Mike Ashurst: 

Hello, everyone. I hope you’re all keeping well. Welcome to today’s ICMIF webinar “Insurance and reinsurance wording in post pandemic world”.  

I’m pleased to introduce today’s speakers. First of all, we have Clive O’Connell, who is the Head of Insurance and Reinsurance at McCarthy Denning. We have Andrew McGuinness, who is the Senior Vice-President of Underwriting at Peak Re in Hong Kong. Clive will make the initial presentation, then Andrew’s going to talk a bit about some recent COVID-19 pandemic losses and take a look at the contracts and see how those losses may be covered or not. So I’ll hand over to you now, Clive. Thank you. 

Clive O’Connell: 

Thank you, Mike. Good morning, everybody. I’m a lawyer: as such, I look at insurance and reinsurance very much from a legal angle. But a legal angle is an incredibly important angle with which to look at the transactions that you enter into on a daily basis. It’s important to look at them particularly now in the world which is moving into a post-pandemic position. Looked at very simply, an insurance contract comes about when one person wants to get covered, and another person is willing to give that cover. In order to do so, they agree the terms upon which it is to be given. Those terms will determine how much premium is paid and what events will occur to allow claims payments to be made. 

If it is the wording in the middle, that is absolutely key to this. There’s the policy or the reinsurance treaty or contract wording that is absolutely central to the issue. It is the product that you buy, it’s the product that you sell. So what is that wording? Well, simply, a wording is a piece of paper with words written on it. Nothing more and nothing less than that. In order to be worthwhile, therefore, those words must be capable of being interpreted. They must be certain, you must know what you’re buying and selling. There must be no ambiguity in there. Also, those words must be enforceable. It’s all very well to have a beautifully drawn up agreement. But if you can’t enforce it, if you can’t make it happen, wording is worthless. So we need to have clear, concise, certain language, an enforceable language in a wording. 

Now, why is this? I think both in reinsurance particularly for the last 38 years, almost four decades and business model or cultures that is lawyers involved in reinsurance has typically been but a soft market will create dispute … There is broking and discipline, underwriting discipline among agents. Also people, purchasers of insurance and reinsurance are trying to dictate better terms. Reinsurers are trying to avoid premium volumes at a certain level. Problems seeds are sown for future. But those problems don’t become manifest until the markets changes from soft to hard. 

Because when the market changes longer, reluctant to dispute reinsurers having in those circumstances to say, “No, I’m not paying those losses because you fall foul of the contract or for other reasons.” We’ve period now where the market hasn’t shifted from soft market for a long time. When I was younger, we had a wonderful business model because the market cycles were so regularly placed together. The disputes would arise at the end of a soft market, beginning of a hard market, carry on until the next term, three or four or five years later. Well, since 2001, we haven’t had such a change. 

In the late 90s, there was a very soft market that hardened dramatically in 2001. There were … In the early 2000s. But then Katrina came, could have been softening. Suddenly it was hard and still further, and it remained hard for a while, until up and into the early 2000s. Then started 2010 and then carried on softening until very recently when it’s hardened again. We’ve now to our first transition for almost 20 years. 

On top of that, we’re going into a transition at a time of [inaudible 00:06:37] and recessions always will create issues. So the two combined create a perfect storm for reinsurance. That is mitigated to some extent because in those [inaudible 00:06:53], we’ve got contract certainty, we’ve got enterprise risk management that’s come in. We had consolidation among reinsurers and insurers. Therefore, there are entities who are operating more carefully. We’ve got regimes in regulation that have made the chance of companies getting into liquidation much less. 

Those are all positives on the one side, but on the other side, this is the first time in 20 years that we are facing a very difficult market, which could give rise to a considerable amount of dispute. For that reason, it is particularly important to look at wording because when there are late around everything, you can happily … Then I’ll do business and make money. When times get tough, people start to query claims and look at the wordings to see whether or not those claims are comparable. That’s the function within the crisis. 

Now COVID-19 has brought with it a number of issues of its own. We’ve got issues such as the business interruption issue, which I’m just going to talk a bit about later. But that’s demonstrates some of the problems that we face. For example, one insurer who are facing a lot of claims under business interruption found that they have 28 separate wordings that cover business interruption. That’s 28 different scenarios that they have to manage. That’s not good management of that. 

