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By Akber Datoo, CEO, D2 Legal Technology, 

Insurance companies believe they have limited exposure to Covid-19 claims. Yet the vast majority of firms are expecting to make a claim for some form of business disruption. So who is wrong? And how long is it going to take to work out?  With law firms already poring over the poor drafting and exclusion ambiguity, insurance firms need to gear up for a legal fight. Akber Datoo, CEO, D2 Legal Technology, explains that insurance companies need to embrace consistency, transparency and a data driven approach to wording that provides a true and accurate picture of risk and exposure – for both insurers and insureds.

 Global Health Emergency

The speed with which the global economy has been devastated by the Covid-19 pandemic since it was recognised as a pandemic by the World Health Organisation on 11th March 2020 has shocked many. With businesses facing many months of disruption, predictions of the final value of the financial losses will far, far outweigh the $10s billions of losses caused by previous viral outbreaks, including Ebola and SARS.

Covid-19 is an order of magnitude bigger. It is global; it has not been contained; and the implications for long term financial stability are unprecedented. With the UK alone predicted to face a fiscal deficit of £200 billion next year, government support will have to be very tightly focused and managed.

Where, therefore, does that leave businesses planning ahead? Many companies appear to believe that their insurance policy(ies) will cover some of their lost revenue from the outbreak. Yet the insurance industry is confidently claiming a minimal exposure to their current underwriting practices and saying “it’s force majeure – not a matter for insurance”. So who is correct? Where does the true risk lie?

 Inconsistent Wording

Covid-19 is pervading every walk of life, from disruption to global supply chains to compulsory quarantine and travel bans to certain regions. For businesses, that means multiple policies and coverage need to be scrutinised to help offset damages and risks.  Yet when it comes to determining the level of risk and financial loss the blunt truth is that right now, no business has complete confidence. Unless an insurer has correctly embraced model wording libraries (and of course, those are well structured and designed) and document generation tools, each policy has different exclusions and nuanced wording – and that is an issue that should be striking fear into the insurance industry.

Many businesses have been surprised to discover that even those policies offering pandemic cover are typically limited to a pre-defined list of diseases. Covid-19 was not known and will therefore, not be included, a fact that has led to a Tory MP calling for Downing Street action after his constituents complained insurers were not paying out on pandemic-related claims.

Similar concerns affect business interruption insurance and the ‘insured peril’ definition within each policy. Cover for compulsory closure in some policies is contingent on physical damage. Was the closure mandated due to the transmission of a notifiable disease by the authorities or prudence? Was the business owner following a definitive government policy or protecting its employees? Does Covid-19 fall under the scope of the notifiable disease definition? Does the policy cover supply chain disruptions – and, if so, how far down that supply chain? There is a disturbing lack of consistency in wording and exclusions – and the first wave of litigation has already started.

There are also serious risks associated with financial lines and the operating procedures of senior management teams in banking and insurance during these extraordinary times. From regulatory compliance to employee protection and continuation of business services, in the face of reduced staff numbers, supply chain difficulties and market volatility there are a number of risks that need to be considered. Have funds been properly valued? Are problematic funds being divested at the right time? There are also very serious concerns regarding silent cyber,  with criminals exploiting Covid-19 fear and uncertainty. If management teams and staff have not followed the contingency plans – many of which will be linked to the insurance policy – the potential for on going legal dispute is significant.

 Lack of Transparency

Law suits are inevitable.  Insurance companies have played Russian roulette with policy wording – and many are going to pay a hefty price. There is so much money at stake that firms will be pushing for a legal resolution to coverage disputes and lawyers will be looking for ambiguity and nuances in the policies to challenge in court. Furthermore, given the impact of Covid-19 on society, it is likely that the courts will construe such ambiguities in favour of policyholders. Many questions are likely to arise over the next few years with regards to insured’s understanding of what they were ordering and the fitness of the insurance being purchased – and the extent to which the insurance industry was remiss in helping insureds obtain such an understanding.

For insurers, the situation is even more concerning, not least with growing concern regarding the likelihood of pay out on reinsurance claims. This pandemic will painfully demonstrate the poor internal management of wording and risks both in primary and reinsurance policies.  Such basis risks are clearly avoidable through prudent policy and wordings management – questions will invariably be asked if the operational risk management of any so affected primary insurers.

Covid-19 may be a once in a lifetime event – or not. The expectation is not only that it will continue to affect global populations for several years but that new pandemics will also follow in its wake. One of the biggest lessons that the insurance industry needs to take from this event is that both insurers and insureds need clarity and transparency with regards to the level of exposure. This should never happen again. Clause taxonomies and model wording libraries ensure consistency; data driven contracts enable rapid identification of exclusions and their financial implication. With the correct approach, insurance companies could and should be in a better position to know where they stand and deliver that transparency to their customers.

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