We continue our examination of the implications of the COVID-19 crisis for professionals and their insurers in the context of a challenging economic environment and the correlation between recession and claims against professionals. This article looks at how COVID-19 issues may impact on insurance brokers, construction professionals and directors and officers. To read Part 1 of our review, which looks at how COVID-19 issues may impact on solicitors, surveyors and auditors, click here.
Insurance brokers will already have seen a high level of queries from policyholders around whether existing insurance cover will support insureds through this crisis and, in particular, around the triggers for business interruption cover. Some policyholders will be surprised to find that they do not have business interruption insurance which covers losses arising from the pandemic.
Business interruption insurance
Difficult questions may be asked about why pandemic cover was not in place which could lead to future claims against insurance brokers if:
- Policyholders allege that they were negligently advised in relation to the purchase of cover which failed to respond to losses from COVID-19
- Policyholders allege that they should have been advised to seek wider cover for losses arising from a pandemic. This will be particularly the case for those brokers actively reviewing or placing policies from January 2020 when COVID-19 was known about but some claimants may argue that the threat of a pandemic is one which brokers should have been live to from an earlier date. For example, in September 2019 the Global Preparedness Monitoring Board, co-convened by the World Bank and the World Health Organization (WHO) issued a report which warned of "a very real threat of a rapidly moving, highly lethal pandemic". Whether pandemic cover would have been available to the individual policyholder at an affordable price point and whether it would have responded to any claim are points which brokers will want to explore in defence of such claims.
- Brokers should ensure that any difficult questions from clients are answered very carefully bearing in mind the potential ramification for future claims against them.
Responding to clients' changing circumstances
Insurance brokers also need to be alive to the changing way their clients are operating and consider whether they need to be pro-active about giving advice to clients for whom they have already placed policies. For example:
- What do clients' policies say about unoccupied premises?
- Brokers' clients are likely to be working differently to their usual modes of working - does a combined all-risks insurance policy cover a restaurant for claims when it is no longer operating as a sit in restaurant but operating a take away/delivery service?
- What will be the effect on policy cover if brokers' clients cannot keep up premium payments?
Failure to consider these types of issues may affect insurance brokers' own risk profiles (although there may be scope of duty arguments to be explored in the face of claims).
Insurance brokers' business resilience will also be tested during this period:
- Business continuity processes must be robust enough to ensure that notifications from policyholders to insurance brokers are not missed while the office is closed. Late notification may lead to repudiation of a claim by insurers and a knock-on claim against the insurance broker.
- Insurance brokers also need to be mindful of the notification clause in their own professional indemnity policies. Some brokers may find it more difficult to monitor and report on risks, claims and circumstances with everyone working remotely. It is very important that notification conditions are fully complied with.
- Insurance brokers notifying COVID-19 issues as a blanket notification of circumstances may experience push-back from insurers depending on the applicable policy wording. There will, of course, also be an effect on claims experience and renewal of cover.
- Linked to this, professional indemnity insurers may seek to aggregate claims of a similar type together depending on the policy wording.
- Broking firms are likely to face a noticeable drop in brokerage revenue across a range of classes of insurance as business and consumer clients try to cut-back on their spending on the insurance.
Above all, expect the unexpected: insurance brokers are likely to see claims arising from unusual situations surrounding the COVID-19 crisis.
COVID-19 has presented a host of challenges for the construction industry. There are the practical challenges around social distancing and site safety on a construction site, labour shortages, supply chain issues, cash flow problems as well as the headaches caused by delay and disruption to construction programmes. But how will the crisis affect the risk profiling of professionals working in the construction industry?
Some construction professionals have started working from home for the first time in recent weeks. According to RIBA, until recently, just 7% of architects worked full-time from home and 21% of architects (primarily sole practitioners) did so regularly. However, that has now changed in light of government guidance and working remotely has become the new norm for many professionals. Many firms will have invested in the necessary IT infrastructure and have well developed business continuity plans which allow professionals to work remotely. Some firms, however, may find themselves with a higher risk profile than previously as a result of the potential issues associated with working remotely which may lead to a reduction in the quality of advice or service, including:
- difficulty producing/coordinating CAD drawings from home due to a lack of appropriate hardware or perhaps as a result of software licensing issues
- inability to engage collaboratively with colleagues which is so important in the design process
- a reduction in supervision
- lack of IT support
- employees generally struggling to adapt their work practices whether as a result of logistical reasons, combining family and work commitments, mental health or other issues.
Issues on site
For those construction sites which have remained open, difficult questions may be asked about problems on site which could potentially lead to future claims in some cases. For example:
- In cases where there are significant supply chain issues (eg where there is a sole source supplier or suppliers/sub-suppliers are within countries or regions significantly affected by COVID-19), the associated professional advice around these choices may be questioned particularly if given in the early part of 2020
- Issues may arise in relation to works left unfinished by sub-contractors who are not prepared to be on site or due to an inability to obtain professional sign off for the same reason
- Equally the choice of specialist adviser/sub-contractor may be challenged if time critical deadlines are missed and/or they become insolvent. Again, timing is likely to be key
- Project delays, though inevitable, will be scrutinised and if a delay is deemed not to be outside of the control of the insured, there could be an exposure.
