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COVID-19: What does it mean for the insurance sector?
As discussed in our previous article[1], the effects of COVID-19 have gone beyond what we consider to be a health hazard. With the world coming to a sudden halt, there are claims being made that the stock markets have suffered the worst quarter since the year 1987[2] and we are yet to see the ultimate impact of this pandemic. This economic disruption means that there is likely to be an increase in claims, resulting in implications for the insurance industry as that is where the burden of loss is likely to be shared. As a result of the same, the UAE Insurance Authority has issued Circular No. 3 of 2020 requiring insurance companies to take adequate measures during this time so that they continue to operate and serve their customers – the contents of which have been discussed in our previous article[3].
In this article, we shall discuss the different type of claims that we are likely to see a rise in, which may trigger the insurance policies being carried by the entity. Having said that, please note that the same shall be determined on a case-to-case basis and would depend on the wording of the insurance policy and the type of claim being brought.
Health and Life Insurance – In the UAE, it is mandatory for most employers to provide their employees with a health insurance that meets the minimum standards prescribed by the applicable laws. As a result of medical treatment being sought and the possibilities of deaths due to COVID-19, there is likely to be an increase in health and life insurance claims.
Travel Insurance – Amongst other things, travel insurance generally covers trip cancellations and delays. As a result of the travel restrictions that have been imposed worldwide and the suspension of airlines, travel insurers are likely to experience an increase in travel insurance claims.
[1] https://www.bbc.com/news/business-52113841
Medical Malpractice – With the number of COVID-19 infected cases reaching a growing number of 1.2 million worldwide, there has been an increased use of medical facilities and there is a risk of medical malpractice. Again, these claims may also rise in the near future.
Business Interruption – Due to the quarantine regimes that have been imposed, in most places for an undefined period of time, businesses may be able to claim their losses during this period. However, the wording of the policy should be carefully checked as these type of insurance policies generally require some form of physical damage (for instance, physical damage caused due to a fire) that results in business interruption. Whether this pandemic is sufficient to fall under this category would probably become a question of debate in courts.
Mismanagement/ Directors & Officers Liability – It is crucial for businesses to not only adhere to the regulations being imposed during this time, but also ensure proper actions are taken to minimize the risk of loss to the business, and contingency plans are effectively implemented in response to the COVID-19 pandemic.
Generally, as per the UAE Commercial Companies Law (Federal Law No. 2 of 2015), managers/ directors can be found liable for, inter alia, the following reasons:
Fraud and/or abuse of power;
Breach of the applicable laws, the Memorandum of Association; and/or
iii. Mismanagement or gross error.
With the current climate, we have already witnessed a fall in share prices, and businesses are suffering financial losses. Although this can be attributed to an external factor, it is important for the directors/ managers of businesses to act prudently to avoid future mismanagement claims against them. Some simple examples would include ensuring that policies and guidelines for the protection of the employees is implemented in compliance with the applicable laws, or limiting the financial risk taken or the liabilities being incurred by the business at present.
Having said that, it is likely that there would be a rise in such claims considering the financial impact this pandemic has caused to businesses and its stakeholders. This is where Directors & Officers (D&O) insurance policy would come into place.
Generally, D&O insurance policies provide coverage for claims that rise due to mismanagement or the negligent actions taken by directors/ managers. However, the definition of “claims�� in the policy would have to be carefully considered to check the type of claims that are covered, and typically a loss would have to be suffered as a result of the claim. Further, claims that arise due to fraudulent or intentional wrongful acts of the director/ manager are likely to be excluded. It is unlikely that there would be specific references to risks associated with COVID-19 or a similar pandemic.
The debate around these claims is likely to be regarding what would be reasonably expected from the management in light of these circumstances, for instance, should a disaster recovery plan already have been in place for such unforeseen events and/or how quickly and effectively the management has responded to ensure that the disruption to their operations is minimized. Whether such claims would be successful would ultimately depend on the circumstances, the actions taken, and type of loss suffered. Further, if such a liability is established, the D&O policy would have to be reviewed to see if it provides the relevant coverage.
Event Cancellations – Along with the travel restrictions and self-isolation regimes, most governments have also prohibited large gatherings which has resulted in events, conferences, concerts, conventions and other type of events either being cancelled or postponed. In the UAE, a lot of major events have already been cancelled or postponed to an undefined date, and recently there have also been talks about whether the much awaited “Expo 2020” should be postponed in the light of the current circumstances. Therefore, we are likely to see a rise in claims for losses suffered as a result of events being cancelled/ postponed.
Event cancellation insurance (ECI) policies generally cover loss of revenue due to cancellation/ postponement of an event and/or the expenses incurred due to the cancellation/ postponement of an event, usually due to circumstances that are beyond the insured’s control.
The wording of the ECI policy would have to be reviewed to verify the “causes” covered by the policy. ECI policies may cover events that have been cancelled/ postponed due to a communicable disease like the COVID-19. Further, it may also provide coverage to event cancellations due to government orders/ regulations such as the quarantine regimes and travel restrictions that have been imposed at present.
Notwithstanding the foregoing, it is also crucial to review the policies to check if there are any exclusions. This is because many ECI policies may contain exclusions for communicable diseases, either specifically (such as SARs) or generally referring to “any other variation of a communicable disease” that results in an event cancellation. Further, the timing at which the decision to cancel/ postpone the event is taken is crucial. For instance, if the ECI excludes cover for events that are cancelled due to a threat/ fear of a pandemic, and the event is cancelled/ postponed before the World Health Organization (WHO) categorized the COVID-19 as a pandemic, various factors would have to be considered to determine when it would be reasonable to consider that the event cancellation is due to a mere threat/ fear. Some ECIs may also exclude cancellation of events due to government quarantine regulations.
Finally, it is also important to consider how the losses can be mitigated, for instance, through rescheduling the event to a future date rather than cancelling it outright, as most ECIs would require the same. The insured may then have to provide proof that reasonable efforts were taken to mitigate the losses.
Therefore, along with the wording of the ECI policy, the timing of the decision to cancel/ postpone the event and reasons (including the surrounding circumstancing leading to the same) for the cancellation/ postponement would all have to be considered.
Creditors’ claims – With the financial difficulties being faced by businesses, there is an increased risk of default payments and businesses going into liquidation, causing creditors’ claims to rise.
Claims against Common Carriers and Business in the Hospitality Sector – Claims against airlines and other common carriers may rise for failing to warn their customers from the risks of being exposed to the virus. Similarly, restaurants, hotels, and other businesses in the hospitality sector may face similar claims.
These are just some of the different type of claims that may increase as a consequence of the impact created by COVID-19. Insurance companies will pay a key role in a time like this as the economy experiences a downturn, businesses face a sudden financial impact, and individuals’ livelihood is affected. It is almost certain that with the increase of insurance claims, reinsurers will also play a crucial role to share the financial risk.
At the outset, it is crucial for insurers, businesses and individuals to review the wording of the insurance policy to check the coverage, if there are any exclusions that relate to the COVID-19, if there are any force majeure clauses that nullify the insurance policy, or if any steps need to be taken before the insurance policy can come into effect. Further, business/ individuals may also have to take necessary steps to mitigate their losses. On the other hand, along with complying with the guidelines issued by the UAE Government, it is also important for insurers and reinsurers to evaluate the type of issues they may face during this pandemic, and strategize accordingly to ensure they are able to handle the rise in claims. The same shall be determined on a case to case to basis and much would depend on the type of loss suffered and the coverage of the insurance policy. Please contact us for further information or assistance.
Please note that this article is for informational purposes only and does not constitute legal advice.
Written by: Hiba Khan - Associate