Insurance/ Reinsurance November SUPERSTORM SANDY - 2012 INSURANCE AND REINSURANCE ISSUES

Introduction property damage has been caused by flooding, which is often excluded under Severe flooding, rampaging fires, explosions the terms of property damage cover, or by and downed power lines were just some of the wind-driven water, which is usually covered. consequences left in the wake of Superstorm Those policy-holders with flood exclusions Sandy, the post-tropical cyclone which battered may be covered for such damage under more than 20 US states last week, having the National Flood Insurance Programme first wrought a trail of destruction through the operated through FEMA (Federal Caribbean. Particularly severely hit were the Emergency Management Agency), although states of New York and New Jersey, both of it is thought that only 15 - 25% of at risk which have been declared disaster areas by the properties are so protected. US Government. • Are there multiple events or occurrences Once again, the insurance market will be faced and, if so, how will the loss be allocated with complex factual and legal analysis to between them? As the weather system ascertain the nature and extent of coverage. moved inland and northwards, winter storms with freezing rain, snow and ice Property damage issues followed. Determination of the number of events, and their respective impact, The following issues are likely to arise in the can have consequences for both context of insurance cover protecting loss policyholders and underwriters. The resulting from Sandy: issue can be exacerbated where there are complex multilayer programmes with • Has the event triggered cover? There diverging interests across the layers. may be issues over, for example, whether Notwithstanding the presence of “hours clauses” (see below), there business to result from that • The operation and effect of are well known difficulties property damage rather than Adjustments Clauses and/or in breaking down periods of from some other cause. When special circumstances clauses sustained heavy weather (and there has also been serious for wide-scale area effects. In the the inter-relationship between disruption to transport links aftermath of Hurricane Katrina, different sequential weather and utility supplies, as well a hotel chain sought to rely patterns) into different “events” as widespread damage to upon an Adjustments Clause, or “occurrences” to allocate property, causation issues may which required the insurer to and aggregate losses, and to arise. Where there are gaps in provide for trends, variations apply deductibles and policy cover, these may be filled by and special circumstances to limits. Synoptic analysis may appropriate extensions. “represent, as nearly as may be employed as a part of this be reasonably practicable, the exercise. • The nature and length of the [hotel’s trading] results which but indemnity period as defined by for the Damage would have been • To what extent will steps taken to the policy. BI policies typically obtained [during the Indemnity mitigate loss, and sue and labour provide for a period of cover by Period]” (Orient-Express Hotels in prevention of damage (whether reference to which the Insured’s Ltd v Assicurazioni General pre-emptive or reactionary) be loss is calculated. Where it may S.p.a) . The hotel argued this covered? The answer to this will take a long time before trading clause required the insurer to depend, in each individual case, conditions return to normal, it adjust its loss as if the hotel upon the terms of the contract, will be important to understand had been undamaged, without but generally speaking New York not only the triggers that cause taking into account the effects of law takes a similar approach to the period to commence, but Hurricane Katrina on the wider English law in considering sue also the length of the period and New Orleans area. The hotel’s and labour claims. any categories of loss that can argument failed. The English be claimed outside the period court upheld the arbitration Business interruption (BI) issues - as is usually the case for ICW tribunal decision that OEH could (increased costs of working). only recover loss which would The damage to property, disruption of not have arisen “but for” the transport links and prolonged utility • The presence and application of damage to the hotel. It was held outages experienced as a result of sub-limits. Policies often provide that “special circumstances” the storm are highly likely to lead to for sub-limits to apply to loss in the Adjustments Clause claims in respect of consequential from particular perils or loss of could include the same event business interruption - often the a particular nature, such as loss (insured peril) that gave rise to largest, most complex and most resulting from denial of access. the Damage and, since the loss contentious claims. Many factors The application of sub-limits, would have been suffered by may impact upon the calculation in particular whether they are OEH as a result of the damage of loss. Considerations for policy- cumulative (ie whether they to the surrounding area, even holders, insurers and also brokers “stack”) or are exclusive, can if the hotel itself had not been who may be required to assist in the have an important impact on the damaged, there could be no preparation of claims, include: indemnity provided by the policy. indemnity under the BI section Sandy affected several parts of of the policy. Recovery was • Establishing causation. BI cover the Caribbean, as well as over available pursuant to the loss is sometimes said to operate 20 US states, with damage being of attraction and prevention of on a “double trigger”. First, it caused, arguably, by a variety access extensions, but a lower requires property damage to of different perils. Issues could limit applied. be sustained by an insured arise as to the different sub-limits peril. Secondly, it requires the applying to elements of a claim There is also a substantial body interruption to the assured’s and the interaction between them. of US case law on this issue.