But at the same time, we’re seeing a lot of other claims which are either directly or indirectly related to COVID. There are many claims in the contingency market and in other markets, we’re seeing issues arising outside of purely COVID and with the economic impact. Whenever there’s a recession, there’s more arson. Whenever there’s a recession, people are more likely to make claims, and they’re more likely to inflate claims. Once the pandemic is over or in fact, while the pandemic is still raging, we need to look at ways in which to ensure that wordings for future products are made safe from possible soft. 

To do that, we need to do a number of things. First thing is in any wording, it is essential to use clear and concise language. Clarity of language is absolutely key. Everybody must understand what is said. There must be a lack of ambiguity. There is no ground for ambiguity whatsoever. I remembered an incidence back in the 1980s when we were asked to look into the archaeology of the aggregate extension course that existed then in London market excessive loss reinsurance wordings.

We trace the origins of the clause back to the 1950s. We’re lucky enough to find an old chap, long retired, who had been involved in the drafting of that clause. We showed him that clause and talked to him about the way in which as first stops related claims were being looked at in the light of that clause. He looked at the clause, and he scratched his chin and he said, “Yes, I remember this clause. It was a difficult clause, and deliberately so.” But it transpired that what had happened was that the clause would have been drafted in a way to leave it somewhat open to interpretation when claims are raised in the future because they weren’t so sure how those claims would arise. 

The problem with that was that it’s meant that there was a huge amount of litigation and the result when the cause was interpreted didn’t suit the market that had originally drafted it. One needs clarity, there is no scope for ambiguity whatsoever. It’s also very important to look at what is covered under contract, what is excluded from a contract. These are two different concepts, which give a very easy example. If I insure my house, I’m insuring my house, but I’m not insuring my car. In my house insurance, I wouldn’t normally say, “Excluding my car.” 

However, one issue that has arisen as a result of some of the regulatory oversight of pandemic claims is that regulators are saying, “Well, if it’s not specifically included, perhaps it should be included.” That creates an issue. It is always far better not to cover something rather than to cover it and then exclude it. In these instances, what we’re looking at is the possibility of having to exclude something that is not covered. 

Now, that’s done in some contracts by saying, first exclusion, we exclude everything that’s not covered under Article One. That could well be provided then that one says, “And this specifically means that we do not include the following,” and making some express exclusion of things that one does not want covered. The more one spells out what are excluded, the better one for ultimate determination of that contract. These warranties can be very important. Warranties are a unique type of clause to insurers. 

The issue with warranties is firstly that the way in which they’re interpreted varies from jurisdiction to jurisdiction. It is incredibly important to ensure that the warranty will operate in the way that you want it to operate in the jurisdiction in which it is being used. The second thing is that one should always express a warranty clearly and obviously as a warranty, words like, “It is warranted or the insured warrants or the reinsured warrants that. “Words like that are very important to make it abundantly clear that it is a warranty and that the consequences of giving a warranty will apply. 

One thing I’m doing a lot of at the moment is reviewing people’s reinsurance wordings. It’s impressive that a number of insurers and reinsurers have decided that this is a good time to have an overall review of their whole book of wordings. I must say I find it quite fun and intellectually satisfying because once I was looking into the future, to find out what might possibly happen, what could possibly go wrong and being a bit of a pessimist, that’s quite fun for me. But one of the difficulties with reviewing wordings, particularly ones that have been in place for a long time is you spot something that’s wrong or something that needs to be improved. Now, if you change it for the next year, to clarify something, are you going to have that contract looked at in the future? 

Some will say, “Well, they changed the wording. Therefore, the intention was to be different from the intention before.” So you’re not clarifying so much as amending. That can be an issue. Where you’re trying to change the terms and improve the terms and pricing can go around it, that is easy. You just do the change in that clause. But where it’s a clarification, where you’re trying to make the earlier ambiguity clear, sometimes it’s worth looking at rather than just changing for the next year, actually using an endorsement to change for prior years as well. 

That’s a particularly important aspect where the contract flows in a series of claims could impact upon more than one year. So look at making the amendments carefully, what impact might this have on prior years, might it create a change in interpretation of prior years of a contract. Do they need to be altered and improved as well by endorsement? Those are some things that one should look at in any review of wordings. I would strongly recommend that people do a wholesale review of wordings now. 

