COVID-19 has potential to generate significant insurance claims worldwide, not only from more obvious covers such as life, trade credit, business interruption, event/contingency and travel, but also from employers’ liability, public liability or D&O covers.
The scale of losses being faced by businesses is dramatic and beyond most expectations – such losses have potential to devastate the balance sheets of insurers. Faced by such sizeable losses, it seems inevitable that insurers will seek to maximise use of their reinsurance programs, including by seeking to aggregate losses to the fullest extent possible. That might be achieved (at least on London market wordings) by arguing that COVID-19 is a ‘cause’ of their losses (on cause-based wordings) or that the outbreak is an ‘event’ (on ‘event’ or ‘occurrence’ wordings – if the outbreak is said to have started in a particular place at a particular time, from which losses flowed – perhaps a more challenging position for reinsureds). Reinsurers should be prepared for the possibility of claims being notified to layers of reinsurance that may never have been intended to respond to such losses.
Over the past week, a particular concern for insurance and reinsurance market participants arose from news that members of one state’s legislature (New Jersey) have been proposing legal changes that would extend business interruption cover to include losses caused by COVID-19, even if the policy wording excluded such coverage. It is by no means clear that such legislation, even if passed, would survive a constitutional challenge, but the New Jersey proposals were complemented by further news that 18 members of the United States’ House of Representatives have written to US insurance trade associations to exert pressure on insurers to pay COVID-19 related claims on existing BI covers. The letter was promptly rejected, but if changes of law or claims practice in the US were to develop, such that insurers became exposed to far greater business interruption claims than anticipated, there would be a potential for a considerable knock-on impact to the reinsurance market should reinsureds seek to aggregate those claims and notify their reinsurers.
Coverage should be assessed on a case-by-case basis by reinsurers and reinsureds alike, paying particular attention to:
- aggregating language used in the policy wording (including hours clauses);
- follow clauses that may bind reinsurers to follow underlying settlements (including those that may be arrived at on account of political or commercial pressures);
- choice of law clauses (including service of suit clauses, permitting the reinsured to bring any coverage dispute in courts of the United States); and
- any exceptions or exclusions to cover that may be relevant.
Those carrying out 1 April renewals may wish to pay particular attention to these clauses and possible COVID-19 exposure.
As with many issues raised by COVID-19 itself, the landscape continues to develop at pace.