COVID-19: To exclude or not to exclude. That is the question.

Introduction

Insurers continue to receive notifications in respect of COVID-19 related losses. A consistent approach to those notifications and policy coverage in the context of the relevant policy wordings is important. In parallel, Insurers across all business lines will be assessing whether to amend their policy wordings and, in particular, whether to insert a COVID-19 exclusion into future policies (be that for new customers or mid-term adjustments, extensions or renewals for existing customers).

What are the implications for insurers in relation to existing and future policy wordings as a reaction to the current crisis?

If insurers are minded to change policy terms to reflect the COVID-19 situation, they should bear in mind the FCA’s recently published guidance, which applies equally to new sales or changes to existing policies, and ensure they are making it very clear, in a prominent position, that the policy has changed.

COVID-19 exclusions

The use of a COVID-19 exclusion, in itself, does not offend the general principles for insurers to treat customers fairly (subject to clear communication, in line with the FCA guidance). The LMA have introduced a market standard exclusion (LMA 5391) for "any claim in any way caused by or resulting from Coronavirus (COVID-19)". This is an absolute exclusion of COVID-19 related losses and is drafted widely such that only a loose causal connection between the claim and COVID-19 is required in order for the exclusion to apply.

Insurers may wish to impose a narrower exclusion, which excludes only those losses of which COVID-19 is the direct or proximate cause of the loss. The scope of any COVID-19 exclusion is a commercial matter for individual insurance companies, based on their appetite for risk and position in the market, in respect of each business line. A blanket change across the full suite of insurance policies may not be appropriate. On the one hand, an exclusion that is too narrow is at risk of being ineffective; on the other hand, a broad exclusion such as LMA 5391 may render the policy unmarketable.

Cover under existing policies

Insurers are naturally concerned that introducing a COVID-19 exclusion in future policies may invite insureds to infer that the terms of existing policies, which do not include such an exclusion, do provide cover for COVID-19 related losses.

Whether or not existing policies cover losses connected with COVID-19 will depend on the wording of the individual policies themselves and will be determined by an exercise in policy construction. When construing an insurance policy under English law, the question is what a reasonable person in all the circumstances would have understood the parties to have agreed, based on the actual language in the policy.

The exercise of determining the parties’ intentions is an objective one; what meaning would the document convey to a reasonable person with all the background knowledge which would reasonably have been available to the parties at the time of entering into the contract. (Investors Compensation Scheme v West Bromwich [1998] 1 WLR).

Such an exercise does not involve consideration of the conduct of the parties post-formation of the contract. In other words, the English Courts should not take into account, or be influenced by, the insertion of COVID-19 exclusions into future policies when determining the scope of cover under existing policies. The fact of now adding a COVID-19, exclusion in order to put beyond doubt that COVID-19 related losses are not covered, should not mean that such losses properly fall within the scope of cover under existing policy wordings. It follows from this that any exclusion in existing policies which might operate to exclude COVID-19 related losses (for example, a pandemic or notifiable disease exclusion in a property policy, or a bodily injury and property damage exclusion in a D&O policy) should not be affected by insurers’ decision to insert a COVID-19 exclusion in future policies.

A further point on policy construction – some insureds may seek to argue that, since their existing policy does not contain a specific pandemic or notifiable disease exclusion, COVID-19 related losses should be covered under the policy regardless of the scope of the insuring clauses. In determining the scope of cover under any given policy, the insuring clauses and exclusion clauses must be read together. Insuring clauses are often qualified by exclusions but this does not mean that anything that is not specifically excluded is automatically covered. It would not be practical to list every possible permutation of cover that is excluded by reference to individual exclusion clauses. That said, where there is ambiguity as to whether the existing policy includes COVID related losses and a specific exclusion is introduced into a renewed policy, a Court might seek to interpret any ambiguity in the expiring policy in the Insured’s favour as including such losses. In that case, the new exclusion may be relied upon in support of the Insured’s argument that, on an objective interpretation, the underwriter intended the former policy to respond. This is not to say tighter wording should not be included, but caution should be exercised in cases where there is ambiguity in the scope of cover under the expiring policy.

Blanket notifications

Insurers of claims-made (as opposed to losses-occurring) policies, for example professional indemnity or D&O policies, may be concerned that the inclusion of a wide COVID-related exclusion on renewal will prompt Insureds to make blanket or block notifications of circumstances which may give rise to claims to expiring policies which do not contain such an exclusion. Would such block notifications be valid, having met the threshold may give rise to a claim?

When considering whether to accept a block notification, insurers first need to check the requirements of the notification provision in the policy. Does it require notification of circumstances which may or are likely to give rise to a claim, the latter requiring a higher threshold? Does it require specific details to be notified (for example, the claimant or transaction in question)?

Where the requirements are limited to notification of circumstances which may give rise to a claim or claims, recent case law on this issue is favourable to insureds. The threshold for notification is low. Insureds can rely on a can of worms or hornet’s nest type of notification, without identifying the potential claimants or specific transactions that may be the subject of claims. However, insurers are entitled to challenge a blanket notification which seeks to notify any and all claims and types of losses arising out of COVID-19, where there is no evidence that an insured is subjectively aware of any wrongdoing on its part.

Two examples may illustrate the point. Take, as the first example, the director of a company which is struggling to avoid insolvency in the current crisis. The director is doing all he/she can to keep the business afloat, but is concerned that his/her measures will fail, the business will be wound up, and the director will subsequently face a claim by creditors/the liquidator for breach of duty. Can he/she notify this as a circumstance that may give rise to a claim? We would suggest not: even allowing for the low threshold of may give rise to a claim, the prospect of a claim has to be more than fanciful. Where (as here) the director is concerned about the situation generally and that he/she may in future make decisions which will turn out in hindsight to be misjudgements, but has no reason to think that he/she has (yet) done anything wrong, this would not meet the threshold of a circumstance which may give rise to a claim.

By contrast, take, as a second example, an insurance broker who has started to receive complaints from customers that their business interruption insurers are refusing to pay out on the basis that their policies, which incepted before the pandemic, do not include Notifiable Diseases extensions. A block notification by the broker in this situation, being based on actual client complaints (whether justified or not) relating to past actions by the broker, may well meet the necessary threshold for a block notification.

If a blanket notification of COVID-19 related losses fails in insurers’ view to give sufficient detail of the potential claims and wrongdoing on the insured’s part, it would be prudent for insurers first to seek further information from the insured before simply rejecting it. Insurers should get as much clarity as possible at the time of the notifications as to the insured’s view of the circumstances which might give rise to claims as this will assist in the determination as to the scope of the notification as and when it arises in the context of an actual claim.

Conclusion

The imposition upon renewal of an absolute COVID-19 exclusion may be relevant to construing the scope of a blanket notification of circumstances which may give rise to a claim under claims-made policies. Where insurers have included an absolute COVID-19 exclusion in a future policy, it will not be attractive for them to argue that the block notification to the prior policy of circumstances which might give rise to such claims does not include all such potential claims as this would result in a gap in cover for the insured. This issue will not arise for occurrence-based policies where the imposition of the exclusion in question in one policy will have no effect on the scope of cover available under the prior policy.

In short, we do not consider that COVID-related exclusions in renewed occurrence-based policies ought to have any relevance to the interpretation of expiring policies. However, the inclusion of such exclusions in future claims-made policies may well generate blanket notifications of circumstances to expiring policies. Whether such notifications are valid will depend on a number of factors, including whether they relate to concerns about the insureds’ past actions (which may well ground a valid notification), or about future actions (which probably will not).

See our coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.