Now, I come to the nub of what I want to say, interpretation. Beauty is in the eye of the beholder, and contracts must be interpreted from the perspective of the person or persons who will resolve the dispute. It doesn’t mean that the contract, that you know what you meant when you put the words into the contract, it doesn’t matter what the other side might interpret the contract as, what their intention was at the beginning of the contract. 

What matters is what is actually said in the contract, and how that will be interpreted by the person who is the ultimate arbiter of any dispute. If you can work out how that contract will be interpreted by that ultimate arbiter. It’s great because then the parties to the contract know how the contract should be operated. That becomes very simple. 

You pick up the contract. Oh yes, I can see this risk or I can’t see this risk. That’s very simple. It also means that if there is a gray area, you can go to a lawyer and the lawyer can look at the contract and say, “This is how a court or an arbitration tribunal will determine this issue.” That means you can avoid getting into dispute. That is what you want to do because disputes are very costly and very time consuming. They ruin your relationship with the other side. So if you can avoid a dispute, you can help yourself. You can avoid a dispute by making sure that you understand how that contract will be interpreted if it goes into dispute. 

It also means that if a dispute does arise, not all disputes are avoidable. If a dispute does arise, then you can at least get an early opinion on what the chances of success in the dispute are, and then get the matter resolved swiftly without too much cost, too much time being wasted. So knowing the applicable law and jurisdiction for a dispute is vital for interpretation. This is one of the things that came out of contract certainty that came into London in the early 2000s. By the time that contract certainty came in, there was something like three to 400,000 reinsurance contracts in the market, which had no wordings. 

Because they have no wordings, they quite often didn’t have a choice of law or jurisdiction clause, which was great for us lawyers, but not very good for our clients. What it meant was that if a question arose on a contract, we would have to give advice on what the jurisdiction was and which jurisdiction applied could quite often mean very different interpretations of the contract. We therefore have an almost mini industry of fighting to dispute what the law and jurisdiction was. Once that was determined, the case quite often settled straightaway. 

Well, now we don’t have that preliminary fights about what the law and jurisdiction is. We go straight to resolving what the words mean. It is far, far better. So knowing the applicable law and jurisdiction is vital. But it’s also vital to get the right law and the right jurisdiction. Obviously law in jurisdictions change. What are the considerations? So firstly, you need law that is certain, law that is easily understood and certain. I’ve done a number of reinsurance disputes in a variety of jurisdictions around the world. 

In some countries, even some very advanced, sophisticated countries, it is quite scary because there is no precedent. There’s no way of knowing how the court will interpret a reinsurance wording. Whereas in for example, England, the courts have looked at every clause on a number of occasions and one knows how they will interpret that clause or know pretty well. 

Precedent is very important because it really does help, also the experience of the courts. We are very lucky in this country that we could go into court knowing that the judges probably in the commercial court will have looked at reinsurance contracts throughout their professional career as barristers and then as judges. They know the difference between equipped to share the severance treaty, they understand the essence of reinsurance. In some jurisdictions, that is not the case. I’ve seen in some places, the most outrageous arguments being advanced by the lawyers for always the other side based upon the fact that they can pull the wool over the judge’s eyes. They can deceive the judge into a wrong understanding of the technicalities and market practice of insurance. 

Another thing is the experience of lawyers. To me, I much prefer to have a good experienced lawyer on the other side from me than someone who knows nothing about reinsurance because a good experienced lawyer will advise their clients properly, eliminate lots of non issues and focus on the nub of the case. Ill-experienced lawyers, and in some countries where there isn’t an experienced, you get absolutely convoluted difficult cases. 

Sometimes, bad points are put to a judge who knows no better and for one reason or another, fiends wrongly. A good experienced legal professional is very useful, although, as I said, I’ve done cases in a number of different jurisdictions in the world quite often working hand in hand with good lawyers in those countries but who don’t have the experience in reinsurance disputes. So there is a way around that but ideally, one goes somewhere with good experienced lawyers. The independence of fairness and the process is obviously very important. This is particularly so when one is dealing with large disputes which might have micro economic effects. One doesn’t want a home team advantage judiciary. The last point is juries. In some jurisdictions like many American jurisdictions, you can have jury trials in complex reinsurance cases. I am lost for words in describing what a scary, scary prospect that is. 

