How Insurers Can More Efficiently Process the Inevitable Wave of Fraudulent ‘Business Interruption’ Claims
The Financial Conduct Authority (FCA), brought this test case against Arch Insurance (UK) Ltd, Argenta Syndicate Management Ltd, Hiscox Insurance Company Ltd, MS Amlin Underwriting Ltd, QBE UK Limited and Royal & Sun Alliance Insurance Plc.
They selected 21 types of policy that had been issued by the insurers and put forward the policyholders’ arguments to the court, in order that they didn’t need to resolve issues around their business interruption (“BI”) policies individually with their insurer. The FCA said that 370,000 policyholders were identified as holding 700 types of policy that had been issued by 60 insurers, all of whom may be affected by the outcome of this case.
The eight insurers argued that only specialist policies had cover for the unprecedented restrictions that have occurred as a result of the covid pandemic and as a result, payments to many claimants awaited the decision that was read down on the 15th January 2021. The insurers lost the argument and must now embark upon the process of paying not only the existing claims, but the vast number that will inevitably follow this decision.
In a year where Government bodies and the private sector have already seen significant increases in fraud, this decision must surely present as too easy a prize for the fraudster.
Claims from businesses which were already insolvent before Covid struck or businesses created purely to justify fraudulent claims are now a major threat to insurers and their shareholders. The insurers are being encouraged to pay out claims as swiftly as possible and as a result, they face a crucial fork in the road which may determine whether they survive this pandemic themselves. In this article, I explore the consequences of this judgement and run through the choices available to the insurers as they line up to meet this gargantuan challenge.
| What did the Supreme Court Justices decide?
The Supreme Court have the final say and this case has already been argued with differing results before the High Court. As a consequence, there is no further line of appeal for the insurance companies. They must apply the results of this decision (noting further guidance is to follow in the coming days and weeks).
The court had to resolve topics including the interpretation of “disease clauses”, “access and hybrid clauses”, “causation”, “trends clauses”, “pre trigger losses” and whether the law had previously been decided correctly in the Orient Express decision.
Lord Hamblen gave the main judgement (which runs to 112 pages and can be found using the link below[1]). The Justices collective determination results in the following consequences:
- The vast majority of policyholders of BI[2] cover will have claims for business interruption losses caused by the national response of Government to covid 19 paid out.
- Insurers cannot argue that their policy was only applicable where narrow (usually written as 25 mile) local covid restrictions were in place.
- Insurers cannot argue that their policy was not applicable because the cover had not been intended to be provided.
- Insured businesses can recover losses caused by Covid 19 cases within a certain radius of their premises, even if they would still have suffered loss of turnover because of Covid cases outside of that radius.
- Cover may be available for partial closure of premises (as well as full closure) and for mandatory closure orders that were not legally binding. As a result, “prevention of access clauses” will be potentially triggered without a law being made that ordered closure of the business.
- In addition, prevention of access, for the purposes of a part of a business or access to a part of a premises may suffice for a claim to be valid. The court gave the example where a golf course itself could remain open, but the clubhouse or shop linked to it had to be shut and therefore the insured party would still be covered for the loss of revenue linked to the closure of that part of the business.
- Valid claims should not be reduced because the loss would have resulted in any event from the pandemic.
- The ‘Orient Express’ decision, as it relates to causation, was wrongly decided and should not be followed by the courts any longer. The Covid-19 pandemic will not be a “competing cause” when assessing if the insured has established causation. This is because the “but for” test is no longer determinative in deciding questions of proximate causation. It’s a relevant test, and in most cases, it would be appropriate, but it will not be appropriate where its application results in a narrowing, or removal, of cover in circumstances where, based on the interpretation of the policy as a whole, that cannot have been the intention of the parties.
- The Right Honourable Judges of the Supreme Court took a narrower approach to identifying “the insured peril” and “trigger in disease clauses”. They found that individual occurrences of Covid 19 could legally satisfy the test of causation along with all other such occurrences.
- There is no ability for insurers to reduce claims by reason of “circumstances caused by the source of the insured peril pre-trigger”.
| What consequences will flow from this decision?
