April 9, 2020
Stroock Special Bulletin
By: Michele L. Jacobson, Robert Lewin
External Authors: Christopher Ash, Consulting Counsel
With the onslaught of COVID-19 insurance claims already underway, reinsurers and cedents will need to pay careful attention to the nature of the claims and potential reinsurance ramifications early in the process to ensure that their financial interests are fully protected. The nature and scope of the claims are unprecedented, and will present complex challenges to all parties.
As a threshold matter, there will be numerous coverage issues presented by the direct insurance claims. Examples of some of the early claims we have seen are business interruption claims for the massive losses experienced by large and small businesses impacted by the shelter in place and other governmental orders, workers’ compensation/employee illness claims and third-party liability claims from people allegedly contracting the virus because of the negligence of others, such as cruise ship lines. Other types include supply chain interruption claims, decontamination/cleanup cost claims and event/trip cancellation claims.
Because of the unique nature of this crisis, each of these types of claims may raise novel coverage issues, and it is possible that many claims may not satisfy threshold coverage requirements, such as the requirement in most business interruption policies that there be direct physical loss or damage to property in order to trigger a business interruption claim. Many claims also may be subject to policy exclusions, such as the absolute pollution exclusion, especially where the language expressly includes “virus” in the definition of a pollutant.
Some policies also include an express exclusion for loss due to virus or bacteria. Complicating matters even further is the jurisdictional nature of the case law, where certain jurisdictions enforce exclusions more stringently than others. Overlaying these coverage issues will be the strong public pressure for insurers to pay claims to preserve reputational and commercial interests. Moreover, several states have proposed legislation to force insurers to pay claims that might otherwise be outside the scope of coverage. While this legislation may be subject to challenge on constitutional and other grounds, the fact is that many insurers may be compelled to pay these COVID-19 claims.
Because of the wide variety of claims, it may be difficult for reinsurers to initially assess their exposures on inbound business. Cedents, on the other hand, are already seeing claims and may have a better ability to assess the potential reinsurance that applies to the claims. The first step all cedents should undertake is to review direct policy records to identify facultative reinsurance and corporate treaties that may apply to the relevant lines of business (including catastrophe and clash protections). Once the potential reinsurance is identified, it should be carefully reviewed to determine the potential scope of coverage and the obligations of both parties. While each agreement is unique, the following are some terms and conditions that may be particularly relevant to the anticipated COVID-19 reinsurance claims:
In sum, the COVID-19 crisis will result in a significant amount of insurance claims. These claims will be unique and may present difficult coverage issues that will be resolved through compromise, litigation and legislation. However these claims are resolved, there will be an ensuing series of reinsurance issues that should be proactively analyzed and addressed up front so that cedents and reinsurers take the proper steps to protect their interests in a manner consistent with the terms of their contracts.
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For More Information:
This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.
April 9, 2020
Stroock Special Bulletin
By: Michele L. Jacobson, Robert Lewin
External Authors: Christopher Ash, Consulting Counsel
With the onslaught of COVID-19 insurance claims already underway, reinsurers and cedents will need to pay careful attention to the nature of the claims and potential reinsurance ramifications early in the process to ensure that their financial interests are fully protected. The nature and scope of the claims are unprecedented, and will present complex challenges to all parties.
As a threshold matter, there will be numerous coverage issues presented by the direct insurance claims. Examples of some of the early claims we have seen are business interruption claims for the massive losses experienced by large and small businesses impacted by the shelter in place and other governmental orders, workers’ compensation/employee illness claims and third-party liability claims from people allegedly contracting the virus because of the negligence of others, such as cruise ship lines. Other types include supply chain interruption claims, decontamination/cleanup cost claims and event/trip cancellation claims.
Because of the unique nature of this crisis, each of these types of claims may raise novel coverage issues, and it is possible that many claims may not satisfy threshold coverage requirements, such as the requirement in most business interruption policies that there be direct physical loss or damage to property in order to trigger a business interruption claim. Many claims also may be subject to policy exclusions, such as the absolute pollution exclusion, especially where the language expressly includes “virus” in the definition of a pollutant.
Some policies also include an express exclusion for loss due to virus or bacteria. Complicating matters even further is the jurisdictional nature of the case law, where certain jurisdictions enforce exclusions more stringently than others. Overlaying these coverage issues will be the strong public pressure for insurers to pay claims to preserve reputational and commercial interests. Moreover, several states have proposed legislation to force insurers to pay claims that might otherwise be outside the scope of coverage. While this legislation may be subject to challenge on constitutional and other grounds, the fact is that many insurers may be compelled to pay these COVID-19 claims.
Because of the wide variety of claims, it may be difficult for reinsurers to initially assess their exposures on inbound business. Cedents, on the other hand, are already seeing claims and may have a better ability to assess the potential reinsurance that applies to the claims. The first step all cedents should undertake is to review direct policy records to identify facultative reinsurance and corporate treaties that may apply to the relevant lines of business (including catastrophe and clash protections). Once the potential reinsurance is identified, it should be carefully reviewed to determine the potential scope of coverage and the obligations of both parties. While each agreement is unique, the following are some terms and conditions that may be particularly relevant to the anticipated COVID-19 reinsurance claims:
In sum, the COVID-19 crisis will result in a significant amount of insurance claims. These claims will be unique and may present difficult coverage issues that will be resolved through compromise, litigation and legislation. However these claims are resolved, there will be an ensuing series of reinsurance issues that should be proactively analyzed and addressed up front so that cedents and reinsurers take the proper steps to protect their interests in a manner consistent with the terms of their contracts.
____________________________
For More Information:
This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.