Many wordings have arbitration clauses as opposed to court clauses that would require the parties to go to court. Arbitration has many benefits over litigation, going into court. In cost, it’s possible to have streamlined arbitrations. They can be much, much more cost effective. Also, it’s possible for the parties to agree once the dispute has arisen to have an arbitration which is streamlined to the question. 

Question, it’s convenient to have an arbitration. It’s much more relaxed and informal, you get coffee breaks. You don’t have to do all troop up to court and go through all the procedures you get in court. Arbitrators can have expertise. They don’t fall foul of that issue of inexperienced judges, not understanding the technical nature and the real commercial position behind reinsurance contracts. But one thing that’s very important is that there is some oversight of arbitrators, but there is a right to appeal. In the UK, we do have a right to appeal but it’s very rarely used, but what it ensures is that arbitrators make sure that their awards are unappealable. That gives us more certainty and enables us to be able to predict the likely outcome of a dispute and hopefully avoid more disputes than we fight. 

There is one clause that has been around reinsurance contracts for literally centuries. It goes along the lines of, “The arbitrator shall interpret this Contract as an honourable engagement and not nearly as a legal obligation, they are relieved from all judicial formalities may abstain from following the strict rules of law. This clause appeared back into the 1850s in some reinsurance treaties. It was used throughout despite cases in the UK, where in the 1930s and in the 60s and 70s, it was held potentially that this clause could render the whole contract unenforceable because it showed a lack of intention to create legal relations. 

At best, it rendered the arbitration provisions void. There was however, a case in the late 70s, which allows this clause and allows some latitude among the arbitrators later cases into the 90s. The 80s, 90s held that latitude wasn’t actually that great. Then the arbitration at 1996 came in which allowed the arbitration tribunal too, if the parties agreed to dispense basically with any law. If there’s no law, you can’t appeal. It’s this caused consternation among the reinsurance market who at that time were in the middle of massive disputes on reinsurance contracts. 

It was agreed that this provision wouldn’t come into effect until January, and for contracts entered into before the end of January 1997. It’s amazing how many times now one sees this provision in English law arbitration agreements. It is not a useful clause because it removes certainty. You’re basing the whole interpretation of the contract upon the subjective use of an arbitration panel that you don’t know. It’s not a good thing. It is a clause designed to kill certainty. It renders all the work you do in trying to get clear, concise, certain language into the rest of the contract void. I would strongly recommend that one does not accept honourable engagement arbitration clauses. 

Another thing that’s come up recently is the mediation clause. Now mediation is a good thing. It’s a really brilliant way of getting cases resolved swiftly when disputes have arisen. It’s a form of facilitated negotiation. A third party is appointed to help the two parties to a dispute to come to a resolution of that dispute, I’ve seen it work marvellously on many occasions. I love mediating cases. It’s a most enjoyable process, and it’s particularly enjoyable when It works. The thing about mediation is you can agree to mediate at any point. 

The problem with mediation agreements is that they add an extra layer of delay and uncertainty into the interpretation and dispute resolution process. So if you have a claim against a reinsurer, that claim is absolutely correct. The wording says, “Exactly how the contract should operate. But for one reason or another, cash flow problems or whatever, the reinsurer doesn’t want to pay or one doesn’t want to pay in full or wants to delay payment, they invoke the mediation clause, and can delay the debt recovery procedure by up to six months by doing that. 

In that six months, they might have gone into administration or might have gone bust or whatever or you’re faced with, “Well, there’s only one way to get money out of them, and that is to accept something less than you’re entitled to.” That’s not good. You’ve got a contract that says you’re entitled to a certain amount of money, you should be able to recover that because that’s the amount of money that you’ve booked as your reinsurance asset. Why should you reduce your insurance asset simply because somebody is delaying prevaricating? 