- The role of contract administrator is a particularly important one at this time and decisions will be scrutinised. Contract administrators must take great care to ensure that decisions are fair and carefully documented in order to help avoid claims down the line.
Construction professionals also need to be alive to their clients' changing needs and keep the client appraised of issues which may affect the project brief, the programme, costs and funding. This equally applies to future projects which are currently in the planning stages.
Directors and officers
The COVID-19 crisis is having a significant impact on the day to day business and operations of many companies. Cash flow is being squeezed from both ends, as payments to the company may be delayed or postponed, this in turn applies pressure in relation to settlement of its own debts. As a result, some companies may find that they reach a situation which would fall within the classification of 'wrongful trading'.
Wrongful trading – relaxation of the rules
In response to the COVID-19 crisis, on 28 March 2020 the government made an announcement of changes to insolvency law including a relaxation or suspension of the rules regarding wrongful trading with retrospective effect from 1 March 2020. Whilst the government indicated that it would implement the legislation swiftly, further details of the 'Corporate Insolvency and Governance Bill' are yet to be released.
Implications for D&O Insurance
The coronavirus crisis has led to the cessation of a great deal of economic activity and volatility generally, thereby increasing the risks posed to directors of companies. The heightened scrutiny of directors' decisions is reflected in guidance of the Financial Reporting Council, which is urging auditors to adopt a tough line when judging whether a company can continue to trade as a going concern over the next 12 months.
Wrongful trading under section 214 of the Insolvency Act 1986 is committed by directors if they cause or allow a company to continue to trade when they know (or ought to have concluded) there is no reasonable prospect of avoiding insolvent liquidation or insolvent administration.
Given the potential for directors to be held liable to a company's creditors for an increase in the company's net deficiency during the period when it traded wrongfully, directors face significant practical issues in a deteriorating economic climate in deciding whether insolvency cannot reasonably be avoided.
Although the detail of the proposed legislation is not known, the proposed suspension or relaxation of the wrongful trading rules should provide some relief to directors (provided the company was not already insolvent before 1 March, which may be a contentious issue). Whilst claims against directors for wrongful trading have become less common over the last few years, it is conceivable that the current economic climate could have otherwise led to an increase in such claims. The proposed changes are, however, unlikely to alter the position where there is clear and genuine wrongdoing by directors in an insolvency context (ie fraudulent trading).
As legislation has not been passed to amend the provisions regarding wrongful trading, directors would be well advised to continue to operate in accordance with current provisions until they are formally amended. On the premise that the provisions are suspended or relaxed for a limited period with retrospective effect from 1 March, then it could lead to a reduction of claims against directors which might be covered under a D&O policy (that would have otherwise been brought) depending on the period of the suspension and the precise legislation.
However, this will not prevent a claim for wrongful trading against a director who has been trading wrongfully already for some time and continues to do so or, potentially, even an honest director who at 1 March 2020 (prior to the suspension) knew or ought to have concluded that there was no reasonable prospect of the company avoiding liquidation or administration.
Other potential causes of action
The government has not said anything about suspending legislation governing other potential causes of action against directors arising out of the insolvency of a company, which can be combined with a claim for wrongful trading or arise out of the same or similar circumstances, such as:
- Breach of Duty – Where a director breaches his/her statutory, common law and or fiduciary duties to the company and the company suffers as loss as a result
- Fraudulent trading – Where a company's business is carried on with the intent to defraud creditors or for any fraudulent purpose
- Transactions at an undervalue – Where a company makes a gift or enters into a transaction for no consideration or consideration the value of which is significantly less that the value it received
- A preference transaction – Where a company creditor is intentionally put in a better position in the company's subsequent insolvency
- Extortionate credit transaction – Where there are credit transactions involving exorbitant payments and/or contravened the principles of fair dealing to the detriment of creditors
- Transactions defrauding creditors – Where the intention is to put assets of the company to be put beyond the reach of creditors.
Whilst the proposed suspension or relaxation of wrongful trading rules will be welcomed by directors and their D&O insurers, it may only lead to a postponement of such claims and does not preclude other potential causes of action against directors arising out of similar circumstances as wrongful trading although it may be some time before such claims are brought.
While professional risk exposures may look different for professionals in the post-COVID-19 world, the essential components of a claim for professional negligence will remain the same: claimants will still need to prove breach of duty, causation and loss, however novel the facts. And, in the meantime, all professionals can do in these uncertain times is to focus on maintaining strong risk management practices throughout this period in order to minimise exposure on future claims.