London Market sectors swerve direct Covid claims due to lack of non-damage BI extensions

Niche London Market sectors have managed to avoid being tarred with the same business interruption (BI) wordings brush as commercial property insurers because policies within the energy or marine markets, for example, do not feature non-damage BI extensions.

Although both the energy and the marine sectors provide BI cover, this is strictly triggered by physical damage – this means that insurers within these fields have seen very few claims notifications directly linked to the ongoing Covid-19 pandemic and the associated lockdown, where the government required non-essential businesses to close in order to mitigate the spread of coronavirus.

Toby Vallance, a partner at DAC Beachcroft who focuses on marine insurance, primarily around cargo, explained that there “isn’t an equivalent product in the marine market” for non-damage BI extensions.

He continued: “The trigger is generally physical damage, so you need something to actually blow up, break, burn, sink [or] be physically lost - Covid-19 itself doesn’t produce that. The big issues that are faced by the property BI market isn’t necessarily replicated elsewhere.

“Generally, things like pandemics and disease aren’t covered unless explicitly requested that there is cover for it and it’s an add-on.”

Vallance added, however, that he has had to advise insurer clients who have received trade disruption claim notifications – this specifically covers any interruption to a vessel’s trade route or its delivery of items, for example if a port is blocked due to another vessel sinking, or there is an issue with the cargo vessel itself. Similar to property BI policies, trade disruption wordings can either be all-risk policies or cover a specific list of perils.

Angela Flaherty, a partner at Clyde and Co with expertise in the upstream and downstream energy sectors, agreed that the energy market has also avoided an uptick in claims activity.

She said: “A couple of people have made some attempts to bring some claims, but realistically there are no claims caused by Covid.

”It is just claims that have been exacerbated by Covid, where the cost of repair has gone up because of supply chain problems or where the time period for a repair operation has been delayed because of restrictions on movement and national lockdowns.

”There are some discussions around losses being exacerbated, but there are no claims really rising out of Covid.”

Practical difficulties

For Flaherty, the Covid-19 pandemic has had a larger impact on existing energy insurance claims rather than generating new claims.

In part, this is tied to continued supply chain struggles and the inability to obtain replacement equipment promptly following a loss for physical damage.

Primarily, however, Flaherty believes the pandemic’s impact on the loss adjusting process has been the most challenging component for the energy insurance sector.

“Ordinarily, when a loss happens the insured will notify their insurance via the brokers and the insurers will appoint loss adjusters, who will travel to the loss location in order to conduct an investigation, together with the insured, to determine what happened and knowing what happened is fundamental to considering [if] the claim is recoverable under the policy,” she explained.

“Global restrictions on travel has meant that this is [far more] difficult than usual because loss adjusters are unable to get to sites. Even where that stage has already been completed, if there are any further physical or forensic investigations of equipment that need to be carried out, it’s not easy to have the relevant individuals and teams in labs or workshops because it’s not a very remote working type activity.

“All the restrictions on having teams of people work together in relation to loss investigation have in some cases led to delays in identifying the root cause of failures, which then has a knock-on delay in determining coverage. Things just seem to be happening a little more slowly and so insurers, in order to make sure they continue to deal with claims promptly, are having to make decisions on some occasions based on less information than they ordinarily would.”

However, Flaherty does predict that there will be less international travel following the coronavirus pandemic, although this bucks the traditional face-to-face approach used by the energy insurance sector.

“In the energy industry, the claim values are very high and they do justify significant amounts of time in face-to-face discussions between insurers and their insureds and the loss adjusters investigating. The relationships are important, the accounts are very large,” she explained.

“But actually, there has been an ability to handle a lot of those discussions via Zoom or other video conferencing platforms and so, even when international travel is allowed again, there will be a shift towards that being the exception rather than the norm.”

Vallance has noted a similar knock-on impact of coronavirus in the marine sector, where it has been more challenging to complete vessel surveys that identify items for repair. In turn, there is the “question whether those surveys will actually take place, then vessels operate without that repaired item being properly surveyed and approved, then that leads to a loss - will [that] impact on coverage?” he asked.

Flaherty further flagged the impact on “policies which have a mechanism for adjusting premium based on revenue or profit forecasts”.

She continued: “Where there’s been a drop in the oil price, this has led to the downwards revision of forecasts for revenue and profit, so in some instances, I understand insureds have been seeking a return of premium if that applies to them.”

Covid exclusions

According to Flaherty, the Lloyd’s Market Association (LMA) has also responded to its members messages by creating “different communicable disease exclusions” for new business in order “to create clarity around losses which either are caused by or are exacerbated by Covid”.

She added that there are specific communicable disease exclusions for the energy insurance market, covering both the upstream and downstream sectors.

The take up of these exclusions has been widespread, Flaherty said.

“A lot of insurers, who have across their entire portfolio been heavily hit by Covid claims, have introduced corporate policies that for future business they will have a communicable disease exclusion of some sort,” she explained.

“There’s a spectrum of exclusions, but the vast majority of the big insurers have made it part of their underwriting policy that there will be an exclusion imposed on all new business and then the look and feel of each exclusion will depend on the class of business - that’s why the LMA has done a lot of the coordination.”