To my mind, don’t put mediation clauses in in cases where mediation will work and will be good. You can always agree to mediate at any time. But mediations work better in any event, when the parties enter into mediation, both voluntarily rather than being forced to. I’m afraid to say that the cynic in me suggests the mediation clauses were put into contracts by brokers who wanted to distance themselves from any potential dispute. Personally, I would rip out a mediation clothes clause any contract that I see 

Finally, and most importantly, the most essential part of any reinsurance relationship as well as the wording is communication. It is important to talk to your counterparty. It’s important to work with your counterparty to make sure that the wording is as good as it can be. Communicate with them, explain why a clause may be imperfect once you’ve conducted your review of your re-insurance agreements and work with them to improve that clause. That’s an essential step to keeping the relationship good and to avoiding any dispute in the future. Well, that’s just a few words from me on some thoughts on wordings that arise given the particular position that we’re in now, with a pandemic, with the change from the soft to the hard market. Now, I’ll hand over now to Andrew, who will talk more specifically about pandemic claims. Thank you. 

Andrew McGuinness: 

Clive, thank you for an excellent presentation. Our subject is the important clarity of contracts. I think that’s a very relevant and contemporary issue as demonstrated by the COVID pandemic losses that have recently been occurring. I’m a property treaty underwriter. So I focus on property BI coverage and then there’s loss. This has resulted in catastrophe treaties even, seeing claims submitted for pandemic related BI in a way that few underwriters foresaw the treaties responding. 

But first, you have to establish coverage in the original contracts. What is it in the drafting of these property policies that has resulted in these losses? I would split these policies into three categories. One, policies where there is clearly coverage for epidemic losses. Two, policies where there is ambiguous coverage. Three, there has also been speculation about legislating to retroactively amend policies to insert coverage where none previously existed. 

Taking these one at a time, point one, its SME policies that are most frequently been found to contain this specific extension. We’ve seen original policies where epidemic is stated as an insured peril, indicating a deliberate underwriting decision that’s been made to include. But there are also less than classic examples such as a pandemic exclusion, which lists known diseases as being excluded, but failed to list excluded newly emerging diseases like COVID, which suggests it’s a slightly less deliberate coverage. 

It’s only a minority of policies that have clear infectious disease coverage. Usually there are sub limits on this extension. But the results in quantum of claim is pretty sizable. We’re aware of a couple of examples in Europe, where a claim of hundreds of millions of dollars is being lodged on core XLs derived solely from this extension. This magnitude of loss is equivalent to a one in a 100 year windstorm for these companies. 

Peculiar feature of this cattle then is that it’s so unequally distributed, whereas a large windstorm would be expected to impact the entire local market. In this event, some insurers are encouraging, are incurring negligible losses whereas their competitors are reporting a cap loss in excess of what was considered to be less than 1% probability at the start of the underwriting year. That is an extremely binary outcome of loss or no loss hinging entirely on the drafting of the insurance policy. 

The second category are those policies with ambiguous coverage. This is most visible to everyone at the moment in the UK as a result of the FCA, bringing a test case with the aim of giving legal guidance on disputed coverage as quickly as possible. The FCA’s selected policies where claims have been denied but where brokers and policyholders believe there is liability. The insurer’s rationale for denying claims have all been published, and their justifications for denial are summarized which gives us an insight into some of the problems in drafting. They were summarized by the FCA as follows. 

A, the policy extension does not cover pandemics but only local events. Perhaps what’s happened here is the extension was drafted to cover loss scenarios such as Legionnaires disease outbreaks. But the intent on drafting was not the global pandemic. As we’ve been discussing, this is no guarantee that pandemic will not be covered if the cause is not carefully written. 

B, any loss was caused by matters other than the policy trigger. This defence is that pandemic is not a covered peril or the contract potentially or seemingly is not sufficiently clear on this point. The final category that the FCA grouped these exclusions into C, businesses are not prevented from accessing or using insured premises or interrupted if they can continue to operate. 

If this is a nursery for example, which would be ordered by the government to be shut down to prevent COVID, it would be insured. Other businesses however, are not directly ordered to close, but would have been caught up in the consequences of the wider shut down and perhaps of their range of operations significantly curtailed, perhaps the restaurant can’t have customers inside but can continue to sell takeaway food. Would that be covered? 

Then point three, given our subject is the importance of clarity of coverage from the outset, the possibility of a government or regulator retroactively creating pandemic coverage when none have been in existence before is particularly concerning. This would undermine the ability to properly understand the risk widespread appropriately, and to manage accumulation. 

