already been the subject of considerable publicity, analysis and comment. It is difficult to argue against a conclusion that the legal action did nothing to enhance trust in the insurance industry.?However, are there any signs that going forward insurers will increasingly defend claims on the basis of their and their legal adviser’s opinions on how insurance policies should be interpreted for the purpose of excluding cover?

In its introduction to the FCA action the Supreme Court succinctly sets out the importance of the case for insurers and policyholders:

The FCA has brought the proceedings for the benefit of policyholders, many of whom are small and medium enterprises (“SMEs”). The defendants are eight insurers who are leading providers of business interruption insurance. As set out in a Framework Agreement between the parties, the aim of the proceedings is to achieve the maximum clarity possible for the maximum number of policyholders and their insurers, consistent with the need for expedition and proportionality. The approach taken has been to consider a representative sample of standard form business interruption policies in the light of agreed and assumed facts. It is estimated that, in addition to the particular policies chosen for the test case, some 700 types of policies across over 60 different insurers and 370,000 policyholders could potentially be affected by the outcome of this litigation

The issue of interpreting the insurance contracts under review was uncontroversial it being accepted an insurance policy, like any other contract, must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean. Evidence about what the parties subjectively intended or understood the contract to mean is not relevant to the court's task

In the course of its arguments RSA (RSA 3) made reference to the following exclusion arguing that all losses resulting from COVID-19 were specifically excluded The insurance by this Policy does not cover any loss or Damage due to contamination pollution soot deposition impairment with dust chemical precipitation adulteration poisoning impurity epidemic and disease…

The court highlighting that the RSA policy ran to some 93 pages held:

“the overriding question is how the words of the contract would be understood by a reasonable person. In the case of an insurance policy of the present kind, sold principally to SMEs, the person to whom the document should be taken to be addressed is not a pedantic lawyer who will subject the entire policy wording to a minute textual analysis (cf Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279, para 59). It is an ordinary policyholder who, on entering into the contract, is taken to have read through the policy conscientiously in order to understand what cover they were getting.

The notion that such a policyholder who is presumed to have reached p 93 of the RSA 3 policy wording would understand the general exclusion of contamination or pollution and kindred risks on that page to be removing a substantial part of the cover for business interruption loss that was ostensibly conferred on p 38 is as unreasonable as it is unrealistic. The reasonable reader would naturally assume that, if the intention had been to put a further substantive limit on the risk of business interruption specifically insured by the extension for infectious diseases in addition to the geographical and temporal limits stated in the extension itself, this would have been done transparently as part of the wording of the extension and not buried away in the middle of a general exclusion of contamination and pollution risks at the back of the policy. The reference in the exclusion to “disease” would reinforce the understanding that the general exclusion could not have been intended to apply to the cover for business interruption caused by an infectious disease, as it would obliterate that cover. It could not sensibly be thought to make a difference that the word “disease” was part of a composite phrase “disease and epidemic”. No reasonable reader would suppose that, although one part of this phrase was not intended to apply to the business interruption cover, the other part was”

It might reasonably be taken from this that there is a significant challenge for insurers to provide policy documents that meet the needs of a “reasonable reader” as opposed to a “pedantic lawyer” and it seems clear neither the court below or the Supreme Court saw any merit in the insurers arguments raised in this section of the judgment.

Lord Briggs in his judgment observed:

The consequence therefore is that, on the insurers' case, the cover apparently provided for business interruption caused by the effects of a national pandemic type of notifiable disease was in reality illusory, just when it might have been supposed to have been most needed by policyholders. That outcome seemed to me to be clearly contrary to the spirit and intent of the relevant provisions of the policies in issue. It therefore comes as no surprise to me that all the judges who have considered these issues have been unanimous in rejecting that outcome, albeit that this court has done so, rightly in my view, more comprehensively than did the court below. This is not to mis-use the dubious benefit of hindsight when applying an insuring clause to events which could not have been contemplated by the parties at the time of their bargain. As the majority show, there were a number of well-known notifiable diseases (such as cholera, plague, typhus, yellow fever and SARS) to which the relevant clauses clearly applied, all of which were capable of spreading rapidly and widely, so as potentially to cause a threat to health on a national scale, and to threaten a national reaction by the responsible authorities, leading to business disruption on a national scale.

