The COVID-19 crisis is creating a unique situation for large corporations throughout the world. At present, making any type of prediction regarding what will happen in the coming months is exceedingly difficult in the medium and long term, as there is no similar or equal prior scenario on which to base our prediction. The reality is that, both for the entire insurance sector and large corporations, there has been extensive concern to determine if insurance programs are well adapted to the risk scenario that we are experiencing.
“The Lloyd’s Market Association recently published model exclusion clauses for epidemics, pandemics, and communicable diseases to provide its members with guidance and advice.”
Most insurance and reinsurance companies are adopting the “wait and see” strategy. The most likely outcome being put forward in some countries like the United States, the United Kingdom, France, and Germany, is to create shared funds with government support, such as those currently in existence for natural disasters and terrorism. However, while progress is being made in this regard, there has been discussion in international markets on whether insurance and reinsurance contracts for large risks should include the so-called pandemic or epidemic clauses.
The Lloyd’s Market Association (LMA) recently published model exclusion clauses for epidemics, pandemics, and communicable diseases to provide its members with guidance and advice. The published clauses that are being incorporated into contracts are LMA 5393 for direct insurance policies in the property line, LMA 5394 for reinsurance contracts, also in this line, and LMA 5395 for third-party liability policies.
“The most likely outcome being put forward in some countries is to create shared funds with government support”
Including these clauses in contracts due to COVID-19 must not lead us to believe that everything not expressly excluded in the conditions is covered by the policy. Consider, for example, Property Damage and Loss of Profit policies. The loss of profit guarantee is only activated once there is property damage covered by the contract. Here we see the first point regarding loss of profit claims and the novel coronavirus: does the interruption leading to a loss of profit arise from property damage? Each case will be different, and, above all, the specific terms and conditions of each policy must be examined in order to provide a response. Nonetheless, according to the definition of property damage as “deterioration or destruction of the insured asset,” it does not seem logical that the coronavirus on its own could be considered property damage for the purposes of the policy. Therefore, it would not activate the loss of profits coverage.
Another problem that can affect Damage and Business Interruption policies is if the contamination caused by COVID-19 is considered to be property damage. In these cases, it is important to consider if the contamination exclusion normally present in these policies—particularly Property policies—could be applicable, similar to clauses that exclude damages arising from any type of “virus or bacteria.” Logically, contaminated equipment and facilities must be part of the assets insured by the policy. Additionally, the cause of contamination—the coronavirus—must be a covered risk or, in all risk policies, not be excluded.
Our opinion is therefore that any clause, like those proposed by Lloyd’s Market Association, that clearly defines that the claim will not be covered for communicable disease caused by a virus, bacteria, parasite, or any other organism will always be easier to apply and will help to increase legal certainty for possible disputes with clients regarding interpretation of the terms and conditions.
For these reasons, and because COVID-19 claims are now a reality. On April 17, 2020, a group of restaurants in Pittsburgh filed a class-action lawsuit against the Erie Insurance Exchange, claiming that the company had unjustly denied coverage for damages caused by COVID-19 to restaurants, bars, and other establishments.
“We recommend creating precise regulations on what is and is not covered by the insurance and reinsurance contract and preventing the uncertainty that a COVID-19 claim can cause”
Also, in the Commonwealth of Pennsylvania, a class-action lawsuit was filed against Inovio Pharmaceuticals after its CEO publicly stated that the company had developed a vaccine for the virus. Following this statement, the company’s stock increased quickly, but later an independent report found that the reality was quite different. In this case, it would appear that without application of an exclusion, Third-party Liability insurance for administrators and executives could be significantly impacted, as has happened in other business lines.
Also consider the Third-party Liability insurance policies where the measures adopted under the state of alarm have had a considerable impact. These measures will undoubtedly affect commercial relations, and there will be many situations in which one of the contracting parties cannot fulfill its contractual commitments on the established timeline and in due form. If the policy were to not have any exclusion relating to force majeure or extraordinary events that limits coverage in the event of a possible COVID-19 claim by a third party, the risk could still be covered provided that the insured party is demonstrated to be liable.
Consequently, and due to what we will see in the coming months, we recommend creating precise regulations on what is and is not covered by the insurance and reinsurance contract and preventing the uncertainty that a COVID-19 claim can cause.
Laura González
Deputy Director of the Legal Area at the Global Risks Unit
