Asia is becoming more accustomed to coping with and insuring seasonal natural catastrophes. Annual Nat CATs continue to present property insurance coverage issues, particularly in respect of the effects of wide area damage. In this article, Mr Ian Roberts and Mr Nicholas Sykes of Clyde & Co Clasis Singapore, identify examples of causation and coverage issues which could affect Nat CAT insurance claims in this region.
In a Nat CAT situation, it is foreseeable that a corporate insured could suffer losses potentially insured under its material damage and business interruption (BI) policies. Whilst issues of wide area damage more frequently affect the calculation of BI losses, they can also affect the adjustment of an insured’s material damage losses.
Generally, regardless of whether it is a material damage or BI loss, an insured is to be indemnified if such loss is caused by an insured peril. This may prove challenging to determine in a Nat CAT situation on the basis of relevant uninsured wide area damage affecting the insured’s losses.
Several perils are likely to arise in a Nat CAT situation. Identifying which peril(s) caused the insured’s loss may not be straightforward. Losses may be caused by a number of independent perils, for example physical damage to an insured’s premises, a prevention of access to its premises and a loss of public utilities at its premises. One or more of these perils/causes may be uninsured or expressly excluded from cover. In those circumstances, how are insurers to determine policy liability?
Under English law, enquiries should be made as to whether the cause is both “proximate” (ie the effective cause of the loss) and if that loss would not have occurred “but for” the incidence of that peril.
In the event of multiple concurrent causes (those happening at the same time), in order to determine the proximate cause(s), regard should be given to whether those concurrent causes are interdependent (ie all causes are required for the same loss to be sustained) or independent (ie each cause, regardless of the other(s), would have caused the same loss).
If the causes are interdependent, one of which is insured and the other(s) uninsured (but not expressly excluded), the insured cause will prevail and insurers should be liable. On the other hand, if the causes are again interdependent, but this time one of which is insured and the other(s) is expressly excluded, the exception will prevail and the loss should not be covered.
Somewhat more challenging is the situation with regards to independent causes of loss. The position under English law offers guidance to other jurisdictions but from our experience, this may not be universally persuasive.
Under English law, if there are multiple concurrent independent causes of loss, at least one of which is uninsured or excluded, the insured’s loss will likely not be covered to the extent that the insured and uninsured/excluded causes would have both caused the same loss. That is because it cannot be said, as is required, that such loss would not have been sustained “but for” the insured cause. In other words, it fails the applicable causation test.
Whilst the English law approach in respect of independent concurrent causes of loss may be followed in the common law jurisdictions in this region (ie Singapore, Malaysia and Hong Kong), it is less certain as to the approach some of the civil law countries (for example Thailand, Indonesia and/or the Philippines) may adopt with regards to that same issue.
In our experience, throughout the region, different approaches have been applied by local markets and tribunals in the civil law jurisdictions, which at times have resulted in insurers covering some of their insureds’ losses caused by concurrent independent perils, in circumstances where, under English law, such liability may not have existed.
For example, we have seen alternative approaches to the treatment of BI claims in which insureds’ have claimed for loss of gross profits resulting from: (i) damage to the insured property itself; and (ii) damage to the wider area.
Those outcomes include: the loss of profits resulting from the insured property damage being deemed indemnifiable (irrespective of whether it was a concurrent independent cause) but not the additional losses in respect of the wide area damage; and the pro-rating of the insured’s losses between insured and uninsured/excluded causes.
The outcome in both of these situations was that insureds were able to recover something from insurers, whereas under English law, they may have recovered nothing. Consideration of the local law and practice is therefore crucial when considering such issues.
Clauses relevant in Nat CATs
Two common clauses in BI policies which are often relevant in Nat CAT events are those in respect of: (i) a prevention of access to the insured’s premises (“POA”); and (ii) a loss of public utility supply.
Prevention of Access: a typical POA clause may provide an extension of cover for losses resulting from physical damage “in the vicinity of the insured’s premises” which prevents or hinders access thereto, regardless of whether or not the insured’s premises are physically damaged.
The “vicinity damage” must be in consequence of an insured peril. “Vicinity” is rarely defined in policies. What is the “vicinity” is left to be investigated by insurers and its extent will vary on a case-by-case basis. The extent of “vicinity” may depend upon whether the insured’s premises is located within a city or rural location (a ‘vicinity’ in the former may be a smaller distance than in the latter location) and the surrounding transportation infrastructure.
A “prevention” of access is clear to understand, but what about a “hindering” – when does a hindrance become, for example, a mere nuisance? If a road closure restricts access via a usual delivery route, but a longer alternate route is available by which access to the insured’s premises could still be achieved, it is questionable whether or not that scenario would fall within POA cover as it will ultimately depend on the facts.
Loss of public utilities: generally, a public utilities clause insures a loss of gross profit resulting from physical damage to an electricity sub/station, water or gas mains.
The damage to the utility provider’s premises must result from an insured peril. If the public utility supplier elects to cease supply, for example, as a precaution because of the threat of physical damage, this is usually not an insured interruption and, accordingly, not indemnifiable under the policy, on the basis that most form wording will require damage to the supplier’s property.
Assessing the cause of any damage can be difficult as insurers and their loss adjusters will be dependent upon the utility provider’s satisfactory explanation of the cause of the physical damage or its consent to visit the premises to investigate. The latter is often unlikely, leaving the insured and insurers to rely upon what, if any, information the utility provider may provide.
The coverage issues identified in the above clauses may be better resolved by way of additional definitions, for example to specify what distance is the “vicinity”. Additionally, stakeholders may benefit from an agreed, clearer, understanding of what Nat CAT losses the clauses would cover and where any shortfall in cover may occur.
Current form wording is not always designed with Nat CATs in mind and perhaps the industry may consider bespoke policy terms (perhaps with sub-limits or higher deductibles) to respond in a Nat CAT event, which could provide broader and clearer cover for losses as a result of wide area damage.
Given the differences and uncertainties in this region’s laws, insurers should proceed with caution when assessing issues of causation and the construction of policy terms.
It is unsafe to assume that a similar approach to that adopted in many common law countries will necessarily apply. It is open to all stakeholders to consider the appropriateness of current form wording and whether or not it reflects the underwriting intention in respect of losses resulting from wide area damage. It is of course open to those stakeholders to determine a more appropriate approach on a policy-by-policy basis.
Mr Ian Roberts is Partner and Mr Nicholas Sykes is Legal Director, both at Clyde & Co Clasis Singapore.