It is perhaps hard to believe that since Hurricanes Katrina, Rita and Wilma battered the US in 2005, an issue which has long been a source of concern for reinsurers and retrocessionaires continues to be of major concern, writes Gavin Coull, partner and head of reinsurance at law firm BLM.
The latest round of back-to-back disasters, which saw Atlantic hurricanes again pound parts of the US and Caribbean as wildfires ravaged California, again brought into sharp focus issues around wide area damage and denial of access.
What has changed? Nothing, but lessons still need to be learned (or remembered) as the losses arising out of these catastrophes continue to impact the international reinsurance markets. Why is this? It is clearly not due to a lack of understanding on behalf of the market, but perhaps it has been driven by the still-continuing soft market and the power of commercial relationship which for many years have governed the relationship between the market and their (re)insureds.
Wide area damage, without the accepted trigger of physical damage, has – for a long time – puzzled those who believe that they have coverage for business interruption. Or, in a similar vein, the interplay between prevention or denial of access and business interruption – sub-limits for the former, full limits for the latter.
Whilst there continues to be debate as to the efficacy of the “but for” test for business interruption losses not arising from damage actually caused to an insured property, as opposed to wide area damage surrounding the property the reality is that a common sense and literal interpretation of conventional business interruption clauses prevails. This may not be palatable to insureds, or indeed reinsureds, but the law is clear. Recent catastrophes, however, present their own issues for the market, and those who are striving for a solution (and payment) which is expected by (re)insureds. One issue, faced with widespread devastation, is the potential loss creep faced by adjusting multiple losses, often within limited resources, building code changes and the like, and the instinctive belief that loss of business is a direct result.
The variation in views on the ground with respect to one or two occurrences following Irma and Maria has, for example, led to tensions between competing interests, not least for reinsurers as to aggregation. Similarly, just because a business cannot operate does not mean that business interruption is recoverable. The “Beast from the East,” is an example of wide-area weather warnings, giving rise to other potential area for disagreement.
Going back to the “but for” test, this may well lead to arguments around concurrent cause arguments – to what extent are denial of access losses attributable to police or highways authorities closing some roads, but the general public simply deciding not to go out (even if roads are not closed) because of the weather – “but for” what? It may be back to basics, but business interruption and sub-limited losses such as denial of access or loss of attraction mean what they say. Allied with potential loss creep or inflation in the rush to deal with what are undoubtedly significant events for insureds, the market must, as in 2005, remain alive to what has been bought, and what is validly covered. Given the significant financial impact on the market, a close alignment between reinsurers and their reinsureds as to the active monitoring and adjustment of such claims remains a central issue.