Underlying the importance and scale of that accumulation issue, the American Property and Casualty Insurance Association estimated a cost of closure of small businesses, and this was just businesses with fewer than 100 employees in the USA, between 255 and 431 billion US dollars per month, which is 100 times the premium that these insurances would be paying, just a vast amount of money that is likely unaffordable for the industry. 

That’s a very brief overview of the potential coverage in original contracts. The second consideration is then coverage in reinsurance contracts. We can see an obvious contrast between various regions and treaty types. Firstly, pro ratas are much more likely to cover the loss than an XL due to the principle of quality fortunes. So I’ll focus mostly on XL treaties here. Same here, Peak Re are headquartered in Hong Kong, and we generate two-thirds of our premium from Asia. So it’s been, I think, probably especially clear it was from before the pandemic, the treaties are often more tightly drafted in Asia Pacific than they are in Europe now perhaps as a result of the long persistence of soft market that Clive mentioned earlier. 

In China, India, Australia, and Korea, there are explicit exclusion of infectious disease prior to COVID. In Hong Kong, coverage is typically sublimated to 10% VI sum insured for COVID for infectious disease, perhaps as a result of their experience with SARS in 2003, which is quite recent. In Japan, perils are routinely listed in the treaty and do not include a pandemic. Contrast this with Europe where we found only two or three property treaties our entire portfolio, but excluded infectious disease. 

For lines of business reinsured in a treaty is another crucial cause into turning coverage in the reinsurance treaty. In Asia, they’re more old-fashioned treaties this will often be defined specifically as fire or property. Typically now in European treaties, it’s defined as all policies issued by the property department or some such similar formulation, which is actually very little restriction and could include risks which we wouldn’t know when we think of as property. 

I picked out a typical Indian property contract when researching this and counted they have 51 separate exclusions. A typical European treaty usually has six or seven at most. Just to clarify the coverage in the Indian treaty is certainly not miserly, the coverage is tightly defined. But on a heavy book and giving coverage that you wouldn’t get in plenty of European similar treaties, but it is tightly defined as requiring physical damage to property. 

Then the third area that will determine coverage potentially in cut contract would be the event definition clause or occurrence close. How would a pandemic event be defined in time limited, because it isn’t explicitly dealt with in any cause I’ve seen? This is not a subject I feel confident offering any final opinion on. Perhaps I’ll be asking Clive’s advice on this later. But pandemic losses would fall under the all over perils section if covered, which is often limited to 168 hours. So that’d be 168 hours for all BI losses. I’ve seen some insurers assessing that the event is the announcement of government shutdown, which takes a minister about five minutes to complete, and all subsequent BI losses would be covered thereafter. If this is the case, would each national government announcement be a separate event? Would separate consecutive announcements as restrictions are lifted and reimpose be separate events? I think there’s a huge amount of uncertainty stemming from this area of the contract. 

None of this is me trying to argue that everything must be excluded to achieve clarity. Flexibility of coverage to address specific client needs is the strength of the industry, and something which products like cat bonds struggle to replicate or compete with. But the point I’m trying to make is that agreement and clarity of what is covered at the point of underwriting is essential to properly manage the risk. When the reality of contractual coverage diverges, and expands from how the risks is priced and accumulated and thought of with reinsurers and the insurers, even if it’s just a handful of SME policies, the effect can be extremely significant extremely quickly. 

To paraphrase Donald Rumsfeld, the unknown unknown is the real problem. A properly constructed contract can help to minimize these risks. As the market hardens, I have seen some evidence of strengthening of contract wording, which is encouraging and more tightly defined coverage being inserted. Most obviously, every treaty that we’ve seen for the past few months is included in infectious disease exclusion. But there’s also been other changes. It’s not strictly a contractual wording matter. 

But for example, the cascading nature of many of the Florida Catholic sales has been removed at the 1st June. That is a similar consideration to achieving clarity on how this risk is priced. Because that sort of thing is very difficult to price. I’m hopeful that with the proper effort now, we can improve the health of people like our client tighten up reinsurance contracts to properly reflect what we think they’re covering. That concludes what I have to say. So I’ll hand back over to our host. 

