Managing risks in an ever-changing world
“Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security.” – John Allen Paulos, American Professor.
The need to manage risks in an ever-changing world is not new. The insurance market has seen sea changes in approach over the last few decades, driven by the emergence of new risks and lessons from significant events.
Significant underwriting changes are occuring, as insurers and insureds become more sophisticated in presenting and assessing risks. The Wellington property market and the D&O market are two recent instances of insurers’ attitudes shifting rapidly, followed by brokers and insureds responding with more focused and detailed underwriting submissions directed at more granular risk assessment.
New year – new issues
In this article we focus on two issues that have assumed prominence since our last edition of Cover to Cover. First, we have seen countries across the world gripped by COVID-19, the Coronavirus disease. Secondly, parts of Australia have suffered some of the earliest and fiercest bushfires in history, likely linked to climate change.
COVID-19 – Coronavirus: trade, travel and insurance
The impact of the coronavirus has been devastating in some parts of the world and as this issue of Cover to Cover goes to print, the damage is spreading. Governments in China and around the world have responded, sometimes with extreme measures, to contain the spread of the virus. In New Zealand, the Government has temporarily banned entry into New Zealand by foreign travellers who leave from, or transit through, China. Several businesses have issued profit downgrades owing to global disruption. Air New Zealand has cancelled all fights to and from China and, at the time of writing, Korea. Reduced international freight capacity is affecting exports of logs and other products. Some events at the Auckland Arts Festival are being cancelled because the necessary equipment cannot be freighted to New Zealand in time.
The threat to life and wellbeing is the most pressing concern. However, global economic disruption has also become a key concern given the increasingly integrated nature of global supply chains and the frequency of global travel. The effect on New Zealand is particularly strong, given that China is our largest trading partner.
We expect many New Zealand companies with suppliers or customers in China to be adversely affected by the response to the coronavirus. These companies will be looking to their contractual and insurance positions in terms of events outside their control – as will travellers.
Business interruption insurance cover?
Many supply chain-dependant companies will have contractual protections in place to reduce or avoid liability to pay for goods and components that are not able to be delivered due to transit restrictions and geographic lockdowns. They may also be relieved from liability arising from a failure to meet their own supply obligations. However, even if a company can escape a contractual obligation by relying on a force majeure clause, in many cases this will not fully restore the company to the position it would have been in absent COVID-19.
For example, a New Zealand manufacturer which relies upon imported Chinese components might avoid liability to pay for those parts and be prevented from pursuing the supplier for non-performance. But its inability to manufacture an end product may cause loss far beyond the cost of the relevant inputs, including lost profits, due to an interruption in the supplier’s business.
“Where there is no physical loss or damage, the prospects of a traditional business interruption claim succeeding are likely to be remote.”
In such cases, businesses should look closely at their insurance policies, particularly business interruption cover. However, difficult issues can arise. In particular, most policies require an identifiable instance of “physical damage” in order to trigger interruption cover. Policies often contain exclusions for disease-related losses. As broker Aon noted in a recent alert: “Property and Coronavirus (COVID-19): Is My Business Covered?”:1
The trigger for any property insurance policy and resulting time element coverage is physical damage to insured property by an insured peril. Insurers are likely to argue that the introduction of a virus does not constitute direct physical loss or damage to insured property nor is it a covered peril. While the introduction of COVID-19 to insured property may be considered a fortuitous (unforeseen) event, similar to other triggers that are typically covered under property policies, it is most likely not covered due to standard policy exclusions. Insurers may point to exclusions related to loss or damage arising from delay, loss of market, loss of use or indirect or remote loss or damage. Alternatively, a policy may contain a contamination exclusion which embeds virus, disease or illness causing agent in the definition of contaminant. Most property policies, including ISO, specific insurer forms and most manuscript policies, do not cover a loss resulting from a virus.
Where there is no physical loss or damage, the prospects of a traditional business interruption claim succeeding are likely to be remote. Some policies may, however, contain sub-limits or endorsements for disease-related losses, although these appear rare.
COVID-19 has also been a focus for the travel insurance market. Many insurers were willing to meet claims arising from travel that was booked before the impact of the virus was known. However, most travel policies will no longer respond following the World Health Organisation’s announcement that COVID-19 is a Public Health Emergency of International Concern, meaning that the disease is no longer an unexpected event. It pays to check when travel was booked and what was known at the time.
Bushfires, climate change and risk
Closer to home, the 2019/2020 Australian bushfires have brought a renewed focus on the impacts of climate change, with many drawing a link between the two.
Fortunately, loss of life and property damage was not as severe as in past events, notwithstanding the large geographic areas affected.
However, insurers are focused more and more on climate-change related risk, including fire, flood and storm risk, in determining the extent and terms upon which they are prepared to write property and related covers. As well they should be, with Marsh Australia commenting that:2
Environmental threats dominate the top five long term risks by likelihood and occupy three of the top five spots by impact in this year’s Global Risk Report produced by the World Economic Forum, in conjunction with Marsh and McLennan Companies and Zurich Insurance Group. This report further identifies that failure of climate change mitigation and adaption is the number one risk by impact and number two by likelihood over the next 10 years. Environmental insurance products can play a key part in mitigation against environmental risks.
Climate change also presents increased risks for companies and their directors and officers. We touched on the issue in our November 2019 edition of Cover to Cover. It remains a top priority with the Australian bushfires and their link to climate change, providing yet another reminder to directors of the seriousness of the issue and the risk to businesses which do not take action. Directors should consider their risk profile in respect of the risk of climate change liability.
We expect to see the insurance markets react as the numberof climate change-related claims increase, both in New Zealand and abroad.