No cover for Covid-19

Sylvia has been running a toy fair for many years throughout New Zealand. Individual toy makers exhibit and sell their home-made, individually crafted toys, everything from model trains to china dolls.

In January 2020 Sylvia contacted her broker to arrange cover, including business interruption, for the coming year. Unbeknown to Sylvia, on 21 January 2020 Sylvia’s insurer introduced an exclusion for loss resulting from the Covid-19 pandemic. The following day Sylvia’s broker presented a quote for general public liability insurance, and asked Sylvia if she also wanted cover for terrorism, earthquakes, and communicable diseases. Sylvia accepted the quote, including the extra cover, on 31 January 2020.

On 11 February 2020 Sylvia emailed her broker asking if she had cover for any Covid-19 disruption. Sylvia’s broker replied that she would have cover if the venue was closed as a result of a government order.

Sylvia’s first fair for the year was scheduled for June. As the weeks passed by, exhibitors started contacting Sylvia worried that Covid-19 might affect the fair. In particular, the exhibitors wanted to know what would happen to their non-refundable deposit if the fair did not go ahead.

On the strength of her broker’s 11 February 2020 advice, Sylvia told the exhibitors that, as she had insurance, their deposit was safe. On 13 March 2020 Sylvia amended the exhibition terms saying that because she had insurance, if the event was cancelled and she had a successful claim, all exhibitors’ fees would be refunded.

On 19 March 2020, as Covid-19 became more of a reality, Sylvia contacted her broker again, asking for advice about what she should do if she needed to make a claim. The broker replied the following day saying that Sylvia did not have cover unless the communicable disease (Covid-19) originated in the venue the fair was being held in. Sylvia responded that this is not what the broker had said earlier and said that, at this point, the incorrect advice had cost her about $15,000.

On 21 March 2020 New Zealand went into ‘level two’ lockdown and on 23 March 2020 a full lockdown of the country was announced, effective from midnight on 25 March 2020.

On 27 March 2020 Sylvia lodged a formal complaint. The broking company replied that they would respond to the complaint within 20 working days. This response caused Sylvia considerable stress. She needed to make decisions about the June fair and felt she could not wait 20 working days.

On 16 April 2020 the broking company responded and said that they considered the broker’s advice to be accurate in so far as it went and did not consider Sylvia had lost any income as a result of the advice. This was because there was a blanket exclusion in the policy for Covid-19 and they were uncertain as to whether or not the venue would be open in June.

Sylvia did not accept the broking company’s response and complained to FSCL.

Dispute

Sylvia said she had asked her broker a direct question: “does this policy cover Covid-19?” and her broker had said “yes, if the venue is closed by the government”. Sylvia had relied on this advice and considered the broker should step into the shoes of the insurer and compensate her for her loss – which she estimated to be $100,000.

Sylvia asked a different specialist event broker for advice about whether it would have been possible to get Covid-19 cover in late January to early February 2020. The specialist event broker said that it was a ‘grey area’ whether it would have been possible to obtain cover for Covid-19 in February 2020. The specialist event broker said that on or around 23 January 2020 insurers regarded Covid-19 as a known event and by 29 January 2020 a Covid-19 exclusion clause was being applied to policies.

Alternatively, if the broker did not agree to cover the full amount of the loss, Sylvia said that she had acted in reliance on the broker’s advice and changed the terms of engagement with the exhibitors and proceeded as if the fair would go on. Sylvia said that she had received about $50,000 from exhibitors in February and March 2020 and, because of the change to her terms of engagement, she was obliged to refund those fees. In Sylvia’s view the fee refunds were a cost she had incurred when relying on the broker’s advice.

In response to the submission that Sylvia had not suffered a loss, because when she cancelled the fair in April the fair may have been able to go ahead, Sylvia asked what she should do: continue spending another $270,000 in the hope that the restrictions on gathering sizes will have been lifted? Sylvia had to make a decision and felt she had no option but to cancel the fair.

Sylvia also said she had suffered a lot of stress as a result of the broker’s actions. Sylvia referred to the excellent relationship she had had with the broker over the many years she had been running the fair. She felt particularly let down that, on the first occasion on which she had needed to rely on her insurance, her broker was nowhere to be found.