Mike Ashurst: 

Thank you, Andrew. Thank you, Clive. We do have some questions for you. So we’ll get we’ll get straight to those. So the first one is, what happens with the pro rata treaty if it hasn’t follow the fortunes clause, and then the insurer decides to allow some COVID-19 claims, even though they’re not strictly covered under the original policies, what would happen in those circumstances? 

Clive O’Connell: 

A lot will depend on the precise terms of the following fortunes provisions. Some following fortunes provisions will allow compromise settlements, will allow ex gratia payments, others won’t. Under English law, the rule, generally speaking, is that the fortunes will be followed provided that the claim falls within the contract and the underlying contract and that there is an absence of fraud. That’s always going to be the question. 

Andrew McGuinness: 

Okay. Unless ex-gratia was explicitly covered, then yeah, it’s optional. 

Mike: 

Thanks. The next one, should insurers take more responsibility to educate and inform insureds about exclusions like pandemic in wordings? 

Clive O’Connell: 

Absolutely, anything that can be done to make it abundantly clear. There has been over the last few years a very, very good move towards getting contracts in this country done in plain English, clean use of language, policy forms that set out, “You will not get covered if,” absolutely banged out. It means that people know what they’re buying when they’re buying it. There isn’t a question later as to whether they have bought cover of that particular risk or not. 

Andrew McGuinness: 

What’s interesting with what’s happening now is that a lot of these claims are coming from SME policies, which you may consider to be slightly less sophisticated buyers than the larger commercial and industrial risks, which is why the FCA has picked it up as part of its sort of consumer protection mandate. It’s seen as a potential area of difficulty. So yeah, absolutely. 

Mike: 

Okay, the next one is in two parts. So the first part is, I guess this is for Clive. Are you involved in any arbitrations or mediations at the moment? If so, what are the key aspects or what are the key areas of disputes over COVID-19 or what do you expect will be? 

Clive O’Connell: 

“Touch-wood”, at present, I’m not involved in anything specifically on COVID-19 yet. What we’re seeing in the UK is that the FCA’s step of taking this action through the courts for declaratory judgment has deprived many of us poor lawyers of a decent living. But on most things, people are waiting to see the quantification of claims isn’t known yet. People are taking a bit of time before submitting many claims. The FCA step has been absolutely magnificent in ensuring that a lot of issues that could have been tied up in the courts for years will be resolved very, very quickly than to be applauded for taking that step. 

Mike: 

Okay, thank you. Another one. You mentioned about the importance of jurisdiction. Are there certain jurisdictions that are more or less likely than others to favour the insured when there is contracts uncertainty or ambiguity? 

Clive O’Connell: 

With ambiguity in many jurisdictions including the UK, there is a rule which is known by its Latin tag of contract referendum, which means that the person who puts forward the clause on contract will have any ambiguity construed against them. As an insurer, we’ll usually be the person putting the contract to the insured, most certainly in domestic lines and in SME lines. 

The contract will therefore if there is an ambiguous be construed against the insurer. There is suggestion that in some jurisdictions, the courts will have more of a home team advantage and for macro-economic reasons, look to ensure that their insureds or their reinsurers will get payment from outside the country, quite how that operates from jurisdiction to jurisdiction will vary even say within the states. I think you’ve probably find some areas are worse than others. 

In the UK, we like to think of ourselves as being very even handed and that there is no preference one way or another. Although there’s always going to be an element of judicial bias towards the poor, innocent insured who’s been made almost bankrupt by this terrible event, and there’s the big insurer who’s got bags of money, and why not hit them for some, despite the fact that if the big insurer is hit, some, they won’t have bags of money for much longer. 

Andrew McGuinness: 

Then I would just add, we don’t have big enough bags of money to pay for a global pandemic shut down. That’s a terrible loss. 

Clive O’Connell: 

Absolutely, and that’s one. If people are going to be paid the claims they ought to be paid and that they’ve contracted to be paid, it’s important that insurer’s assets aren’t dissipated on claims that shouldn’t be paid. 

Mike Ashurst: 

Great. Thank you. Just a couple more questions. So this one, in tightening up a policy wording to ensure that pandemics are not covered, is there a risk that this highlights the weakness in the original wording? 