02 Insurance/Reinsurance For example, in the most widespread, some areas, such customer chain has become more recent of these listed cases, as certain parts of Manhattan, clearly appreciated. CBI issues that Catlin Syndicate Ltd v Imperial have been relatively unscathed. may arise from Sandy include: Palace of Mississippi, Inc Any ability to switch production/ (2010), the court upheld an operations to unaffected areas • Is cover extended by expanding insurer’s calculation of business and thereby continue to trade will the concept of “damage” to interruption loss based only on have to be taken into account include loss from denial of the insured’s pre-catastrophe in calculating the level of any access and/or loss of attraction? sale figures, without taking indemnity. The widespread disruption to into account the insured’s the New York City subway has significantly higher, post- • The task of collecting and severely hindered accessibility interruption sales figures. In this tracking information for the and is likely to have had a severe case, the insured was damaged purpose of preparing or effect upon business in areas by Hurricane Katrina and, as a scrutinising a claim. BI claims to which people are unable to result, was forced to suspend usually require significant travel. its casino business. Upon amounts of documentary re-opening, its revenues were evidence to demonstrate the • The nature and effect of substantially greater than before impact of the insured damage identifying (whether generically the hurricane, due in large part to upon the business’s profitably. or individually) suppliers and/ the closing of several competitor This task is made even more or customers in the CBI casinos that were also damaged onerous in circumstances in extensions to cover. Even if an by the hurricane. The insured which records may have been assured does not suffer damage contended that its loss of destroyed by the property to their property, resulting in earnings should be measured by damage giving rise to the business interruption, they may assuming a hypothetical scenario interruption. nonetheless experience an in which Hurricane Katrina impact upon their ability to trade struck, causing damage to other • The calculation and as a consequence of damage casinos, but causing no loss to ascertainment of increased suffered to a key supplier or the insured. The insurer argued cost of working, and additional customer. Just as it will be that the appropriate hypothetical increased cost of working claims. important for an insured and their was one in which/hurricane BI policies will usually cover advisors to be able to record Katrina never struck in the first the assured for the increased and document the interruption place. The court agreed with the costs of working incurred as a suffered to the business, it will insurer, stating (at page 7) that: consequence of the peril. In the also be crucial to understand absence of contrary provision, the effect and scope of any “Without language in the these costs may be recovered extensions to cover in respect of policy instructing us to do so, in full, even though they extend such interruption, which will itself we decline to interpret the beyond the indemnity period. involve a thorough understanding business interruption provision It may also be necessary to of the assured’s chain of key in such a way that the loss take account of savings, such suppliers and customers. caused by Hurricane Katrina as reduced overheads, that can be distinguished from the may follow an interruption of Liability insurance issues occurrence of Hurricane Katrina business. This is to prevent an itself”. insured being over indemnified. After catastrophes such as Sandy, it is not uncommon for there to be • The ability or otherwise to make Contingent Business Interruption enquiry into the loss, the extent to up production at the affected (CBI) has developed in recent years which and how it could have been or other locations. Although the as businesses’ loss exposure from avoided, and how such loss may damage and disruption has been interruption to their supply chain or be mitigated in future. Whether or

