COVID-19 Losses From a Reinsured’s Perspective
This blog post provides some thoughts on addressing COVID-19 losses from the perspective of the reinsurance buyer: the reinsured or cedent. A cedent has two main considerations when faced with a loss: (1) is the loss a covered loss under the cedent’s insurance policies? and, (2) if the loss is a covered loss, is it also covered under the cedent’s reinsurance contracts? With the explosion of business interruption claims flowing into insurance companies because of civil stay-at-home orders, this has become a major issue for cedents and reinsurers.
A notice of loss received by an insurance company triggers a variety of actions. How an insurance company responds to a loss notice is governed by the terms and conditions of the insurance policy and by state insurance laws and regulations. Those responses are relevant from a reinsurance perspective because if an insurance company fails to respond appropriately, common law and/or statutory claims may be brought against the insurer for its claims handling, which, if found to be wanting, may trigger the extra contractual obligations and similar provisions of the reinsurance contract.
To avoid these types of claims and to comply with all the notice and claims-handling provisions of the reinsurance contract, cedents should consider adopting the following practices for all COVID-19 business interruption (and other) claims:
- Document the receipt and acknowledgement of all claim notices (and any follow-on communications).
- Determine if notice and proof of claim requirements of the policy have been met and, if not, follow-up with the insured.
- Document the claims investigation, including all questions and answers about each element of the loss (including, but not limited to, when the loss was first incurred, the nature of the loss, the cause of the loss, the basis for claiming business income and/or extra expense with full documentation, whether the insured premises was contaminated by the novel coronavirus and proof of contamination, documentation of direct physical loss of or damage to property either at the insured premises or within the required zone for civil order coverage).
- Document the review of all relevant terms and conditions of the insurance policy, including all relevant coverage grants, sub-limits and exclusions.
- Document the initial claims determination and supervisory and/or legal review and sign-off.
- Adhere as best as possible to all contractual, regulatory and statutory time periods and requirements for responding to a notice of loss.
- Document the issuance of the claims determination and proof of delivery.
To keep reinsurers apprised of COVID-19 business interruption claims, cedents should consider the following:
- Provide a periodic report to reinsurers of the number of claim notices received, including the date of the notice, the date of the response, the nature of the response, the amount claimed, the jurisdiction where the claim was incurred, whether a lawsuit has been commenced and, if so, basic information about the lawsuit (date, venue, causes of action, status).
- Provide reinsurers with a report (similar to that being required by several regulators) of the number of policies in force with business interruption-type provisions, their geographic distribution and policy limits relevant to this coverage grant.
- Advise reinsurers if the cedent changes its position on the interpretation of relevant policy provisions.
- For the broker market, keep in contact with the relevant reinsurance intermediaries involved in the relevant reinsurance contracts.
Although most insurers have made it clear that they never underwrote for a global pandemic and have denied business interruption coverage for most COVID-19 claims based the lack of direct physical loss and other bases, cedents should nevertheless prepare for scenarios that may require them to cover these losses. For example, some losses may be covered under the specific facts of a claim and the terms and conditions of individual policies. Additionally, courts could find that coverage is required for COVID-19 losses under certain circumstances. Finally, legislation could be enacted that retroactively forces insurance companies to cover these claims (assuming no stay of enforcement and/or no finding of unconstitutionality of these proposed laws).
To prepare for these scenarios, cedents should be doing the following now:
- Identify all in-force reinsurance contracts that reinsure the cedent’s property or other business policies that contain business interruption-type coverage grants.
- Examine the coverage grants under each reinsurance contract to determine if COVID-19 losses could be ceded under those contracts should the cedent have to pay COVID-19 losses.
- Examine (and comply with) the notice requirements for loss cessions under each reinsurance contract.
- Review all definitions of “loss occurrence” and similar terms to determine whether COVID-19 losses, if paid, could fit within those definitions.
- Review aggregation provisions, which are often contained within the definition of “loss occurrence” in property catastrophe reinsurance contracts, to determine the basis (cause-based or event-based) for aggregating individual losses into one single reinsurance claim. Develop in good faith an objectively reasonable and businesslike aggregation plan.
- Examine all exclusions in the reinsurance contract, particularly those concerning pollution, contamination, bacteria or virus, that might preclude cession of COVID-19 losses.
- Review all provisions in the reinsurance contract that grant the cedent authority to make claim determinations to evaluate whether that authority is broad or narrow. For example, the reinsurance contract may provide that the insurance company is the “sole judge” as to the interpretation of the terms and conditions of the ceded policies and the coverage provided under the reinsurance contract.
- Review all provisions in the reinsurance contract that incorporate the terms and conditions of the ceded policies into the reinsurance contract to determine the extent to which the reinsurance contract follows the form of the ceded policies.
- Review any “follow-the-fortunes” or “follow-the-settlements” provisions in the reinsurance contract to determine whether those provisions exist and whether they are broad or narrow.
- Determine whether the reinsurance contract has any provisions addressing ex gratia payments.
- Review all extra contractual obligations and excess of policy limits coverage that the reinsurance contract may provide in case of any bad faith judgments on COVID-19 business interruption cases.
By considering these and similar actions, cedents will be prepared to respond to COVID-19 losses and to obtain any reinsurance recoveries warranted under their reinsurance contracts.