Brokers' E&O: Getting Ahead of BI Claims

Since the first Covid lockdowns last spring there has been much talk about a likely backlash against the insurance industry, as carriers pushed back against a barrage of claims for non-damage business interruption (NDBI) losses suffered as a result of the pandemic.

One possible outcome, commentators suggested, was that insureds whose claims had been refused, and who failed to get compensation via other means (for example, through class actions), were then likely to turn on their insurance brokers, alleging that they had been mis-sold cover for BI losses. This was expected to lead in turn to a spike in errors and omissions (E&O) claims against brokers.

As far back as April last year, trade publication The Insurer reported that brokers’ E&O carriers were already bracing for a surge in Covid-related claims. The Insurer suggested that if the industry successfully resisted pressure to retroactively include pandemic exposure in insureds’ coverage, the result was expected to be “a deluge of lawsuits from SMEs against retail agents and brokers for failing to warn them that their policies did not include the coverage”.

And as Business Insurance reported in November last year, a panel at the Professional Liability Underwriting Society annual conference reiterated the belief that a surge in brokers’ E&O claims arising from Covid-related BI exclusions was possible. The panel stressed the need for brokers to clearly communicate the nuances, including exclusions, of any policies they sold to clients and to document that process to avoid future exposure to E&O claims.


The Legal Situation

With some insurers sticking to their guns on the issue of Covid BI exclusions, the outcomes of a wave of corporate lawsuits and class actions are being closely watched to determine how this issue will be viewed by courts in years to come – and how this might impact insureds’ view of both carriers’ products and brokers’ advice.

The picture is by no means a clear one. In a recent case that is still being disputed in the Kansas City District Court, a judge who has repeatedly ruled in favour of the plaintiffs in COVID-19 BI cases, again refused to dismiss the case brought against Cincinnati Insurance Company by restaurant chain K.C. Hopps, despite having ruled in favour of the insurer on allegations of breach of contract.

Similarly, in Chicago, a judge in the Cook County Circuit Court last month refused to dismiss Covid-19 BI litigation filed by construction companies against a subsidiary of CNA Financial, despite rulings in favour of defendants in other states, arguing that the case needed to be decided on its own merits.

However, there are also recent instances of courts dismissing cases against insurers on the basis that plaintiffs have been unable to establish proximate cause for BI claims in the absence of a physical loss to trigger the coverage, such as the filing made by Mudpie Inc against Travelers in San Francisco, and that made by an Ohio-based Italian restaurant owner against Acuity Insurance.

Balanced against this contradictory legal situation is the growing political pressure from state legislators to mandate explicit pandemic coverage in BI policies. In a recent political development, New Jersey’s governor signed off on a law to compel carriers to inform insureds as to whether their current policies provide pandemic coverage or not.


Current E&O claims drivers

As we near the end of 2021, the fact that a claims spike predicted over 18 months ago has yet to emerge is not necessarily an indication that forecasts were over-hyped.

As Stephen Adam, Head of Miscellaneous Professional Liability at AXA XL in the US observes: “Claims [for brokers E&O] have been on the rise due to the frequency and severity of major weather-related events in recent years, going back to Hurricane Katrina.”

“Claims arising from Covid are the ticking time bomb,” says Ben Goodier, a partner with law firm RPC. “Everyone's looking for a pot of money against which they can seek to recover. I'm expecting a lot of claims to be brought against brokers, albeit a significant number are unlikely to have merit. However, even bad claims do cost insurers money in defending them.”

An additional concern for brokers is the more onerous duty of care that has been placed on them in recent years, driven in part by a growing body of case law. RPC partner Goodier says there is an increased requirement that brokers “get under the skin” of their clients’ business, adding that “acting as a postbox” is very rarely acceptable.

“What is definitely true is that, as a lot more clients make claims on their insurance policies, they will have an increased understanding of what cover they do and don't have,” says RPC’s Goodier.

“And an increase in claims will lead to an increase in declinatures, which will lead to increased scrutiny of what policies the brokers have placed for their clients. This will mean brokers will need to ensure that they are taking good care to understand their client's business and appreciating what cover they need.”


Mending reputational damage

The forecast surge in brokers E&O claims has yet to materialise, but that may be due in part to the lengthy process of redress for BI losses suffered by SME clients.

A regularly expressed concern in the wake of the darkest days of the pandemic is that the reputation of insurers to make good on claims will have suffered irreparable damage, along with confidence in the sector’s ability to provide effective coverage for difficult-to-insure risks.

As part of this reputational damage, questions about the ability of brokers and agents to source appropriate coverage on behalf of their clients may come with the added risk that other lines of business suffer, as buyers choose not to insure in the belief that their claims will not be honoured.

If brokers are to avoid having to claim against their E&O policies and instead are able reassure clients that insurance products are fit for purpose, there needs to be an ongoing dialogue about the role insurance can play in risk mitigation and risk financing for BI exposures.

One interesting development, highlighted in an article from Reinsurance News is the launch of a startup, OTT Risk, which aims to provide reinsurance cover specifically for NDBI.

The technology-driven startup is focused on creating reinsurance capacity to give insurers more confidence in underwriting these problematic exposures, using a machine learning platform to assess and price the risks, and parametric triggers for claims.

But the underlying insurance product also needs a re-think. Where a small business owner’s property policy doesn’t cover NDBI losses, for example, is that coverage available as a bolt-on product or a standalone policy? And where NDBI coverage, whether as part of a property coverage or a separate policy, doesn’t cover risks like transmissible disease – or where the triggers are either not clear-cut or are subject to exclusions that make the coverage next to useless - are there alternative options that can plug the coverage gap?

This is where having an advisor with close links to specialist markets, such as those found in Lloyd’s and the London specialty market, can be invaluable.

Whatever the outcomes of BI insurance claim disputes, subsequent court cases and any E&O claims made against brokers, it is clear that there will be continuing scrutiny of the advice given by brokers to their insureds and of the suitability of coverage sourced from the open market. Getting ahead of the curve on NDBI exposures should be a priority for the industry in the months ahead.