Disease exclusions thwart pandemic claims

New Zealand has had few Covid-19 pandemic-related claims because most policies contain infectious diseases exclusions.

That was the conclusion from a panel of experts who spoke at an 11 June NZILA webinar.

Participants were Fee Langstone partner Craig Langstone; Peter Ziegler, head of specialist areas with Crawford & Co; and Cameron McLisky, country manager New Zealand for Berkshire Hathaway Specialty Insurance. The moderator was Rob Coltman, a partner at Duncan Cotterill.

Craig said there were three types of claims: material damage, for example rotting stock, that triggered a business interruption (BI) policy; tourism, for example claims from Chinese nationals not permitted to enter NZ before the nation’s strict lockdown occurred; and pure financial loss because of the lockdown. However, he pointed out that all three claims would be “taken out” by an infectious diseases exclusion.

He said some Australian insurers had a problem because legislation changed in 2015 from the 1908 Quarantine Act to the Biosecurity Act, but not all policy wordings reflected the change. “The [new] Act is quite different, so some scraps are brewing” that would be decided on exclusion clause wordings.

In the United Kingdom, there was “a lot of infectious diseases cover” and a BI test case was being run for a group of SMEs. If each were eligible for £25,000 it could be “a huge exposure”.

Peter said for those with pandemic cover, there were challenges in determining when cover ceased at different levels of restrictions. [NZ alert levels 1-4 explained – PDF]  “What’s the new normal?” he asked.

US litigation

Cameron said there had been a small number of NZ financial lines claims, but there was a lot of litigation in the United States, including about nine securities class actions. Some were against cruise ship companies for allegedly not disclosing the extent of Covid-19 outbreaks and biotech companies that had seen share prices surge when they suggested they had discovered Covid-19 cures.

There were actions against fund managers by investors who wanted their portfolios rebalanced but that did not occur quickly enough. “Most of the [litigation] action’s in the US at the moment,” he said.

EPL claims

Rob asked whether employment practices liability (EPL) claims were likely because some companies had used Covid-19 as an excuse for restructuring and redundancies. Cameron agreed that was likely.

Peter said contract works claims were “an interesting challenge” because of the closure of some projects, the unavailability of resources, supply chain interruptions, and increased financial and operational costs. Delays could mean liquidated damages applied.

If claims were on foot before the pandemic was declared, the impacts of Covid-19 had to be identified and measured.

Some “shovel-ready projects” could not proceed because there were no contractors available.

Cameron agreed that, before the pandemic hit, there were already issues with resourcing and big delays on construction projects. “There’s potential for contractual disputes about whether [problems] started before Covid-19.”

There was “momentum” in the market to tighten terms & conditions for construction professional indemnity (PI) contracts in an already hardening market where it was difficult to buy the limits required and premiums were increasing. For some projects, insurance was cost prohibitive and principals were “thinking of self-insurance”.

Asked by an audience member why construction PI was so expensive, Cameron said the fundamental issue was claims. A lot of capacity had disappeared because it was “highly unprofitable business”. Covid-19 had just exacerbated the situation.

Cameron said travel insurance was first to bear the brunt of claims. Large events, like volcanic eruptions, had cause claims spikes in the past but insurers were copping a “double whammy” with Covid-19 claims because there was an increase in claims and no premium income because of travel restrictions.

Craig said the US appeared not to have infectious diseases exclusions in some policies, which enabled litigation like Chicago’s Billy Goat Tavern’s action against its insurer. “I wouldn’t think that would get a run in NZ,” he said.

Cameron warned the frequency and severity of claims would increase as Covid-19’s economic impact was felt through insolvencies, allegations of continuous disclosure breaches, and EPL disputes.

He warned that some EPL policies had a condition precedent requiring insureds to obtain legal advice before taking actions like redundancies. “So don’t invalidate cover by not seeking advice.”

Rob said NZ employment contracts probably did not enable employers to “furlough” workers, but Peter said: “Anecdotally, there are some very poor employer behaviours out there.”

Cameron said D&O had seen significant hardening, particularly for Australian listed companies, and it was becoming difficult to get coverage.

The NZ continuous disclosure regime was similar to Australia’s and the emergence of more litigation funders meant NZ was likely to follow Australia with increased securities class actions. While D&O was cheaper for NZX than ASX listed companies, some were seeing capacity restrictions and increased premiums.

Craig said insurers were “generally compassionate bit firm”.

Cameron said NZ’s Covid-19 Response Act’s business debt hibernation scheme offered a safe harbour for directors and protection to reduce litigation risks against them, but directors had to show they were not trading while insolvent before a specified date and that they could later trade out of difficulty. “You must prove you’re eligible for protection.”

Australian legislation went further, with limits on the continuous disclosure test, but the D&O market had not reduced premiums.

Payment for no cover

Responding to an audience question about potential US legislation to force insurers to pay BI claims even if there was no cover, Craig said it was “a load of shit”. “It’s like saying your house policy should insure your car.”

Cameron said it would be hard to see any court agreeing to that and “it could lead to insurers falling over”.

Craig said there was no evidence of NZ insurers trying to limit cover, mainly because the infectious diseases exclusion meant policies did not respond. There had been some refunds on motor premiums, which was “remarkable” and “clever PR”. It was a positive, but “how do you know how much I drove my car during five weeks” of lockdown?

Cameron said some sporting events, including Wimbledon and perhaps the Tokyo Olympics, had pandemic cover, but it was generally not purchased. However, he expected more inquiries about it.

Peter suggested parametric insurance as a possible solution. Cameron said it was purchased for some earthquake and windstorm events but could be complex and expensive. “But we’re seeing more interest [because of] the hardening market, so it’s possible.”

Rob asked whether reinsurers might drive pandemic exclusions, as they had with asbestos and Y2K risks. Cameron agreed that might happen once global losses were tallied up.

Insurers were now asking businesses “very specific Covid-19 questions about health & safety, business continuity planning, and cash flow issues”. Some insurers were not writing new business, particularly D&O. However, Cameron said short-term avoidance was usually followed by a return to the market “when there’s more certainty”.