Covid-19: Risks for Brokers moving forward

There has been a lot of commentary in the past 8 weeks or so about the risks the Covid-19 pandemic poses to various professions, perhaps none so clearly as the Insurance Broking industry.  Business Interruption (“BI”) Insurance Policies in particular are being pored over closely, not least in light of the FCA’s ongoing action to seek judicial declarations (to resolve contractual uncertainties arising out of select BI Policies) and the current Hiscox Action Group (challenging Insurers’ pandemic exclusions in its commercial BI policies).

There will inevitably be BI Policies that do respond to the Covid-19 pandemic losses, most of them unintentionally rather than intentionally.  This will be the exception, rather than the rule in our view and what we expect to see far more broadly is BI policies declining to respond to Covid-19 pandemic losses.

It is out of this scenario unfortunately however that there will almost certainly be an increase in claims against Insurance Brokers.  Policyholders will turn to their Brokers when they start to ask why they are not covered and whether they could have obtained a Policy that does provide cover from a different Insurer? Such claims are fraught with difficulty for Policyholders but they do also carry risk for Brokers when one considers the relative ease (when compared to Court proceedings) with which a Policyholder can pursue a claim through the Financial Ombudsman Service (which will have jurisdiction over the vast majority of these claims).  We explored the potential allegations that could be made against Brokers arising out of the Covid-19 Pandemic in greater detail in our recent webinar here.

The above is not where the story ends for Brokers.  The Covid-19 Pandemic risks do not only arise out of past events i.e. the placing of (allegedly inadequate) cover.  There are risks moving forward, which we broadly categorise as:-

1. Operational risks;
2. Advisory risks; and
3. Regulatory risks.

Operational Risks

Covid-19 has required the business community to make wide-ranging operational changes, and quickly.  All but essential key workers and those who cannot work at home are working remotely.  For Brokers, this could create the following issues:-

1. Business Continuity – do broking firms have sufficient resources or sufficiently sophisticated IT systems to support the work force working remotely? Does working from home create additional risks to ensuring timely notifications, on behalf of not only Insureds (where a late notification could have serious consequences) but also the broking firm’s own monitoring and reporting duties for its own PI cover?
2. Confidentiality and Information Exchange – Insurance Broking is traditionally a very “face to face” profession, not only between the Policyholder and the Broker but also the Broker and the insurance market.  The move to remote working means that this can no longer be the case (and likely will not return for some time yet). Like most other professions, remote working creates additional confidentiality risks for Brokers (not only in relation to hard copy files but IT security too); and it also brings into sharp focus the need to keep clear and detailed attendance notes of instructions given by the Policyholder and the advice given in return, particularly where Brokers may have been used to relying on recordings of telephone conversations with their client.

Advisory Risks

The Covid-19 pandemic is likely to result in the further hardening of the insurance market with higher scrutiny of risks from Underwriters, higher rates and more restrictive wordings being offered.  In turn, this will make it more difficult for Brokers to place risks.  The advice given by Brokers to Policyholders (and the accurate communication and recording of that advice) will be crucial.  Brokers should consider:-

1. Timing – Insurers are likely to scrutinise proposals more closely and require additional information (for example in relation to business continuity or solvency of a Policyholder) for renewals.  Subject to each Insurers’ approach, this is likely to create additional work for Brokers particularly when collating the relevant information (which, as a result of remote working will be a slower process than normal in any event as much of the information might be inaccessible in policyholders’ offices) and Brokers should be consider whether they need more time than normal to complete the renewals process.  If there is going to be insufficient time as a result of additional information being required, Brokers should give early consideration to whether a short extension to cover should be sought.  Brokers should at all times be mindful of clear advice to be given to Policyholders about their duty of fair presentation, especially where any information is put forward on a ‘best estimate’ basis due to accurate records being inaccessible.  The broker is the agent of the policyholder and so could be held to account if information is inaccurate.
2. Scope of cover – as above, the hardening of the market is likely to bring with it more restrictive policy wordings, likely with blanket Covid-19 exclusions.  Brokers will need to take detailed instructions from Policyholders (including whether the Policyholder’s suite of insurance cover requires change in light of the pandemic and the new working environment it has created – eg cyber cover, enhanced Directors & Officers cover.  They will also need to take heightened care when (i) comparing the scope of cover to previous years; (ii) considering what events trigger cover (and similarly what events will exclude cover); and (iii) explaining and advising the Policyholder about precisely what cover they have, and where it differs from their initial requirements due to this new situation.  Again, the accurate transmission and recording of this advice will be key in fending off future claims.

Regulatory Risks

Following the FCA’s review of the wholesale brokers market, the industry was effectively put on notice in April 2019 that the FCA would be scrutinising business models in relation to (i) compensation and incentives (which is its priority) (ii) governance and culture (iii) conflicts of interest (iv) market abuse; and (v) financial crime.  The Covid-19 Pandemic is unlikely to slow the FCA’s review and, to the extent that Brokers are making changes to their policies as a result, this should continue.  We expect that the FCA will be focusing on Brokers’ charging fees to Policyholders and also receiving commission from Insurers.

Conclusion

Like life in general, Covid-19 is having a fundamental and wide-ranging impact on the insurance broking profession, not only in bringing to the forefront a potential wave of claims in the future, but also in heightening the risk of future claims due to restrictive ongoing covers and enhanced difficulties in communicating effectively with policyholders.  Brokers are undoubtedly going to have to work even harder in this market than immediately before the lockdown, and it is essential that they foresee and plan for the enhanced risks that exist in this new normal.

For further information please contact Joe Bryant or Fiona Murphy.