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Covid-19 legal uncertainty leaves travel insurers exposed

Articles | Wed 8th Jul, 2020

Much has been written recently about the unwillingness or inability of airlines, travel agents and tour operators to provide holidaymakers with refunds for holidays cancelled or otherwise affected by the Covid-19 pandemic and the measures taken worldwide in response to it. Put briefly, where a flight is cancelled, pursuant to Regulation 8 of the Denied Boarding Regulations (EU Regulation 261/2004) the airline must provide the traveller with a full refund.


Where a holiday is cancelled, tour operators owe an obligation under Regulation 13 of the Package Travel, Package Holidays and Package Tours Regulations 1992 (and now Regulation 13 of the Package Travel and Linked Travel Arrangements Regulations 2018) to refund holidaymakers’ money. Regulation 14 of the later regulations provides for a full refund to be provided to the traveller no later than 14 days after termination of the contract. It is this provision that is causing so much consternation within the travel industry. It is little comfort that Regulation 16(4)(c) provides if the cancellation is due to “unavoidable and extraordinary circumstances”, no compensation is payable for loss of enjoyment of the holiday; the refund remains payable whatever the reason for the cancellation.


Tour operators and airlines, having paid their suppliers and with a dearth of new bookings, simply do not have the cashflow to enable them to make the refunds required under the law.


An insoluble problem

Some consumers and tour operators may regard travel insurance as the solution to what appears at present to be an insoluble problem. The Association of British Insurers (ABI) has calculated travel insurers in the UK could face at least £275m ($343.6m) of claims as a result of coronavirus for holidays and trips that could not be fulfilled because of cancellations or general travel restrictions. To put this into perspective, the Eyjafjallajökull volcanic eruption in Iceland in 2010 resulted in a mere £62m of payments, a record at that time.


Travel insurers point out, however, their policies are not priced or intended to replace consumers’ legal rights against other parties; they are designed as a safety net rather than a consumer’s first port of call. Indeed, the Financial Conduct Authority might well take a dim view of an insurer that priced into its premium and sold to a consumer coverage for risks that are covered elsewhere; in this case, by virtue of the cancellation regulations referred to above, supplemented by the regime imposed by s 75 of the Consumer Credit Act 1974.


Most policies purchased before March 1, 2020 should cover cancellation or curtailment claims arising out of the pandemic and the measures taken to contain it, but only where the consumer has attempted to obtain a refund by the other routes available. A difficulty arises where an  insured is offered by an airline or tour operator a voucher or credit note rather than a refund; some insurers assert this is an acceptable option, and will not accept claims in these circumstances.


The Association of British Travel Agents’ position on this is credit notes offered by package holiday operators are different from those offered by airlines, because the credit notes they propose do not replace a cash refund. The consumer’s right to a refund is preserved and he or she will be entitled to his or her cash back either if the tour operator cannot honour the credit note or if the consumer decides in the end not to use it. In these circumstances, a credit note does seem to constitute an acceptable alternative to cash.


What of future bookings? At present the Foreign and Commonwealth Office is advising against all but essential international travel, with the result that if a holidaymaker were to travel now, this would almost certainly invalidate his or her travel insurance policy and would prevent him or her from making a claim against it.


Whether or not making a booking now is a breach of any particular policy is, of course, a matter that can only be judged against the policy terms; but where a policyholder deliberately places him- or herself in position of needing to claim on a policy, it may be this would constitute a deliberate and wilful act within the meaning of any exclusionary clause (see the decision of the Court of Appeal in Patrick v Royal London Mutual Insurance Society Ltd (2006) in this regard).


The future

What, then, will happen in the event of another pandemic of this nature that causes disruption to international travel? There have been suggestions the UK government might step in, most obviously by disapplying the provisions of the EU Denied Boarding Regulation 2004 and the Package Travel Regulations 2018; but to amend either so as to remove consumer protection would be a breach of the UK government’s obligations under the Treaty of Rome, which are still extant in this transitional period before full Brexit and would lay the government open to a Francovich  challenge  in the domestic courts. Indeed, the European Commission has just opened infringement proceedings against Italy and Greece for doing just that; and has sent letter of formal notice to eight more member states.


To add to an already complicated and delicate situation, one must also consider what happens in January 2021, when the UK will have left the EU. In theory the government will be able to legislate as it pleases without fear of a Francovich challenge. However, this of course would bring UK law out of step with European law, endangering the legal harmony travel businesses and insurers need to operate most effectively and smoothly.


For now, in the absence of any amendment to the legislation that requires airlines and tour operators to provide full refunds in the event of cancellation, the implications of any further pandemic for the travel industry are sobering. For the time being at least, travel insurance will not cover consumers for cancellation or curtailment and whether the industry will be able to obtain its own insurance cover for refund claims seems dubious at best.


The travel industry is left  in an invidious position: unable to contract out of consumer protection legislation, unable to insure against claims and unable to predict when the next pandemic might strike or from where. Similarly, insurers already reeling from this pandemic are unlikely to have any appetite or ability to cover the cost of another one.


In recent times the senior judiciary has taken what can only be described as a breezy approach to the availability of business insurance; see, for example, the comments of Sir Brian Leveson P in Wood v TUI (2018) 2 WLR 1051 to the effect that “although I recognise tour operators will complain they are being held liable for events outside their control, there are many ways in which protection from exposure in this area can be achieved”.


It might be helpful if the UK government could comment on what some of those ways might be in this particular situation.


This article was originally published in Insurance Day, 7th July 2020

By Matthew Ford (BLM), Sarah Prager and Richard Collier (1 Chancery Lane)


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