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IMS Insights: Civil Authority, Reinsurance, and Considering "Occurrence" in the Context of COVID-19 - YouTube
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Dale, I periodically hear reference聽
to the concept of civil authority.
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Could you explain a little bit about that and聽
how that may apply to these kinds of claims?聽聽
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Yes, there is a provision in a lot聽
of policies of loss due to the聽聽
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requirement of a civil authority.聽
In other words, when the authorities
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shut down a business, they shut down a street,聽
they shut down a city or something like that.聽聽
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So, you're going to have to look at聽
the exact terms of each policy to see
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if there is a virus exclusion in a policy, but yet,聽
there is coverage for a loss of operations
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due to the requirement or order of civil authority.聽
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Which one of those would apply?
How do they work up one against another?
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We don't know.
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Manuscript聽policies will have to be looked at for their聽
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own provisions as to how these things will聽apply.
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For people who may not be as familiar with
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the insurance industry, a manuscript policy is聽
one that is specifically drafted for the insured.聽聽
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Yes, that's correct. That's that's the聽
term for a large policyholder who has聽聽
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negotiating power with an insurance
company聽over its coverage.
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This is something where the two sides聽
work out the various forms of coverage.聽
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There are a lot聽of standard forms of coverage,
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particularly for the聽smaller businesses,
but for a large hotel chain or聽聽
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cruise line, it's probably going to be a manuscript,
something that was negotiated at great length聽
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between the two parties.
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You mentioned reinsurance聽type claims.
Can you explain to people who are
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watching what types of claims we're talking about聽
there and how you see those issues playing out?聽聽
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Yes, the reinsurance industry will be involved聽
heavily without doubt, because of the magnitude聽聽
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of the claims. And of course, the terms in a聽
reinsurance contract are different than the terms聽聽
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of the insurance policy that it reinsures.
So, sometimes you have a conflict between the聽聽
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nature of the coverage in the insurance policy聽
that is underlying and that produces the claim聽聽
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and the coverage in a reinsurance contract.聽
I would strongly suspect that over the years聽聽
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once reinsurers get involved,聽
there may be questions and聽聽
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disputes involving this and arbitrations come聽
out of this as a result, between insurers and聽reinsurers.聽
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You know, historically in huge claims聽
such as this, Dale, the definition of occurrences聽聽
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and how the court interprets the number of聽
occurrences has been an important issue.聽
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Do you see that as something that's going
to be important聽as we move forward?聽聽
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I strongly suspect that it will,
and I think each type of policy,
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the specialty聽policies that deal
with the out of the ordinary聽聽
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circumstances will come into play. For example, one聽
of the thoughts is event cancellation insurance.聽聽
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Now, is the virus itself one occurrence?
Or is every event, every concert, every show,聽
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every musical production that has to be聽
canceled, is that a separate occurrence?聽
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I think you're gonna have to go back to the individual聽
policies to see how that's treated.聽
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And there may聽be some issues because
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this is what I've described聽as the Black Swan
event that nobody really聽anticipated.
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Did the underwriters anticipate聽
this, and did they put provisions in there that聽聽
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defined whether the cancellation of a dozen聽
concerts is one occurrence or is the cancellation聽聽
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of one concert an occurrence? And as an聽underwriter,
you would anticipate probably a聽single event.
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You wouldn't really be thinking聽about
concerts being cancelled far and wide, but聽聽
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maybe one concert cancelled because of who knows聽
whether the performer, anything, and an insurer聽聽
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can absorb one or maybe a dozen losses, but can聽
the same insurer absorb 100 losses? We don't know.聽聽
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So this could have a big effect on the
solvency of an insurance company conceivably.聽聽
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So just to kind of pursue that, you know, if
The Rolling Stones are on tour and they're going to聽聽
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be doing fifty tours, the underwriter may anticipate聽
that the weather will be such they're going to聽聽
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have to cancel one tour and price accordingly.聽
But this is an instance where the entire聽聽
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concert series has been cancelled聽and
there may be a loss of fifty different聽concerts.聽
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Is that basically it?
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That's exactly it, yes. Is the insurer able to absorb聽聽
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that without going into their reinsurance?
Do they have reinsurance? Do they have the capacity?聽聽
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Do they have the solvency to handle 100聽
concerts being cancelled?
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Eventually there's going to be claims being brought
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against the聽re-insurers. And again, for people who are not聽聽
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really versed in coverage, the reinsurers are聽
the ones who, by way of a treaty or an agreement,聽聽
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agree to cover some of the losses that the聽
insurance company has covered. Is that right?聽聽
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Exactly. Every company has reinsurance for some聽
reason or another, at some level. Obviously, the big聽聽
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companies don't need it that much. But even a giant聽
insurer wants to have protection in the case
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there's a Hurricane Katrina聽
or something of that nature that聽聽
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wipes out thousands of homes, as one聽example.
And the reinsurance industry聽聽
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is there to respond to smooth out the results to聽
enable companies to stay in business when there's聽聽
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the unexpected, unanticipated large losses.
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In those聽kinds of claims, what are some of the issues that
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may arise that you might not ordinarily see under聽
some of your basic, early coverage claims between聽聽
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the insured and the insurer?
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The coverage for聽the policyholder
of course is determined by the聽
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language in the insurance policy itself. But then聽
the language as to how the reinsurance applies聽聽
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may be an entirely different situation.
The reinsurance industry is one that operates a聽聽
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little bit different in the relationship聽
with its customer than you normally聽聽
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have in the world of commerce.
I have treatises about reinsurance that say that聽聽
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in a dispute, the arbitrators are required聽
to look beyond the wording of the contract.聽聽
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It's an agreement of utmost good faith.
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You try to look at the intent of the drafters
of the contract at the time that it was聽drafted.
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Those things have evolved through the聽
asbestos and environmental claims that we've seen聽聽
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over the last twenty or thirty years. What did they mean聽
when this contract was drafted in 1955, and nobody聽聽
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had heard of the types of losses that聽
are being presented today?聽聽
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So it goes back to that basic principle that
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insurance is,聽in fact, a contract. And one of the basic聽聽
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elements of interpreting a contract is to聽
go back to see the party's intentions.
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Exactly particularly in reinsurance
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where it's equal parties聽negotiating
the coverage in each situation.
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You've mentioned asbestos,聽
you've mentioned environmental.
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Do you take any lessons away from those, either聽
with respect to claims handling or聽
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how insurers may respond? Any anything, I mean, does聽
the past help us predict the future in any way?聽聽
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I think in this instance, it might. The way that the聽聽
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insurance industry and the reinsurance industry聽
evolved to handle claims that were unanticipated聽聽
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may provide us somewhat of a roadmap in聽
certain situations for anticipating聽
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the resolution of claims that will be coming as聽
a result of the virus. Where that will take us, we聽聽
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don't know yet. But precedent in the industry is聽
sort of like in the law too. You try to look at it,聽聽
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to give yourself a road map as to what聽
the intent was of the parties at the time.聽
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You mentioned public policy. How are you聽
anticipating public policy to play a role here?
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That's a good question. One of the first聽
thoughts about that would probably be聽聽
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the virus exclusion in most standard聽
policies for business interruption.
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Was this against public policy? Was this聽
unanticipated by the purchaser of insurance,聽
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as well as the issuer of the聽policy?
We don't know. But again,聽
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there are a lot of lawsuits, litigation聽in this
area has already started. So, exactly where聽聽
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that will end up, where that聽will play out,
is going to be a big unknown.
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