COVID-19: Prepare for the Flood of Insurance-Related Litigation

On the other hand, insurance companies believe they have limited exposure to COVID-19 claims. Which side is correct? Should insurance firms gear themselves up for a legal fight, whilst law firms become familiar with the poor drafting and exclusion ambiguity of their policies?

However, an incoming battle over COVID-19 related claims needn’t be the reality. To learn from this, insurance companies need to change their approach; embracing consistency, transparency and a data-driven methodology to wording that paints an accurate picture of risk and exposure for both sides – both the insurers and insureds. Akber Datoo, CEO at D2 Legal Technology, explains how this can be achieved.

Long term financial stability on the rocks

From the moment COVID-19 was recognised as a pandemic by the World Health Organisation on 11 March 2020, the global economy took a devastating hit, which has continued spiralling downwards ever since. Despite some knowledge gained from previous viral outbreaks which had already caused tens of billions of dollars in losses, businesses still acknowledged that they would face many months of disruption, with the final value of financial losses unable to be predicted due to the new scale of magnitude of the disease.

COVID-19 is unprecedented and its impacts are still being felt almost two months on; there is still no ‘end’ in sight. With the UK predicted to face a fiscal deficit of £200 billion next year – and that’s not taking into account the rest of the world – it will be essential for government support to be very tightly focused and managed.

To learn from this, insurance companies need to change their approach; embracing consistency, transparency and a data-driven methodology to wording that paints an accurate picture of risk and exposure for both sides – both the insurers and insureds.

Businesses have now been left in a state of flux, with no ability to plan ahead. Many have no guarantee that their insurance policies will cover at least some of their lost revenue from the outbreak, although many remain hopeful. Despite this, the insurance industry is confidently claiming minimal exposure to their current underwriting practices and saying “it’s force majeure – not a matter for insurance”. What does this mean for the future of many businesses? Will we see more alliances between organisations in the same industry formed to enforce their policies?

Businesses across all industries are in the same position; there is a large group of dentists, for example, that have worked with the British Dental Association, who are urgently examining insurance policies affecting the practices of their members. The BDA Board Chair Mick Armstrong said that: “Many dentists who took out policies to guard against the unexpected have been left with no support during this pandemic”.

Examining the Words

Many businesses have been surprised to discover that even those policies offering pandemic cover are typically limited to a pre-defined list of diseases. One of the issues is that although COVID-19 is not specifically mentioned as a possible ‘infection’ disruption, at the time when the policy was written, it obviously would not have been able to foresee the virus “COVID-19” to be able to include it in a list of covered diseases.

Similar issues impact business interruption insurance and the ‘insured peril’ definition within each policy. Cover for compulsory closure in some policies is dependent upon physical damage. Was the closure enforced due to the transmission of a notifiable disease by the authorities or prudence? Was the business owner following a definitive government policy or protecting its employees? Does COVID-19 fall under the scope of the notifiable disease definition (which is unlikely)? Does the policy cover supply chain disruptions – and, if so, how far down that supply chain will the disruption be covered?

For the most part, insurers have held the line that most cases will not be covered. This has been recognised more broadly, with a Tory MP calling for Downing Street action after his constituents complained insurers were not paying out on pandemic-related claims.

Above all of this, there is a disturbing lack of consistency in wording and exclusions, making it very difficult to assess coverage in respect of potential claims – but despite this, the first wave of litigation has already started.

The widespread disruption and impacts of COVID-19 means that for businesses, multiple policies will be under the spotlight to help offset damages and risks. Yet, with the full extent of the damage yet to be determined, no business can have complete confidence in their policies. Unless an insurer has correctly embraced well- structured and well-designed model wording libraries and document generation tools, each policy has different exclusions and subtle changes in wording. This is an issue that should be striking fear not amongst the insureds, but the insurance industry itself.

There are also serious risks associated with financial lines and the operating procedures of senior management teams in banking and insurance during these unprecedented times. In the face of reduced staff numbers, supply chain difficulties and market volatility, there are a number of risks that need to be considered – from regulatory compliance to employee protection and continuation of business services. Questions must be asked: have funds been properly valued? Are problematic funds being divested at the right time? There are also very serious concerns regarding silent cyber, with criminals exploiting COVID-19 fear and uncertainty. The right contingency plans – many of which will be linked to the insurance policy – must be followed; if not, the potential for a very long legal dispute is extremely high.

In the face of reduced staff numbers, supply chain difficulties and market volatility, there are a number of risks that need to be considered – from regulatory compliance to employee protection and continuation of business services.

The Stakes are High

The situation is this: insurance companies have played Russian roulette with policy wording – and many are going to have to face the consequences of that. There is so much money at stake that firms will be pushing for a legal resolution to coverage disputes and lawyers will be looking for ambiguity and subtle distinctions in the policies to challenge in court. Furthermore, given the impact of COVID-19 on society, it is likely that the courts will construe these ambiguities in favour not of insurers, but of policyholders.

This pandemic will painfully demonstrate the poor internal management of wording and risks both in primary and reinsurance policies. Despite many questions being raised over the next few years with regards to insureds’ understanding of what they were ordering and the fitness of the insurance being purchased, the extent to which the insurance industry was remiss in helping insureds obtain such an understanding will also come into the spotlight.

An Unknown Future

Will COVID-19 be a once in a lifetime event? Unlikely. More likely is that the pandemic will continue to impact the world for years to come, with new pandemics possibly following suit. There are certainly lessons to be learned. The insurance industry must recognise that both insurers and insureds need clarity and transparency with regards to the level of exposure covered in the policies.

This battle between insurers and insureds should never happen again. Clause taxonomies and model wording libraries ensure consistency and must be adopted. Furthermore, data-driven contracts enable rapid identification of exclusions and their financial implication, which the industry has learned is essential. With the correct approach, insurance companies can deliver the much-needed transparency to their customers and ensure history does not repeat itself.