Insurance/Reinsurance 03 not they become the subject of tropical storm in a marina berth - or delay in the delivery of millions of public scrutiny, businesses and there could be doubt as to what dollars worth of cargo due to arrive public authorities may be exposed this means exactly and whether this for the Christmas season. to liability depending upon the requirement has been fulfilled. adequacy and professionalism of Commentators have speculated their risk management, preparation For commercial vessels, un- as to the likely cost of the cargo prior to the storm, and their disaster seaworthiness issues could arise, disruptions, with some predicting that management during and following it. both for hull & machinery coverage they would not be as significant as Exposures may arise, for example, and for owners’ responsibility to Hurricane Katrina, whose impact on from: cargo owners where cargo is lost the transport and logistics sector was or damaged. Generally, commercial heavily felt. • Liabilities for contaminants or vessels will be covered for both hull pollutants that escape from damage and liabilities arising from Logistics companies and supply premises on to third parties’ Sandy. Potential liabilities might chain managers closed distribution property, as a result of flooding. include, for example, significant centres along the East Coast, but pollution damages following contact given the nature of the logistics • Liability for damage attributable after breaking free from moorings. business, where flexibility and to inadequate insulation or safety problem solving are often the key precautions. There is also the possibility of loss attributes of the companies involved, or damage to spares held in storage many operators continued to • Failure to make contingency onshore, and in this case the “parts provide services, by re-routing cargo plans in respect of interrupted removed” clause extension to the wherever possible and for as long utility supply. Institute clauses might operate, as possible. That said, it is inevitable assuming that these are not that cargo will have been damaged • Design liabilities may arise where replacement parts and assuming they and there will be delays resulting from questions are raised about the have in fact been removed from an the inescapable backlog, which is adequacy of building and flood insured vessel. None of the standard likely to take some time to recover retention design, particularly in cargo exclusions refer to hurricanes. fully. the case where key services such as electrical and communications In respect of marinas, their liability This gives rise to a number of are located in basement areas policies will usually cover vessels in potential issues for both the shippers prone to flooding. their care, custody and control, but and receivers of cargo as well as the will only respond where they have a companies involved in forwarding, Marine insurance issues liability for the loss, which is unlikely transport, logistics and supply chain in this case. Generally, direct marine management. As well as causing widespread policies will cover most losses arising damage to property, Sandy also from the storm, but clearly this will Of immediate concern to the cargo damaged or destroyed large numbers not always be the case. interests will be the fact that whilst of vessels, both commercial and most cargo policies will cover recreational, which found themselves Logistics issues physical loss or damage of, or to, the in its path. Marine insurers and cargo, they do not generally cover reinsurers can therefore expect Transport and logistics operations damage caused by delay, even if to receive claims arising out this were inevitably hit hard by the arrival the delay has been caused by a risk damage, and should be alive to of Sandy, which resulted in the insured against. Cargo interests may issues such as, for example, whether closure of a number of major East therefore find themselves uninsured yacht policies contain “named Coast ports and caused massive under traditional “cargo” policies. tropical storms” clauses, which might disruption to air transportation, Such claims may then be passed only cover the vessel where is it as well as the inland road and rail onto to the service providers, who ‘appropriately prepared’ for a named infrastructure, resulting in damage to will doubtless look to applicable

04 Insurance/Reinsurance international conventions or coverage arguments to the effect they generally provide that contractual conditions to limit or that such deductibles should, in law, losses caused by a hurricane exclude such liability, wherever it is be applied. The prospect of liability or a typhoon or windstorm, and appropriate. losses in addition to property losses occurring within the specified may lead to issues about whether the number of hours (say, 72 hours), Often, contract terms will seek to former are non-elemental rather than can be aggregated. Furthermore, exclude liability for failing to adhere elemental losses, in circumstances in depending on the wording of the to agreed departure or arrival dates; which reinsurance towers are split. hours clause, losses caused by contain a force majeure clause and flood may be aggregated for 72 will in any event limit liability (insofar It will take some time to assess hours or 168 hours. Some clauses as liability attaches). whether industry loss warranties also provide for aggregation are triggered by industry losses, of such storm losses, with Force majeure clauses will only apply but expect the usual issues about losses arising from flooding. It where the force majeure event is whether loss sustained by captives is generally for the reinsured to the sole cause of the loss. Potential should be included, or whether choose the time and date when claimants will therefore be looking uninsured losses which are picked up the applicable hours period closely at whether there has been by insurers due to state decree are commences, and it is usually an intervening event caused by the included. It is understood that trigger not before their first reported service provider, which was in fact points for responsive ILW covers losses. Subject to reinstatement the actual cause of their loss. This range from US$5 billion to US$50 of the reinsurance cover, it may might arise, where, for example, billion. Aggregate ILW covers are now be possible for a reinsured to the service provider fails to store common, for example responding recover in respect of two or more perishable cargo in an appropriate to the industry loss across the entire loss occurrences within the same environment, or where it can be hurricane season. hurricane catastrophe, although argued that there were other means they usually cannot overlap. by which the cargo could have been Other issues likely to arise in a Issues may also arise as to how carried. Each case will of course turn reinsurance context include: cedants’ aggregations are to be on its own facts. verified, and whether they fall • Issues surrounding triggers, within the aggregation language It is probably too early to assess the aggregation, excess/attachment of the corresponding reinsurance overall impact upon the transport and points, and reinstatements. contracts. Fact patterns, logistics industry, and its customers, definitions, and full contract both in relation to potential claims for • As to aggregation, property wordings need to be reviewed cargo loss, damage or delay, but also catastrophe excess of loss carefully. in respect of the BI claims faced both contracts usually contain an by the industry and by its customers, “hours” clause containing a • Follow the settlements/follow the but it will likely run into hundreds of definition of a “loss occurrence”, fortunes obligations will need to millions of dollars. as meaning all losses arising out be considered. of and directly occasioned by Reinsurance and retrocession one catastrophe. However, the • Claims control clauses, which may issues duration of any “loss occurrence” allow reinsurers to deny claims is usually limited where the losses following insurers’ loss settlements At the time of writing, insured loss are caused by a named peril which they (reinsurers) have not estimates are rising beyond US$20 (e.g. hurricane where a 72 hours controlled. This may even be the billion and are well into property limit applies) or where they are case where compliance with the catastrophe programmes. With some caused by a non named peril clause is not strictly described as states dictating that larger hurricane (where a 168 hours limit may a condition precedent and where deductibles on household policies are apply). There are various different the reinsured can show that they not triggered, reinsurers may consider wordings of such clauses, but were actually liable to pay the