Clive O’Connell: 

Absolutely. That’s one of the points I was trying to make when I was talking about amendments to the contract. If there is some ambiguity early on, and you come up with something absolutely abundantly clear now, it’s possible that one could go back and look at the earlier wording and say, “Look, it’s different, it must mean something else.” Therefore, it doesn’t mean that pandemics are absolutely excluded. The only benefit we have at the moment is firstly, one can show that something has been put in for clarity. Many of these claims will be fairly short, short tail in nature and therefore being made already. Therefore, one could point to the fact that in the light of those claims, the wording has been clarified rather than altered.

Andrew McGuinness: 

I would just add that that fear of the employing previous contracts perhaps did get coverage is absolutely not at the top of reinsurer’s concerns right now. There is an absolute imperative to put a thorough clause on this subject in absolutely every single contract. I’ve seen for example, contracts that already had an infectious disease exclusion in them briefly for years have an additional, much longer, more detailed cause added to them additionally this year to be double insured going forward. 

Clive O’Connell: 

Another point I would make on this subject is that when the court does come out and make this determination on the FCA action, we will have a definition and an understanding of what particular clauses mean. When that’s there, it will be best to take a wording whose results suit your purposes and has been defined by the courts, rather than inventing a new wording. 

In the past, we’ve seen many cases where the courts have interpreted the wording and someone said, “I don’t like that interpretation. I’m going to write my own wording.” The problem that they then face in the future is that their wording is clearly different from the one that the court has interpreted and subject to interpretation itself. Whereas the one that the court has interpreted, one knows what it means or one could price around what it means. There are so many clauses going before the court at the moment that there should be one that suits your purposes for the future. Ut may well be best to get one that’s been endorsed by the court as to its meaning. 

Andrew McGuinness: 

Actually thinking of reinsurance again, we were informed by brokers in the first race to exclude a pandemic. They received in excess of I think, 60 different varieties of exclusion while everyone was still drafting their own. I think it would be much more healthy if there was an agreed sort of market standard. So that there is … Yeah, well understood and defined lines of coverage and exclusion. 

Clive O’Connell: 

Hopefully, the LMA and BERMA can put something together that is pretty much a market standard in that respect and that people know and understand that. 

Andrew McGuinness: 

I think they’re moving elements quickly. 

Mike Ashurst: 

Okay. The last question, which I think will be a nice one to wrap up with for both of you, what are the key steps the insurance industry needs to take in wordings of COVID? 

Clive O’Connell: 

Number one is to conduct a thorough review of the wordings that you’re using. Wording discipline is very important. As I mentioned earlier, there was one insurer found that it had 28 different forms of pandemic cover, given its business interruption clauses, that simply isn’t sensible. It’s not manageable. It’s not good enterprise risk management at all. Review of all wordings to make sure that they stand up, renegotiation of wordings with one’s partners to make sure that everybody is working towards clarity and certainty in the contract should be the very first step. 

Andrew McGuinness: 

I’d say clarity and on alignment of the contracts with what you are pricing and accumulating. If you’re thinking of my own area again, if your pricing for fire and natural perils losses and similar things, and accumulating on that basis, what’s the worst case scenario can happen in an earthquake perhaps, and you find you’re getting coverage that results in larger accumulations or isn’t priced for, that’s a model to go revise pretty quickly. I would say just clarity and alignment is absolutely essential. 

Clive O’Connell: 

Just to give an anecdote, I remember when, just after 9/11, Lloyds announced that their worst case scenario was a loss of X amount based upon multiple events, that it was reduce by reinsurance by a significant amount. But actually reality was that the reduction by reinsurance might not have been quite what they expected because all of their inwards risks were written on New York law, under New York law. Whereas the outward reinsurances were under English law. The difference of one event definitions in the England could have been very significantly different to that’s in the States. 

Therefore, their worst case net scenario could have been significantly worse than the one that they were putting forward, which was based upon the same event definition, inwards and outwards the type of sums that can be involved in that and the accumulations that can be consequential upon it on are massive. It is terribly important to know and understand one’s wordings correctly. Also it’s incredibly important to price contracts based upon the wording because the wording is what the product that one is selling. 

Mike Ashurst: 

Great. I think that’s all we’ve got time for. Thanks very much to Clive and Andrew for taking us through this very timely topic. Thanks to you all for joining us today. Stay safe. We look forward to seeing you again soon. Bye, everyone. 

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