The last two months has witnessed a series of catastrophic hurricanes with Harvey, Irma, Maria and Nate which are predicted to be the costliest storms in US history. Certainly many in the insurance and reinsurance industry are now speculating that these, together with other catastrophes such as the Mexican earthquake, could turn the market having a fundamental impact on the conditions of the insurance and reinsurance market.
Policyholders, insurers and reinsurers alike now turn to whether and how the losses suffered will be covered. This will require complex factual and legal analysis and may take some time to resolve coverage issues.
The nature of those countries affected and the variety of businesses involved will ultimately lead to an array of insurance / reinsurance coverage considerations.
Property Damage Issues
Insurers will face a wealth of property damage claims from retail, office and commercial residential exposures. The following issues may well arise:
- Has the event triggered cover? There may be issues over whether the property damage has been caused by an excluded peril such as flooding or by storm surge. Under standard homeowner contracts, insurers will usually cover wind damage but exclude damage caused by flooding. On the other hand commercial policies will typically include cover for flood damage, but it will often be sub-limited which may also cause disputes. Some policyholders with flood exclusions may have purchased protection under the US governments National Flood Insurance Programme (NFID).
- Are there aggregation issues? The determination of the number of events or occurrences and their respective impact can have significant consequences on insurance coverage. Many policies will define an “occurrence” as a single event within 72 or 96 hours. What are known as “hours clauses”. There are well known difficulties in breaking down periods of sustained catastrophic weather and the inter-relationship between different sequential weather patterns. This can lead to complex coverage arguments often relying upon synoptic analysis.
Business Interruption (BI)
Damage to property and disruption to transport links, road closures and restricted access to hotels, restaurants and business is also likely to lead to BI claims. When compared to property claims, BI claims are often the largest, more complex and most contentious of the insurance claims arising from natural catastrophes and many factors will affect the calculation of such losses. Considerations will include:
- Establishing causation. BI is sometimes described as operating on a “double trigger”. That being, firstly, the requirement for covered property damage and then secondly interruption to the insured’s business arising from that property damage. Where there has been disruption to transport links or utility supplies, for example, causation may prove difficult to establish and a likely contentious battleground.
- The indemnity period. BI policies will typically provide cover for a period of time by reference to which the insured’s loss will be calculated. Depending upon the business in question and the extent of property damage, it may take a long time before trading conditions return to normal and so it is important to understand the triggers that cause the indemnity period to commence as well as the length of the period and any other category that can be claimed outside of the indemnity period such as increased cost of working.
- Wide Area Damage issues. This is where the insured premises have been damaged as well as the surrounding area and therefore consideration needs to be given to the interrelationship between the loss experienced by the insured and the damage caused to the surrounding vicinity. Such issues arose in the aftermath of hurricane Katrina, an example being the well known decision in Orient-Express Hotels Ltd v Assicuraziono General S.p.a . Similarly business interruption might be experienced at the insured’s premises in relation to physical damage caused to the vicinity of the insured. These have raised complex issues previously as to the amount of cover offered and the quantification of loss. Certainly, sub-limits, adjustments clauses and contingent business interruption insurance cover need to be considered when considering the scope of cover to wide area damage.
- Sub-limits. Policies will often contain sub-limits which apply to loss from particular perils or losses of a particular nature such as denial of access. Issues often arise as to the different sub-limits which apply to different elements of the claim and the interaction between them.
- The operation of Adjustments. These clauses are also known as “special circumstances” or “trends” clauses. They are broad in nature and their aim is to accommodate all influences in the calculation of loss, such as the affect market trends would have on the business that would have occurred but for the incident itself. There is a significant amount of US case law on the impact of such clauses which will undoubtedly play a part in a number of the affected policies which will have been written in the US.
- Losses sustained by criminal activity, for example looting, in the aftermath of hurricanes is unlikely to be covered.
- The level of the losses will be impacted further by the cost increases experienced by the pressures caused by the demand for labour and materials for the rebuilding work. These pressures were already being felt following Harvey and Maria.
Contingent Business Interruption (CBI)
There are likely to be CBI claims due to the interruption to supply chains or customer chains. Texas alone produces nearly three-quarters of the country’s supply of ethylene. Ethylene is the foundation for making plastics essential to US consumer and industrial goods. With plants in Texas being shut down, this will obviously have an impact on production and will no doubt affect the supply chain. Issues which may arise on CBI claims include:
- Identifying suppliers and customers in the CBI extension to cover (whether generically or individually). Even if an insured does not suffer damage to their property resulting in BI, they may nonetheless suffer an impact upon their ability to trade as a consequence of damage suffered to a key supplier or customer. It will therefore be very important to fully understand the scope of any extensions to cover in respect of any such interruption.
- Cover may also be extended to include loss from denial of access and/or loss of attraction.
Reinsurance and Retrocession
Reinsurers and retrocession will be important, especially to Florida’s insurance market. The effects of hurricanes from 1992 through to 2005 devastated the local insurance industry to such an extent that local insurers today are heavily reliant upon reinsurance to pay insurance claims as they fall due. This will magnify the importance of reinsurance pay outs and increase the likelihood of litigation where reinsurance coverage disputes are taken.
The US government National Flood Insurance Program will also face claims for homeowners which have purchased flood protection, which is not provided as part of standard property cover.
Cat Bonds will also come in to play as well as the alternative capital and reinsurance investments which we have become more and more popular over the last decade. It will take some time to assess whether industry loss warranties (ILWs) are triggered. This will also depend upon the trigger point, but we can expect the usual issues as to what losses should be included for the purposes of calculating the industry loss.
Other issues which may arise within the reinsurance and retrocession market include:
- Issues around triggers, aggregation, attachment points and reinstatements.
- Issues may also arise as to how the cedants’ aggregation is to be verified and whether they fall within the corresponding reinsurance contracts.
- Follow the settlements and follow the fortunes obligations will also need to be considered.
- Claims control clauses will be a consideration for reinsurers.
- Back to back issues. As insurance policies are likely to be written under a US governing law, for example Texas, and reinsurance into London potentially written under English law as well as a US governing law, there may well be gaps in cover appearing due to the differences in governing laws.
There has been a significant amount of press coverage and speculation on the level of the losses caused by the hurricanes. Maria alone has been modelled at between US$40bn to US$85bn. A huge sigh of relief was felt when Nate did not cause as much devastation and damage as expected. However, what is certain is that loss adjusters, insurers and reinsurers will be considering policy wordings and definitions carefully against the damage and losses sustained in order to assess the extent of insurance and reinsurance coverage. There will be a significant number of coverage issues to deal with and it is likely that (re)insurers will be instructing lawyers early in the claims process before setting out their coverage position to the cedant or policyholder. Brokers, cedants and policyholders need to be on their guard and do the work necessary to ensure they are able to document / evidence as much damage and loss as is possible to support their insurance claims and to limit coverage issues being taken against them.
|Find out more:|