Bird flu tests the wordings

Bird flu has reached the shores of the UK. Bet let's not panic. While as yet it does not appear that the H5N1 virus has mutated into a form transferable between humans, which would be likely to result in a human flu pandemic, experts are talking of this possibility in terms of "when" rather than "if".

Consequently insurers need to turn their minds to the potential impact of two sources of claims. Most imminently those arising from outbreaks of bird flu across the UK and in the longer term those caused by a human flu pandemic.

Many areas of the market would be impacted by such claims, including health, travel, contingency and property/business interruption (BI) insurers.

Property insurers will recall the problems they faced in the recent past following the outbreaks of foot and mouth in the UK and the Sars outbreak in the Far East.

As a useful form of analogy insurers could liken the potential claims from bird flu in the UK to those seen for foot and mouth. And those claims from a human flu pandemic, albeit on what is likely to be a much larger scale, could be compared to those from Sars.

In both cases a significant number of the claims pursued were made under extensions to standard BI covers, as the vast majority of policyholders, with the exception of farmers, did not actually suffer any insured property damage - the usual BI proviso.

The most likely extensions that policyholders would look to cite in support of such claims are those for "infectious or notifiable disease", "denial of access" or "loss of attraction".

However, these clauses should normally afford cover only where a business suffers losses as a direct result of an identifiable incidence or outbreak.

Another possibility is that claims could be made under a "suppliers or suppliers of suppliers" extension where the insured's business is affected because of restrictions that have been placed upon those on whom it relies.

The infectious or notifiable disease clause is likely to be the extension that causes the industry most difficulty.

There is probably little doubt that flu is infectious and if the only requirement under a policy extension were for loss to result from an infectious disease then that element of cover could potentially be met without too much difficulty.

One can envisage though possible arguments arising over such issues as bird flu not yet being infectious/transferable to humans, and/or whether a particular policy wording only covered infectious diseases that affected public, that is human, health.

The question of notifiability is more uncertain. Bird or avian flu is a formally notifiable disease under the Diseases in Poultry (England) Order 2003, but whether pandemic flu in humans, which is a different form of the disease, is notifiable is open to question.

On this issue as with many others much will depend on the precise wording of policy provisions as to whether or not cover will potentially be available.

There are likely to be additional requirements included in an "infectious or notifiable disease" extension. For example, the outbreak in question may have to occur within a specified radius of the premises or rather more nebulously within the "vicinity" of the premises.

These requirements themselves can cause their own headaches for insurers as policyholders who meet them may simply, albeit erroneously, point to the relevant outbreak and seek cover irrespective of whether it specifically has had any causative influence on the losses suffered.

There is clearly the possibility that claims of this nature could result from either bird flu or a flu pandemic. For example, quarantine areas could be imposed for bird flu, as could restrictions on travel to particular parts of the world deemed to be infected, as in the case of human flu pandemic. Insurers will recall the significant downturn in air travel to South East Asia as a result of Sars with particularly damaging effects on hotel chains and the tourist industry.

This is likely to be a complex area for insurers. We have indicated above various potential heads of claim that policyholders might pursue. However, the likelihood is that any downturn in various sectors of the world economy will largely be the result of generic problems as opposed to specific outbreaks of disease.

The other issue in this regard is the likelihood that a flu pandemic by its very nature will spread rapidly around the world affecting very large numbers of the population. The Health Department's UK influenza pandemic contingency plan published last October provides models based on up to a 50% clinical attack rate. Therefore, trying to tie down losses to any specific outbreak is likely to prove extremely difficult for policyholders.

The question of the number of outbreaks that could be considered to have caused loss is also likely to be complicated. Much will again depend on the aggregation wordings in policies. For example, will it be possible to achieve the required unity of place and time to satisfy the requirements of an 'event' where there are ongoing outbreaks over a very wide area?

The aggregation of losses is likely to be more tenable with a wider wording such as "all losses or series of losses arising or emanating from one originating cause".

With bird flu already here and experts predicting a probable human flu pandemic, businesses will be looking to their insurers to alleviate the problems they will face and the "add-ons" provided to many all-risks property policies are a clear target. Insurers providing cover should be planning now how best to manage their potential exposure to such claims. IT

' Nick Williams and Tony Hannon are partners with law firm Kennedys