UK: Avian flu – Is the Market Ready?

Last Updated: 28 February 2006
Article by Yvonne Jefferies and Leigh Williams

Originally published in The Insurance Law Quarterly: Winter 2005

One of the biggest concerns currently on the catastrophe radar screen is the potential for avian flu to mutate into a form which can spread amongst humans. The World Health Organisation has cautioned that even if avian flu does not turn out to be as virulent as some predict, 7.4 million people could die worldwide. Economic damage could easily run into hundreds of billions of dollars as business grinds to a halt. Insurers could be exposed to a sizeable hit – providers of life and health insurance, business interruption cover, livestock cover, contingency cover, travel cover and reinsurers of those lines may all be significantly affected.

Avian flu is perhaps the most recent example of a potential catastrophe which is a nightmare for insurers in today’s world. Like SARS (and to some degree Foot and Mouth Disease) it has the potential to spread very quickly around the globe. It will not only affect the population and businesses within affected areas, but also beyond these areas, due to perceptions (justified or otherwise) of the risks associated with the disease and how it spreads.

The outbreak of SARS in South East Asia in 2003 resulted in 8,000 people contracting the disease. Of those, fewer than 800 died. However, the economic impact of SARS upon East and Southeast Asia is estimated to have been in the region of US$60 billion. There were sizeable claims made on life, health, travel, contingency and business interruption insurers who provided ‘notifiable diseases’ extensions as ‘add ons’. For example, a SARSrelated claim by the Mandarin Oriental Hotel Group was recently settled by insurers for US$16 million.

Following the outbreak of SARS, Swiss Re recommended that losses from SARS be specifically excluded from the notifiable diseases extension.

Although it appears that in the immediate wake of SARS, South East Asian insurance carriers stopped selling notifiable diseases extensions, it is not at all clear to what extent insurers elsewhere have done the same.

The obvious thing for an underwriter to do when faced with a serious, unquantifiable risk is to exclude it. There is nothing new in this approach. The serious and unquantifiable nature of nuclear, war, terrorism, asbestos and pollution risks is precisely why they are almost universally excluded from standard covers. The main points to bear in mind when drafting exclusion clauses are as follows:

  • First, draft clearly. The courts construe exclusion clauses narrowly: see Tektrol Ltd v International Insurance Co of Hanover Ltd and Anor (2005). Use words which hit their target - but do not attempt to obliterate the target with a string of words which mean the same thing. Make the clause free-standing. In particular, never be tempted to modify the back end of an existing exclusion clause which deals with something completely different.
  • Second, displace the "proximate cause" test. If an insurer wants to rely upon an exclusion clause to deny cover, the ‘default position’ is that the burden is upon him to prove that the proximate or dominant cause of loss is an excluded event or circumstance (i.e. peril). However, this test is not always easy to satisfy: there may have been a number of factors contributing to the loss and furthermore the test is informed by ‘common sense’. The way round these problems is to prescribe a less cogent causal connection between the loss and the excluded peril, e.g. "any loss directly or indirectly arising out of ".
  • Third, consider reversing the burden of proof. The usual position is that the evidential burden of showing that the particular loss was caused (proximately or otherwise) by an excluded peril is upon the insurer. The insurer can improve his position by including wording requiring the insured to prove that his loss was not caused (directly or indirectly) by the excluded peril. However, the insured must still provide some proof that the excluded event or circumstance occurred and that there is some causal relationship between it and the loss.

There are conflicting reports as to the extent to which the insurance market has taken steps to limit or exclude its exposure to avian flu losses. In Aon’s recent white paper about Pandemic Influenza, the authors remarked that life assurance and sickness cover aside, because of changes in the insurance market’s perception of risk, there is currently very limited or no protection against many of the risks attendant upon a pandemic, particularly for loss of business.

S&P’s report issued on 16 November 2005 conveys a very different picture. They suggest that multiple insurance lines would be hit with worldwide losses up to a range of US$71.4 billion - US$200 billion and that business interruption insurers would be particularly badly affected.

Some London Market contingency insurers have, since SARS, adopted clauses excluding losses directly or indirectly arising out of any ‘communicable disease’ which leads to the imposition of restrictions on the movement of people and/or travel warnings by any national or international body or agency. Furthermore, given that the causal link between disease and human behaviour is not just physical but psychological, the exclusion embraces losses directly or indirectly arising out of any fear or threat of movement restrictions and/or travel warnings being imposed.

Some exclusions in contingency covers confine themselves to avian flu and/or SARS and/or Atypical Pneumonia but attempt a broad exclusion of all loss directly or indirectly arising out of those diseases or fear thereof. In other words, while confining itself to specific diseases, the clause seeks to take no chances with the manner in which loss may arise.

It is clear that some sectors of the insurance market are taking the obvious step of spelling out the position on avian flu where it matters most - the contract. However, it is by no means clear that this approach has been adopted by the Market as a whole. Although some commentators say that the threat posed by avian flu has been exaggerated, any underwriter caught out in the event that an epidemic or pandemic were to occur, will be hard put to complain that he has not had fair warning.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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