Brokers May Face a COVID-19 BI Wordings E&O Storm from Two Sides

Brokers face a risk of coming under fire from two sides as the litigation and complaints over pandemic related business interruption from Covid-19 spread, with the potential for intermediaries to find themselves in the middle of an E&O storm.

Source: Reinsurance News | Published on August 20, 2020

Property insurance market

With carriers stating that pandemic related business interruption was never envisaged to be covered under many business insurance policies, the insureds are in some cases turning to whoever sold them the policies and as a result brokers could face legal action themselves.

From the other side, some insurance carriers have a growing concern that broker’s own business interruption wordings may have been less robust than their own, leaving them potentially exposed.

The issue of potential broker errors and omissions claims has been discussed in the market for some weeks now, with many expecting that as the litigation continues it could spread to target the retail sellers of commercial insurance policies.

As carriers fight back against legal actions to retroactively force business interruption coverage into policies where it was never envisaged or priced for, should these actions go the way of the insurers (as has been seen in three potentially key decisions so far) the focus may turn to the brokers.

Lawyers at Beale & Co. explained, “Where insurance does not respond, desperate businesses will look to others to meet their losses, and their insurance broker will inevitably come under scrutiny.”

The lawyers believe there is likely to be a “significant battleground in COVID-related E&O claims.”

Claims could be that brokers failed to advise their clients on the extent of BI coverage their insurance would provide, or that brokers failed to advise of the potential risks of events like pandemics.

The claim then would be that brokers and those selling policies on behalf of carriers have failed to adequately warn insureds that the coverage lacked all-encompassing business interruption protection.

Reports suggest some of these cases and complaints are coming to light now, while agents have also been named in litigation against carriers as well.

Agents and brokers that face this legal action from insureds, are likely to turn to their E&O carriers for financial protection and assistance in paying any valid claims that result from this.

But that’s just one side of the argument that brokers could face challenges from, that leads to potential E&O claims against their insurers.

On the other side of this are carriers that have followed broker specific business interruption wordings and who deny coverage, but then require the broker to defend this as the author of the terms.

Insurer Aviva highlighted this issue last week, saying, “There is a risk that litigation will be required to provide legal clarity in terms of the events and the cover provided under broker determined business interruption policy wordings where we are the lead or follow insurer and many of the issues are now subject to the outcome of the FCA test case.”

Does this suggest Aviva is ready to start that legal action, should the FCA test case cause certain broker determined wordings to provide coverage to insureds?

It’s possible and at the least it shows another angle where a broker could eventually face claims that fall under its E&O coverage.

With the potential for disgruntled insureds and insurers to both turn on brokers, the test case and other business interruption litigation avenues could prove key to the major E&O insurers that cover the broking community.

Any brokers failing to defend themselves against an E&O claim could find themselves liable for the coverage that insureds believed should have been in place, as well as potentially for consequential losses. While from the insurer side, any losses suffered due to broker wordings could be disputed and claimed back through E&O or similar actions.

This issue probably has a way to run though and should a test case go the opposite way, it could clear the outlook for the broking community considerably.