Insurance/Reinsurance 05 claim in question. Reinsureds must available, particularly in the • Will there be co-operation proceed with caution where such early stages of the adjustment between Lloyd’s and London clauses are present. Where there is process. companies markets, and other a captive or fronting arrangement, international markets such as, for similar issues may arise as to Key questions example, Bermuda, Japan and the extent of the captive/front’s the Far East, so that cedants get role in claim investigation and Certain broader issues are likely to a consistent message - or will negotiation. arise across the spectrum of policy each market work on its own, types. These include: thereby risking mixed responses • Cover not being “back to back”, by an international group which and involving the law of different • How are deductibles and co- has participations on several jurisdictions, so that important insurance warranties in original platforms? terms may be defined differently policies to be applied? in the direct or master insurance • What lessons are to be learnt policy, as against the reinsurance • Under what law are the relevant from the recent Queensland policy (e.g. aggregation terms, policy obligations to be floods, Japan and New Zealand definition of “flood”, “storm” construed and in which forum are earthquakes, Thai floods and etc). Other such issues might disputes to be decided? There Japanese wind/weather events? include, for example, the may be significant differences in reinsurance excluding flood coverage positions depending Our team when the original policy does upon the answers to these not do so, or the period of cover questions. Our team includes specialist lawyers differing. Issues may therefore who have advised on and managed arise as to how many “losses” • To what extent will there be large and complex insurance and or “loss occurrences” can be waiver of claims documentation reinsurance claims including major aggregated and significantly how to support claims. This may PD, BI, liability, marine, logistics and many insurance and reinsurance be encouraged by broker and aviation claims arising out of all of deductibles may apply. US political pressure to get the recent major natural catastrophes losses compensated as soon as globally, including for example • Payments on account and how possible, but may cause issues Hurricanes Katrina, Rita & Wilma, these should be managed, in the context of recoveries Thailand and Queensland flooding. particularly where there is a from reinsurers. Similarly, to Our previous briefings on these reinsurance programme with what extent will any ex-gratia events can be found here http://www. multiple layers and potentially settlements be recoverable from hfw.com/publications/briefings. non-aligned interests. reinsurers? HFW will continue to follow the issues • The exclusion by some • In light of AIRMIC guidelines, are we have outlined in this briefing. For leading property reinsurers of reservations of rights off limits, more information, please contact CBI, because it is difficult to or a necessary protection whilst Paul Wordley, Partner on +44 (0)20 underwrite on an informed basis information is scarce - even if 7264 8438 or [email protected], and the risk is too difficult to only as an interim protection? Will or your usual HFW contact. price. potential differences in practice between US and UK regarding • Reinsurers may wish to consider the use of reservation of rights judicious use of inspection language cause friction? of records clauses, in view of potential issues concerning • Will Lloyd’s step in and “urge” the limited amount of claims the London market to deal with information/documentation claims in a particular Lloyd’s way?

06 Insurance/Reinsurance For more information, please contact: Paul Wordley London Partner T: +44 (0)20 7264 8438 [email protected] Olivier Purcell Paris Partner T: +33 (0)1 44 94 40 50 [email protected] Pierre Frühling Brussels Partner T: +32 (0) 2643 3406 pierre.frü[email protected] Jeremy Davies Geneva Partner T: +41 (0)22 322 4810 [email protected] Dimitri Vassos Piraeus Partner T: +30 210 429 3978 [email protected] Sam Wakerley Dubai Partner T: +971 4 423 0530 [email protected] Paul Aston Singapore Partner T: +65 6305 9538 [email protected] Peter Murphy Hong Kong Partner T: +852 3983 7700 [email protected] Nicholas Poynder Shanghai Partner T: +86 21 2080 1001 [email protected] Richard Jowett Melbourne Partner T: +61 (0)3 8601 4500 [email protected] Andrew Dunn Sydney Partner T: +61 (0)2 9320 4600 [email protected] Julian Sher Perth Partner T: +61 (0)8 9422 4701 [email protected] Jeremy Shebson São Paulo Partner T: +55 (11) 3179 2903 [email protected]

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