Beyond COVID-19: Crisis response or road to recovery?
Crisis response or road to recovery?
Insurers were inevitably going to be faced with challenges in responding to the wave of claims resulting from COVID-19 (coronavirus) losses across various lines of business. Whenever catastrophic losses are presented, there may be difficult questions of policy interpretation to be resolved but such questions revolve around what the policies at issue actually cover.
An emerging challenge for insurers in the current climate is how to navigate a world in which governments and regulators put pressure on the insurance market to respond generously to claims being presented whilst upholding the terms of contracts which reflect the premium charged for the risks assumed. Nowhere is this challenge greater than for those insurers who wrote Business Interruption cover.
There are now four states in the United States where pending legislation has the effect of mandating cover for business interruption claims irrespective of any exclusions (e.g. in respect of epidemics, pandemics) that appear in policies issued, and a fifth, where proposed legislation is intended to incentivise insurers to forego coverage objections in exchange for certain protections. It is likely that there will be more. A link to a summary of the proposed legislation as of April 1, 2020 appears here.
The UK FCA has set out its expectation of insurers1 and while there has been no suggestion that losses should be indemnified irrespective of policy terms and conditions as in the US, the expectation of the FCA is that insurers demonstrate an understanding of the circumstances in which insureds find themselves and show “flexibility” towards them.
Lloyd’s has informed managing agents of its expectation that COVID-19 losses would be covered where contagious disease extensions are included in business interruption policies but the corporation has made it clear that it does not expect covers to be extended retrospectively to cover COVID-19 related losses.2
The contrast in approaches between legislation pending in some US states and that in the UK is clear. The difficulties that those differences present to both cedents and reinsurers are also apparent. Although the terms of the reinsurance contracts involved will determine the extent of any difficulties, there will be many instances where reinsurance cover isn’t back to back.
An insurer that is compelled to pay COVID-19 business interruption losses as a result of legislation of the kind described above, may face challenges in securing recovery under reinsurance contracts governed by English law. US and continental European traditions make an important distinction between the concepts of follow the fortunes and follow the settlements, with the former more likely to protect an insurer that settles under legislative or regulatory mandate or, perhaps even, pressure. Future articles will elaborate on some of these differences. The balance of this article is focused on the English law approach.
Even assuming the inclusion of a full follow the settlements clause (see, e.g. the clause in Insurance Company of Africa v Scor3 1 Lloyd’s Rep 312 ), it may be difficult to establish that the claim as recognised by the insurer arguably fell within the risks covered by the reinsurance as a matter of law. (See Wasa v Lexington,  UKHL 40.) Although Wasa was said to represent an exceptional case where the cedent had litigated cover to judgment and lost, the imposition of retrospective liability to override express policy exclusions might well result in disputes (most likely by way of arbitration) to establish whether there are further exceptions to the follow principle.
The case for indemnification by reinsurers might be assisted by the fact that legislation obliged the cedent to pay a claim that was otherwise excluded under its policy and would be strongest where the cedent paid a claim that was arguably covered under the existing terms of the policy.
A decision to agree a business interruption claim under a policy originally issued with a virus and bacteria exclusion because of new regulation or other political pressure may face challenge under a “double proviso” follow clause (e.g. as in Hill v M&G  1 WLR 1239). The double proviso clause requires a cedent to prove that the loss falls within the terms of both the (inwards) original policy and the (outwards) reinsurance contract. Under Hill v M&G principles it was later held (in Commercial Union Assurance Company PLC. v NRG Victory Reinsurance Ltd  2 Lloyd’s Rep. 600) that it was not sufficient to rely on the advice of a lawyer that a jury may find against them for purposes of satisfying such a clause. The question of whether it was arguable that reinsurers might not be liable to their reinsureds was for the Court to decide.
Naturally, where an insurer agrees to settle claims without being able to establish that on the balance of probabilities it has a legal liability to do so, there is likely to be a challenge to collecting such settlements from reinsurers who will carefully examine whether the settlements should be treated as ex gratia.
The English Court has, along with Parliament, also ventured down the path of maximising recovery of losses in exceptional circumstances, namely the injuries suffered by mesothelioma victims (due to asbestos exposure) and their families by developing a special jurisprudence which facilitated recovery from employers and their EL insurers. Whilst that approach secured maximum compensation for the victims, litigation continues between some of those insurers and their reinsurers as to the effect of those Court rulings on the parties’ rights and obligations under reinsurance contracts which reinsured those EL exposures. (See Equitas Insurance Ltd v. Municipal Mutual Insurance Ltd  EWCA Civ 718.)
It would be undesirable for insurers and reinsurers if uncertainties of the kind seen in the mesothelioma litigation were replicated in the context of COVID-19 business interruption losses. The quantum involved would be far greater and unlikely to be resolved for many years.
The clause provided that reinsurers would indemnify insurers provided that:
The COVID-19 pandemic has seen governments across the world restricting civil liberties and movement to new levels.