Ebola continues to devastate West Africa. Over 14,000 cases including 5,000 deaths have been reported. Whilst the threat of a global outbreak remains relatively low, this crisis and the recent discovery of avian flu in Britain have again brought to the fore the exposure the (re)insurance industry has to pandemics. Prudent (re)insurers should use this opportunity to review their exposures and ensure their products are tailored accordingly. Prudent corporate insureds should take the time to review their existing insurance arrangements and confirm that these are adequate for their needs bearing in mind their potential exposure to pandemics.
These exposures can broadly be summarised as follows: (i) (contingent) business interruption and supply-chain insurers: through losses arising from site closure, inaccessibility or decontamination, supply chain impairment, or employee inaccessibility, immobility, quarantine or evacuation; (ii) travel insurers: through cancellation claims or claims arising from infection during travel; (iii) A&H insurers: through claims arising from infection; (iv) liability insurers: through allegations of negligent exposure to disease; and (v) insurers with investments linked to affected regions in Africa may even hold non-insurance risk related to the outbreak.
Whilst many corporates are likely first to act to protect their employees from exposure, in the longer run they will want to ensure the effects of regional outbreaks of disease do not affect their bottom line. This will entail scrutiny of business interruption (re)insurance arrangements. BI policies likely to be affected will be those covering insureds with business or supply operations in West Africa – these (re)insureds are likely to be groups in the mining, energy or travel sectors.
Traditional BI policies typically require physical loss or damage to insured property to exist before a claim for business interruption loss can be made. In the case of pandemics, there is a general market view that disease does not cause physical damage to property and therefore BI losses cannot result. Those wishing to put the point beyond doubt may have included specific exclusions, but others may not. Normally, to avoid gaps in coverage insureds take out contingent extensions of coverage to address this, where available – infectious disease extensions exist to cater for this market.
It is unclear how many insureds are actually aware of this possible gap, but equally untested is the market assumption that an insured without an extension for BI caused by disease will not be able to argue that disease causes physical damage to property. Whilst the weight of the argument may well favour the market (particularly for losses resulting from quarantine orders or site access restrictions), English Courts will analyse each case on its facts and in appropriate circumstances could in specific situations conclude that property can be damaged as a result of disease. In the case of a highly virulent and contaminative disease causing significant fear, the longer it takes and the more expensive it is to remove from property (particularly if the decontamination process is destructive), the more credible the argument that the property is damaged. Insureds wishing to re-use property after contamination may well insist on exhaustive decontamination measures way beyond those ultimately necessary to restore confidence and manage with full certainty their risk of exposing workers to the disease. This may also weigh into the equation.
A review of (re)insured industry profiles, coverage and clarity of wordings/extensions and dialogue with (re)insureds is the appropriate medicine to prevent future headaches. Allied to this, insurers looking to develop novel products including quarantine covers and bespoke BI and supply chain cover will need to consider careful tailoring to ensure appropriate cover is granted.
Allied to the corporate’s exposure to BI losses is its exposure to third party liability claims based on negligent exposure to disease (as in the case of employees bringing the disease into the workplace following travel abroad). Most corporates will have some form of contingency plans for pandemics and many will want to deliver measures that allow for optimal protection for their workforce. But whether these are appropriate is highly sensitive to the disease in question. And pandemics tend to be fast moving and can require rapid decision-making on the ground. Where (re)insurers underwrite policies (including employer’s liability covers) that may respond to such claims, a healthy risk management dialogue between insurer and insured can be prescribed. Are these processes and procedures actually fit for purpose? Are they consistently and adequately reviewed and updated? Will they enable the insured to rapidly assimilate and make decisions about diseases in a manner that enables effective and timely decisions about workforce exposure? What is the insured’s general attitude?
The travel industry has also seen some knock-on impact from Ebola. Travellers are more cautious, changing travel plans, airlines may become partially grounded. This risks cancellation claims and possible medical evacuation claims.
Coverage for such claims will again depend upon individual policy terms. Coverage under many policies will turn on the advice given by the UK Foreign and Commonwealth Office (‘FCO’) at the time of booking. The FCO currently advises against non-essential travel to Liberia, Sierra Leone and Guinea and so bookings made prior to this guidance may be in scope for cancellation cover. However, given these destinations are not tourist hotspots, there is unlikely to be a deluge of claims. But the issue is worth considering in relation to possible spread of the disease to other African destinations (including Nigeria) or in relation to other pandemics. A broader set of advisory warnings on popular travel destinations could trigger a spike in cancellation claims.
The road ahead
The world is finally waking up and responding to the Ebola crisis in West Africa and the first tentative signs are emerging that new infections are slowing. Let us hope that this is a sign of better things to come. Whilst the crisis itself may ultimately have a limited financial impact for the (re)insurance industry, it is a timely reminder of the exposures disease and pandemic may entail. These require ongoing monitoring and management to ensure appropriate underwriting discipline is maintained and that appropriate steps are taken to control risks. For insureds, an ongoing monitoring existing insurance arrangements against coverage requirements is crucial to ensure exposures are managed and appropriately insured.