Exceptional monsoon rain since late July has caused the worst fl ooding in Thailand for half a century. The fl oods have aff ected 63 of the country’s 77 provinces and killed more than 500 people. A third of the provinces have been declared disaster zones and the recovery cost is estimated at more than $30bn. The Thai Offi ce of the Insurance Commission has issued an initial estimate of the overall insured loss at approximately THB600 billion ($19.5 billion), which would make it the costliest disaster on record in South-East Asia.
Significant insurance losses will arise from the following commercial and personal risks:
- Industry and manufacturing, in particular the automobile and technology sectors;
- Agriculture, in particular rice crops and livestock;
- Tourism and event cancellation
- Life and health
Thai insurance law
The vast majority of fl ood claims will be directly insured by the Thai market under policies governed by Thai law. In light of this, we highlight below some substantive provisions relating to insurance contracts contained in the Thai Civil and Commercial Code (CCC).
Valuation of loss
Section 877 of the CCC provides that insurers will be liable to pay the actual amount of the loss, valued as at the date and place where the loss occurred. It states “The sum insured is presumed to be a correct basis for such valuation”, and does not provide for adjustment by average where the sum insured is at an undervalue. Insurers will therefore commonly include an average clause expressly in their policies.
Issues may arise if a sum insured was adequate for reinstatement immediately prior to the loss, but due to shortages of materials following the fl oods, the actual replacement costs are higher than the sum insured. However Section 877 also provides that “The compensation cannot exceed the sum insured.”
Mitigation of loss
Whilst there is no statutory duty on the insured to mitigate a loss, the insured is entitled, under Section 877, to recover the costs of damage caused to property by reasonable measures taken to prevent loss, and also all reasonable costs incurred to preserve the insured property from further loss. This may lead to disputes over the extent to which costs incurred and measures undertaken may be regarded as reasonable.
Under Section 878, the insurer is liable to pay expenses for valuation of a loss. However, it is not clear whether this would entitle the insured to appoint its own loss assessors at the insurer’s expense.
Gross negligence and inherent vice
Section 879 automatically excludes insurers’ liability for loss caused by bad faith or gross negligence of the insured, and for inherent vice in the subject of the insurance.
Notification of loss
Under Section 881, when the insured becomes aware of a loss, it is obliged to notify its insurer without delay. If the insured fails to do so, the insurer is entitled to compensation for any damage caused, although this may be difficult to quantify in practice.
The Thai Supreme Court has previously indicated that policies must identify the eff ect of a breach of any term. Therefore any notifi cation provision labeled as a ‘condition precedent’ should explain that its breach will entitle insurers to deny a claim.
Under Section 870, if two or more policies provide cover for the same loss, then to the extent that the combined cover exceeds the amount of the loss, the policy incepting fi rst will in principle respond fi rst. If two or more policies are issued on the same day, then cover will be pro-rated between them. However, the eff ect of “Other insurance” clauses, which seek to exclude cover for losses covered by other policies, has not been tested in the Thai courts.
All claims brought under insurance policies, whether by individuals or company insureds, are subject to the Consumer Case Procedure Act 2008. Under this Act, the court may award punitive damages if insurers have deliberately taken advantage of the insured, or by gross negligence or recklessness acted in breach of their responsibilities. However, such awards are rare.
Property coverage issues
Generally, the cause of loss will be straightforward as fl ood, which may be covered under its own section of the policy, and/or subject to specifi c deductibles/ limits. Nevertheless, insureds may present claims arising from a combination of perils, including fl ood, storm surge, pollution, emergency evacuation and/or negligent construction.
Causation issues may include the extent to which damage triggered by the fl oods can be attributed to inherent defects or negligent construction, which would in principle be excluded under the Thai CCC. Therefore, any buildings or transport infrastructure which collapsed or was washed away due to design and/or structural defects may give rise to such issues.
Pollution from waterborne contamination may give rise to large claims for clean up costs, which would be excluded under most policies. Issues may arise as to whether such losses should be apportioned between covered and excluded perils. It is not clear whether Thai courts would uphold the application of anticoncurrent causation clauses, which provide that if one of the causes of damage is excluded, the loss as a whole is excluded.
- Business interruption
Business interruption exposures under commercial risks are expected to be substantial, leading to many claims for the full extent of the insured’s BI cover. As a starting point, with UK based wordings, BI claims must arise from physical damage to the insured property. Where, as in this case, a loss causes wide area damage, it will be necessary to distinguish between those BI losses arising from the damage to the business premises and wider BI losses caused by the damage and devastation to the area which may lead to a downturn in business due to lack of demand (for example, in the hospitality, tourism or entertainment industries), a shortage of staff or diffi culties in gaining access to the premises.
If this is not possible and the insured business would have suff ered the BI losses in any event due to the wide area damage, there would be a nil recovery, as illustrated by the English case of Orient Express Hotels v Assicurazioni Generali .
The BI losses caused by the wide area damage/ lack of demand would fall to be covered under the BI extensions which typically provide cover in respect of BI losses caused by Governmentordered evacuation, denial of access or loss of attraction, albeit these are usually subject to a sub-limit.
Given the damage to Thailand’s manufacturing base, Contingent Business Interruption (CBI) losses will be suff ered by insureds worldwide. CBI cover applies where the insured’s business sustains loss due to one of its suppliers or customers suff ering damage at their own premises. Issues commonly arise in respect of how remotely in a supply chain the damage may occur, and in respect of the territorial limits of cover. The adjustment of CBI losses will be complicated by the eff ects of the Japanese earthquake and tsunami in March 2011. In many cases, mitigation of loss and recovery plans from Japanese losses involved moving production to and/ or sourcing supplies from Thailand. This will compound the earlier losses and may give rise to complex causation and adjustment issues.
- Event/occurence issues
Aggregation issues may arise on direct and/or reinsurance policies where insureds have been aff ected by losses caused by a combination of fl ood, storm surge, pollution, emergency evacuation and/or negligent construction. In addition to the interpretation of terms such as “event” and “originating cause”, aggregation will depend on any hours provisions included in the defi nition of loss occurrence (usually at the reinsurance level). These provisions are usually limited to 168 hours for fl ood, although we understand that some Thai policies are limited to a 72 hour period. In the event that any losses were incurred over longer than the period specifi ed, any later losses may be presented as a separate event under the policy.
- Proper and businesslike settlements
For the purposes of any outwards reinsurance recoveries, depending on the terms of any follow the settlements clause, claims should as a minimum be adjusted in a proper and businesslike manner.
Given the massive scale of the adjustment process now underway, and potential delays in loss adjusters reaching some of the aff ected areas, it is likely that insurers will come under commercial and political pressures to pay claims before a proper adjustment has been carried out. In such cases, it is recommended for reinsurers to work with their cedants so that they are kept informed of the adjustment process, and to enter a reservation of rights where appropriate, in particular if they make any interim or advance payments.