The Association of British Insurers (“ABI”) predicts £900m of BI claims and £1.8bn of Covid claims will be made. Whilst this decision is very good news for policyholders the findings on causation mean that it will be very challenging for insurance companies to deny cover or reduce an indemnity where the underlying cause is the Covid 19 pandemic.
Huw Evans, Director General of the ABI, said:
“All valid claims will be settled as soon as possible and in many cases the process of settling claims has begun. We recognise this has been a particularly difficult time for many small businesses and naturally regret the Covid-19 restrictions have led to disputes with some customers.”
In short, this ruling will cost the insurance sector hundreds of millions of pounds in relation to perfectly proper claims. Each policy now needs to be considered against the judicial reasoning to work out what it means for that policy. The real danger, however, now lies in relation to those claims brought by less scrupulous businesses that are under financial pressure as a result of factors not linked to Covid 19.
Arch, Argenta, MS Amlin, QBE and RSA are not the only insurers in this situation – as many as 60 insurers sold similar products and they will now all being paying out on legitimate and potentially illegitimate claims.
This problem isn’t just limited to the English and Welsh based businesses either. The Financial Ombudsman Service and courts in Scotland and Northern Ireland are expected to use the judgment to rule on other, similar cases in the near future.
The wave of claims that have already been made, combined with the inevitable swathe of new claims that will be lodged, leaves the insurers extremely vulnerable to criminality.
Hiscox estimated its 2020 Covid 19 related business interruption claims had risen by $48 million as a result of the ruling, reaching a total for the year of approximately £136 million (US$186 million).
Insurers are being pressured to now process these claims swiftly, and with very good reason. Legitimate businesses impacted by covid and having the forethought to have insured against that risk deserve to be paid for their losses and the insurers involved in this case should be commended for thanking the courts for clarification on these issues and for, often, seeing to the payment of claims prior to this decision having been made.
Insurers are now at a fork road and will have to do one of the following:
- Pay the claims in full and without detailed scrutiny, accepting a high percentage of them are exaggerated or fraudulent, or
- Recruit large numbers of claim / fraud assessors to manually cross reference the contents of claims against a variety of data sets which can assist in determining the risk of fraud, or
- Pay to outsource the evaluation of claims to large case management companies.
Inevitably the costs of these options will spiral into the millions. The insurance industry can either directly fund criminals by choosing to not check every aspect of a claim or see significantly reduced margins through a burgeoning staff bill.
Thankfully there is another way…
Use automated risk assessment software to process and evaluate claims for signs of or evidence of fraud in bulk and in near real time.
At Synalogik Innovative Solutions we have created the leading insurance fraud investigation platform. Our clients include a number of the UK’s largest insurers, banks and law enforcement agencies and our products are assisting in the automated assessment of risk linked to furloughed worker claims, bounce back loans and a great deal more.
The Scout™ investigation platform harnesses the power of automated gathering, cleansing and analysis of data to empower our customers to make more informed decisions, in a fraction of the time.
Scout™ enables your existing team to process far more cases, find more fraud and identify links between organised criminals targeting you or your industry.
Our customers report up to 85% time savings compared with previous manual investigation processes and up to a 50% increase in the detection of fraud compared with previous manual processes.
If you would like to know more about how we work or to see a demonstration of the platform in action, please contact us at:
or through the link below
https://insurance.synalogik.com/
Daniel White
Barrister and Co-Founder of Synalogik Innovative Solutions Ltd
Daniel is a barrister specialising in criminal and data protection law. A tenant in Citadel Chambers since 2004, appointed to the Attorney General’s unified list, grade 4 prosecutor and specialist in the use of advanced data analytics to prosecute and investigate cases of fraud.
Daniel Co-Founded Synalogik Innovative Solutions in 2018 with individuals who came from intelligence, policing and military (UKSF) backgrounds. Since going out to market with their platform, they have taken significant market share in the insurance, gaming, banking and law enforcement sectors.
References
[1] https://www.supremecourt.uk/cases/uksc-2020-0177.html
[2] Non-property damage cover.