Turning to the decision in Burnett v International Insurance Company of Hanover Ltd (Scotland) [2021] UKSC 12 (23 April 2021) it is noted that the dispute related to the operation of a public liability policy. The circumstances giving rise to the claim were very unfortunate:

In the early hours of 9 August 2013, Craig Grant was killed as a result of an assault on him by Jonas Marcius (the first defender), a door steward employed by Prospect Security Ltd (the second defender) to work at the Tonik Bar in Aberdeen, operated by its tenant, Blu Inns Ltd (the third defender).

The insurer’s interest arose as a consequence of:

The appellant (the fourth defender) (“the insurer”) insured the second defender under a policy covering, among other risks, public liability. The second defender is in liquidation. Mrs Grant claims that the insurer would be liable to indemnify the second defender in respect of its vicarious liability for the wrongful acts of their employee, Mr Marcius, and that the right to be indemnified was transferred to and vested in her under the Third Party (Rights against Insurers) Act 2010 (“the 2010 Act”).

The insurer was contesting the case on the basis it was entitled to rely on an exclusion under the policy of “liability arising out of deliberate acts” of an employee

It was noted:

the policy is provided in respect of the second defender’s business of “Manned Guarding and Door Security Contractors”. There is a clear risk that door stewards will use a degree of force in carrying out their duties and that vicarious liability for their tortious acts may result. That is a public liability which is inherently likely to arise in connection with such a business. As observed in Hawley at para 108: “one of the most fundamental concepts underlying the policy was that the insured would be covered for damages which it had to pay owing to its vicarious liability for its employees’ torts. Thus, it can be said with real force that one would not expect the underwriters to be able to invoke [the employer’s] vicarious liability for its doormen as a ground for avoiding, as opposed to accepting, liability under the policy.”

The argument between the parties was distilled as the critical issue dividing the parties is what is meant by “deliberate acts”. The insurer’s case is that it means acts which are intended to cause injury, or acts which are carried out recklessly as to whether they will cause injury. Mrs Grant’s case is that it means acts which are intended to cause the specific injury which results, in this case death, or at least serious injury, but that on any view it does not include reckless acts.

The insurer’s position was rejected on a number of grounds with the court finding amongst other things if, as the insurer contends, clause 14 excludes reckless acts causing injury, it would seriously circumscribe the cover provided, for the reasons given by Mr Milligan and by all three judges of the First Division. The consequence of accepting the insurer’s argument that “acts” in clause 14 refers to the act of causing injury, rather than the specific injury resulting, is that an exemption of reckless acts would lead to a very wide and commercially unlikely exclusion, given the nature of the second defender’s business.

Conclusion

The commentary I have provided in relation to the Supreme Court judgments is one dimensional and does not seek to deliver a detailed analysis of the courts findings. I simply reference the judgments in order that they might serve as a backdrop to stimulate debate on the question posed; are insurers are more readily prepared to challenge the interpretation of policy wordings in an effort to avoid their contractual obligations??

What appears clear from the judgments is that there certainly appears to be an expectation gap between what cover insurers believe they are offering and what cover policyholders believe they are buying. If this is indicative of a wider problem in terms of insurance products then this is a matter of some concern and will undoubtedly be a drag on the insurance industries ambitions in terms of achieving a greater level of trust.

There are many reasons that are likely to lie behind insurance policy disputes such as:

? Poorly drafted insurance policies

? A one size fits all approach

? Extensions to policy cover that do not sit easily with the main policy terms and conditions

? Not fully understanding a policyholders business

? A rush to declinature

? A failure on the part of an ordinary policyholder who, on entering into the contract, is taken to have read through the policy conscientiously in order to understand what cover they were getting.

? A focus on price with very little advice – increasing commoditization

I am sure there are many more issues that those within the insurance industry and its various service providers, to include insurance brokers can put forward as a cause of policy disputes. However, as a general observation anecdotally there appears to be some grounds to consider a hardening of insurer’s position which sits somewhat uneasily with the industries trust ambitions.

Gary Thompson FCII