Correct as of 6 April 2020. This article is not being maintained.
Following an initial series of direct claims by policyholders (which may or may not be covered), a wave of notifications is now reaching reinsurers. In this Law-Now we assess specifically the legal issues arising for reinsureds and reinsurers.
Classes of business
COVID-19 related claims continue to grow in number, many of which will be optimistic in their interpretation of coverage. Notifications so far have tended to be made on a broad basis without identifying specific loss or damage. Along with inevitable claims on travel, life and health insurance, we consider that reinsurers are likely see claims clustering around the following lines:
Property / business interruption, including landlords’ loss of rent (although the property damage required to trigger traditional business interruption cover may not have been suffered by the insured, unless there are specific extensions within the policy);
Contingency policies (such as event cancellation);
General liability including employers’ liability, general casualty, professional negligence and D&O;
Trade credit insurance; and
Under normal circumstances, aggregation, quantum and settlements are common areas of reinsurance disputes. Each of these areas will be a potential area of dispute in COVID-19 claims. We have addressed some areas that may be of particular consideration to reinsureds and reinsurers in respect of such claims below.
Cedants will obviously be seeking to maximise their cover by way of aggregation of the claims under a unifying concept or, if it suits the deductibles and limits of their reinsurance, through separating them out.
In some lines, such as life and accident & health policies, it may be simple to establish that the disease itself is the direct cause of the loss and the unifying concept. Although questions may arise as to whether multiple outbreaks across various countries, or perhaps even multiple waves of the disease in the same country can be unified, the cause of the loss will be clear.
However, it is unlikely that all losses arising from COVID-19 will be aggregated cleanly as a single catastrophe occurrence for reinsurance purposes across other lines, for which COVID-19 may be the underlying cause of the loss but not the event or occurrence that triggers cover. Such events or occurrences may range from the announcement of government orders, or perhaps the establishment of legal liability of the insured in court. An insurer may therefore struggle in aggregating claims with differing triggers for cover.
There will, in addition, be some ‘events’ which are used to trigger cover across a number of policies and therefore facilitate aggregation. In particular, the UK government order dated 23 March which closed certain businesses and venues and required people to stay at home (with some exceptions) is a discrete event that will trigger cover for innumerable business interruption losses over subsequent months. Equivalent orders will apply elsewhere, but it may be a point of contention in claims as to whether multiple national and local orders in cross-jurisdictional cases are ‘unified’.
In excess of loss treaties, there may be an hours clause through which a reinsured will be able to aggregate losses arising from one particular time period. They will be able to choose when the clause is to be triggered and the period of hours begins, such as a 168 hour period commencing with the government order on 23 March. These decisions by insurers may be the source of disputes on notification and causation under their reinsurance due to the combination of various perils and losses through this method.
Furthermore, under Risk XL policies, defining the ‘risk’ itself has the potential to be contentious.
There may be particular difficulties adjusting quantum, for example in ‘big ticket’ contingency policies which may be subject to facultative reinsurance. The majority of claims facing reinsurers are likely to be in respect of policies with low sub-limits and reinsurance cover may be quickly exhausted if there are several waves of the virus in the same policy year. If an insured has suffered loss across a number of locations, however, there may be conflict over whether the sub-limits should be applied cumulatively or not and this may significantly affect the quantum.
As so few businesses will have cover for their business interruption losses, insurers are coming under pressure from their customers, the press and governments to make ‘ex gratia’ payments to customers for COVID-19 losses that were not covered under their policies. Although Lloyd’s has indicated that it does not expect covers to be extended retrospectively to cover these losses, other authorities such as the state legislatures of Massachusetts, New Jersey and Ohio have proposed legislation that would mandate insurance coverage. Lawmakers in New York, for example, have introduced a bill that would require the retroactive cover of business interruption claims resulting from COVID-19, even if the policies specifically excluded such risks.
A reinsurer may face difficulties seeking to argue that an indemnity or ex gratia payment did not have to be paid under the terms of the contract if an insurer was under a new legal obligation to do so. These legislative actions, which have been criticised for contravening basic principles of contract law and jeopardising the solvency of the insurance market, also render reinsurers’ potential exposure unknown and uncontrollable.
Furthermore, the pace and volume of COVID-19 claims is likely to compromise the scrutiny of claims handlers and there will be immense pressure for claims to be settled in a short period of time due to the precarious cash flow and solvency position of many insureds and, indeed, their insurers. Reinsurers whose policies contain ‘follow the settlement’ clauses may be obliged to indemnify such early settlements and do so quickly. However, it is likely that some indemnities paid were not insured as a matter of law and were instead paid out for the sake of commercial expediency. Reinsurers may wish to consider their rights to request lawyers’ reports or similar under inspection of records clauses to evaluate the claim details and to confirm that the settlements were reached in a ‘proper and business-like’ manner.
In the US, some settlements may be made by insurers in order to avoid the spectre of a plaintiff-friendly jury trial in which even a watertight coverage defence may be disregarded. However, English case law indicates that it will not be sufficient to settle and recover from reinsurance on this basis; an insurer will be expected to test their defence at trial, even if they have received legal advice to the contrary.
There may also be conflict over whether loss adjustment expenses will be recoverable under reinsurance if there is litigation with a successful ‘no coverage’ outcome.
The pace and financial pressure arising out of COVID-19 claims will only continue to increase and will put existing claims handling procedures (for both reinsureds and reinsurers) under strain. Reinsurers will no doubt remain vigilant and ensure that cedants continue to meet their obligations under their policies, despite the exceptional circumstances. Effective and timely communication is more important than ever.
Going forward, reinsurers may also need to consider whether their programmes should be redesigned in response to increased exposure to pandemics in future years.