Thanks to numerous avian flu articles, books, and even a television movie, the effects of a pandemic outbreak on the insurance industry have not gone unnoticed. However, while there is apparent agreement that there would be serious ramifications for the life insurance industry, the exposure situation for property/casualty insurance is a bit muddled.
In view of the industry’s response to such events as SARS, Mad Cow Disease and even Y2K (many underwriters still include Mad Cow and Y2K exclusions on their policies), it’s worth asking: how will U.S. businesses really be impacted should a flu pandemic strike? And how are property/casualty insurance companies, and for that matter insurance agents and brokers, responding today?
In May, the federal government released a 233-page document titled “Implementation Plan for the National Strategy for Pandemic Influenza.” This report provides extensive information regarding the history of influenza pandemics in the United States and worldwide.
It also provides recommendations for how businesses should prepare adequately and review their continuity plans. The report says that both private and public entities should “plan with the assumption that up to 40 percent of their staff may be absent for periods of about two weeks at the height of a pandemic wave, with lower levels of staff absent for a few weeks on either side of the peak”.
Since the 16th century, flu pandemics have swept across the globe at the rate of roughly three per century, with the 20th century’s occurring in 1918 (Spanish Flu), 1957 (Asian Flu) and 1968 (Hong Kong Flu).
The avian flu strain H5N1 is first known to have jumped from chickens to humans in 1997, when authorities began tracking this particular strain. To date, approximately 205 people have been infected by the virus, mainly in Southeast Asia, and 113 have died since 2003. Thus far, more than 100 million birds have either died from strain H5N1, or been killed to control the outbreak.
Normally avian flu viruses do not affect humans, however human infections of H5N1 have been reported in several Asian countries, and the U.S. Office of Health and Human Services estimates that, unless stopped, a pandemic could cause the deaths of at least two million people in the United States and require hospitalization of up to 10 million more.
There could theoretically be an outbreak in the U.S. at any given moment. As recent as May 1, a mild form of avian influenza was reported at a live bird market in New Jersey, but this was then determined not to be the H5N1 strain, but a version not harmful to humans.
Insurance buyers are therefore taking a close look at their insurance and risk management programs, looking for possible financial recourse in the event of an outbreak. It is therefore worthwhile to examine each line of coverage in order to properly evaluate potential exposures.
For any type of property coverage to respond, there needs to be direct physical damage to a covered property caused by a covered peril. Most client policies are written on a “Special Peril Form,” which covers Risk of Direct Physical Loss unless the loss is: 1. Excluded in Section B., Exclusions, or 2. Limited in Section C., Limitations.
It is difficult to envision what the potential would be for “direct physical loss” in the event of a pandemic. Additionally, as carriers see a potential for significant claim activity, buyers should expect more exclusions to be added for contamination (similar to exclusions added for Y2K). This would likely preclude coverage for clean-up.
If there were a quarantine or shut down, a business could potentially suffer from a Business Interruption/Extra Expense loss.
Again, without “direct physical loss,” there would be no insurance coverage, not even for civil authority, as insurers would argue that the presence of avian flu on the premises does not constitute “physical loss or damage” under the policy. Other standard policy exclusions would also likely be invoked.
In today’s litigious society, it is conceivable that lawsuits may arise from claimants alleging that they contracted the flu from premises or activities of third parties.
The standard commercial general liability policy provides coverage for bodily injury and property damage resulting from the insured’s negligence. Potential claimants are therefore likely to closely examine the causal connection between a flu infection or exposure and the actions of the insured that might have resulted in it.
Emotional injuries and mental anguish may also end up being covered, depending on the specific policy language.
Then there is coverage under the “personal injury” section of the commercial general liability policy for “wrongful eviction.” Real estate clients should be particularly wary of this language, as it could be argued that the actions of a landlord that result in closure of a building(s) or evacuation fall within the reach of this definition.
While there is no specific avian flu exclusion at this time, carriers may try to exclude coverage based on pollution or other similar contaminant type exclusions.
Even most environmental liability policies today contain some sort of exclusion for “naturally occurring substances” or “microbial matter.”
There is the potential for claims that the flu was contracted in a workplace environment — the issue will be whether injury occurred “arising out of and in the course of” employment. Whether these definitions hold up will be up to the workers’ compensation boards in various jurisdictions. If claims are upheld, there is the potential for an extremely adverse effect on clients’ experience modification factors, and ultimately workers’ compensation rate and pricing models.
Of greater concern will be employees stationed overseas. Employers should therefore examine whether they have coverage for foreign voluntary workers’ compensation on their existing workers’ compensation policies or via separate international policy, and whether there is coverage for endemic disease and repatriation expense.
Another gray area would be exposure within the United States to employees infected overseas. The exposure to avian flu would need to be proven as solely a result of workplace exposure to be considered under workers’ compensation coverage.
At this time, there are no specific products available in the marketplace to cover exposures associated with avian flu. Underwriters in London have entertained discussions with specific risks but to date there is no evidence of coverage placement. Underwriters have indicated that before offering coverage, they would require stringent underwriting, including quantification of risk and discussion of exposures. If offered, coverage would have large deductibles and significant premiums. As a result of these requirements, generally coverage is not being pursued.
The main issue for most businesses is continuity of operations.
John Schaefer of Global Risk Advisors in San Francisco says he has received increased inquiries about business continuity planning due to avian flu concerns.
“Out here, the main area of concern from a business continuity standpoint has historically been earthquake and fire,” Schaefer said. “Business continuity concerns had always centered around natural disasters, until 9/11 when terrorism became a concern. Then Hurricane Katrina caused an increase last year. We saw some of the same thing during the SARS situation.”
Schaefer feels that from a property/casualty insurance standpoint, Foreign Voluntary Workers’ Compensation could see increased claim activity.
He recommends businesses have a tiered plan that addresses all of the following:
- Current company response action procedures.
- Identification of clear decision authority to improve preparedness or implement response.
- Allocation of company resources.
- Health and safety issues and procedures.
- Operational responses.
- Travel monitoring.
- HR/benefits involvement.
- Internal and external communications.
- Communication of medical information to employees.
- Financial resource allocation and impact modeling.
- Government involvement.
- IT security.
- Review of businesses’ supply chains to determine where and how it might be vulnerable during a pandemic.
While it remains to be seen whether H5N1 avian flu will have the global impact that some envision, it is clearly worthwhile for businesses to evaluate their business continuity plans and evaluate whether existing property/casualty insurance contracts would respond in any way to the related exposures.
Useful Web sites to assist in planning inlcude: www.pandemicflu.gov; www.uschamber.com; www.dhhs.gov; www.who.int; and www.krollworldwide.com.
Robert Meder and Frank Scott, CPCU, are vice presidents in the New York City office of Hilb Rogal & Hobbs. From offices throughout the U.S. and in London, HRH assists clients in managing risks in property/casualty, employee benefits and many other areas of exposure.
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