The broking company reconsidered their position and came back to us saying that although they did not consider they were liable for any loss, they were prepared to offer $7,500 in compensation, being half the amount of loss Sylvia had estimated in her first conversation with the broker about the complaint.

The broking company explained that even if the correct advice had been given, Sylvia would have been in the same position. At the time the cover was arranged it was very unlikely that it would have been possible for Sylvia to get cover for Covid-19.

The broking company said they had inadequate information on which to assess Sylvia’s loss caused by making refunds to exhibitors. The broking company also said that a loss may not even be suffered as it may be possible to proceed with the fair.

The broking company acknowledged that Sylvia may have incurred some unrecoverable costs between the date of the advice and when Sylvia learned she had no cover, but the decision to proceed or cancel the event was a commercial decision for Sylvia to make.

Review

We were satisfied that the broker’s incorrect advice had caused financial and emotional stress for Sylvia for which compensation was appropriate. The difficulty was how to assess this compensation.

We explained to Sylvia that the broking company were not liable for the full amount she could have claimed against the insurer if she had had cover for Covid-19. The broker did not cause Sylvia to lose insurance cover, because cover for Covid-19 was never available. Instead we focussed on establishing the loss that Sylvia had suffered as a result of the broker’s incorrect advice.

We accepted that between 11 February 2020 and 20 March 2020 Sylvia was acting in reliance on the broker’s mistaken advice. We calculated that between 11 February 2020 and 20 March 2020 Sylvia had received about $27,000 from exhibitors. We advised Sylvia and the broking company that we considered $27,000 was the maximum likely compensation and a starting point for negotiations between Sylvia and the broking company. We noted that both Sylvia and the exhibitors had received some benefit from the entry fees because Sylvia had been able to proceed with an online fair.

We also found that the broking company had let Sylvia down during the complaints process. Given the degree of stress Sylvia was under, it was not helpful to say they would take 20 working days to respond to the complaint and then, when that response came, to say that the broker’s advice was partially correct. We considered the maximum compensation available for inconvenience ($2,000) appropriate in the circumstances.

Sylvia was very disappointed with our view and claimed $50,000 for the liability to the exhibitors, $31,046.58 in additional costs incurred and the maximum $2,000 as compensation for inconvenience.

The broking company also did not accept our view saying that Sylvia had not suffered any loss at all. If it had not been for the reassurances Sylvia had given that the entry fees were safe, the exhibitors would not have paid fees to her. However, the broking company were prepared to increase their offer to $15,000 as a gesture of goodwill.

Sylvia rejected the broking company’s offer saying that if we did not recommend compensation along the lines she had suggested, she would be going to court.

Resolution

We reviewed the complaint again and recommended that Sylvia accept the broking company’s $15,000 offer. We repeated our earlier advice to Sylvia that the broking company did not have to put her in the position she would have been in if the misstatement had been true, they only had to compensate her for the consequences of the mistaken advice.

We explained to Sylvia that if she took her claim to court, she would need to provide evidence of her loss. Sylvia’s submission about her loss had changed many times during our investigation. We were unable to establish an exact dollar figure for the loss attributable for the misstatement.

In our final decision, we decided to take a slightly different approach. We acknowledged the broking company’s point that without the reassurances that the fees were safe, the exhibitors would not have paid the fees in the first place.

However, for the purpose of our investigation, we decided not to extend the refund period to before 13 March 2020. Although Sylvia had provided email exchanges with two exhibitors, indicating a reliance on the 11 February 2020 statement, but we observed that a court would be unlikely to extrapolate, from these two exchanges, that other exhibitors were similarly affected. We also noted that Sylvia and some exhibitors had benefited from the online fair, which a court would be likely to take into consideration when assessing loss. Instead of a refund back to the date the insurance was arranged, we limited the fee refund to between 13 March 2020, when the change to the terms and conditions was made, and 20 March 2020, when Sylvia learned she did not have cover for Covid-19.

On reconsideration, Sylvia accepted our recommendation and accepted the broker’s offer of $15,000.

Insights for participants

This complaint highlights the importance of accurate advice. In this case, inaccurate advice led to the broker having to pay compensation. Had more care been taken to properly understand and explain the cover and policy limitations including that Covid-19 was excluded from cover, Sylvia may still have proceeded with the planned fairs, but she would at least have known that she was not insured for the risk she was running.