The insurance market has proven to be a difficult environment for buyers in 2019. The long tenure of the soft insurance market cycle is changing, and is presenting challenges with pricing, capacity, and sustainability of favorable coverage terms. Coming out of difficult natural catastrophe years in 2017 and 2018, the property insurance market took a sharp turn to protect insurers’ bottom lines. While hardening of the property insurance market was expected, the broader casualty market has taken this opportunity to drive corrective action on their portfolios as well, leaving insurance buyers with little leverage.

How Insurers Are Reacting to the Market Shift

Insurers are approaching the market shift with different strategies, some focused on rate increases, while others are focused on restricting terms, or both. While individual loss experience still plays a role in renewal outcomes, there appears to be more of a portfolio-level push on rate and terms regardless of individual quality of risk factors for any given policyholder. In this environment, stricter control over capacity deployment leads to less competition, which may force the buyer into tough decisions regarding what utility insurance provides for its organization. The guarantee of comprehensive coverage at a fair price becomes harder to balance in a setting where definitively having both is less than certain.

Thorough coverage evaluations are warranted to understand changes in policy wording and the resulting impact on future claims. The cost of coverage will always be an important factor; however, significant focus needs to be directed at maintaining terms that provide recovery within your expected threshold. Renewal negotiations need to start significantly earlier than in years past, with clear objectives set to achieve success. Anticipating the changing market dynamic is critical, while ensuring prioritization of what is most important within the parameters of a policyholder’s risk tolerance.

Why Seemingly Small Language Changes Matter

Two cases stemming from the closure of Reagan National Airport during the 9/11 attacks demonstrate that small differences in policy language can lead to very different results. The Federal Aviation Administration (“FAA”) ordered Reagan Airport closed after the World Trade Center was attacked, but before the Pentagon was attacked. Ultimately, no property was damaged at the airport. It remained closed until October 4.

Both US Airways and United Air Lines sought business interruption coverage. A Virginia court ruled that US Airways’ losses were covered (US Airways, Inc. v. Commonwealth Ins. Co., 65 Va. Cir. 238 (Va. Cir. Ct. 2004)), but the Second Circuit held that United’s losses were not. (United Air Lines, Inc. v. Ins. Co. of Pa., 439 F.3d 128 (2d Cir. 2006).) The reason for the differing result appears to lie in nuanced policy distinctions.

US Airways’ business interruption clause provided coverage to the extent access to insured property was prohibited by order of civil authority “‘as a direct result of a peril insured against.’” US Airways, 65 Va. Cir. at 240. The Virginia state court concluded that this civil authority clause “does not require actual damage or loss of property to invoke coverage,” but only the risk of actual damage. Id. at 244. US Airways was entitled to coverage for its business interruption losses because the order to close Reagan Airport was issued due to the risk of an imminent attack, and because US Airways property was located there. Id. at 245.

In contrast, United’s policy provided coverage if access to insured property was prohibited by order of civil authority as a direct result of “‘damage to adjacent premises.’” United, 439 F.3d at 129. The district court held that the Pentagon is not “adjacent” to Reagan Airport, reasoning that the two facilities are three miles apart and separated by roads and buildings. Id. at 134. Moreover, the Second Circuit held that even if the Pentagon were “adjacent” to the airport, United still would have had no coverage because the FAA closure order was issued before the Pentagon suffered actual damage. Id. at 134-35.

In this one example, a couple of innocuous looking words in the insurance policy’s “civil authority” coverage grant meant the difference between a covered claim and a non-covered claim—with potentially many millions of dollar of insurance proceeds in the balance.

Conclusion

With the challenging environment for insurance buyers in 2019, policyholders face tough business decisions regarding whether to purchase insurance and, if so, what type and how much. And that is just the beginning. As markets harden, and insurers potentially seek to narrow coverage by altering policy language, policyholders will be well served to carefully review and question any variations from their expiring policies.