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Avian Flu: Assessing the Risk, Part 2

By Lawrence S. Greengrass and William C. Kolb

First-Party Property Insurance (Commercial)

Business Income Losses and the Physical Loss or Damage Requirement

Some first-party insurance policies (particularly those written in the London Market and those issued to health care facilities) contain extensions of coverage for business income losses arising from an “outbreak” of an “infectious” or “communicable” disease. These coverage provisions may be implicated if there is an “interruption and/or interference with” the insured’s business. Policies granting this type of coverage often do not require that there be property damage for coverage of business interruption losses, as would be the case under typical U.S. policies.

The more customary forms of basic business interruption and contingent business interruption coverage, particularly those written in the U.S., typically require that the insured property or some other qualifying property (e.g., an “attraction property”) suffer some form of direct physical loss or damage as a predicate to recovering loss of business income resulting from that damage. It therefore may be important to determine, as discussed in the First- Party Property Insurance (Homeowners) section above, whether the presence of a virus such as the avian flu at an insured premises constitutes direct physical loss or damage.

Typically, under a U.S. policy, in order for the insured to recover for business income losses—be it under the policy’s basic business interruption provisions or an extension of coverage such as a civil authority or dependent properties provision—it must also be established that some covered event caused the insured to suffer an “interruption” or “suspension” of its business operations. Many courts have interpreted those terms narrowly to mean a cessation of operations as opposed to a mere decrease in customers, attendance, or sales.

If, under the applicable policy wording, coverage is dependent upon “a necessary suspension of business” (or similar language), then a business that experiences a reduction in patronage/income as the result of avian flu-related events arguably would not be able to collect business interruption coverage if it remains open (or is able to remain open) for business. On the other hand, if the policy only requires that the business be “interfered with,” this suggests it need not suffer an actual suspension and/or cessation of business. Indeed, “interfere” typically is defined as “to interpose in a way that hinders or impedes.” Merriam Webster’s Collegiate Dictionary (10th ed. 2000). Thus, if the insured can establish a decrease in patronage because of an interference with its business caused by an infectious disease, even in the absence of a suspension of operations, this element may be satisfied under such policies. This, of course, is but one of the requirements that would need to be considered and whether coverage ultimately is available would depend on the specific policy wording and whether the other policy requirements are satisfied.

Outbreak

Another issue that may arise is whether avian flu cases rise to the level of “outbreak” so as to trigger “infectious disease” coverage extensions or similar extensions. There is no uniform definition of the term “outbreak” and it may indeed vary, but several common definitions are:

1) Medical and Public Health Law Site, “Disease Outbreak Investigation”: If the current incidence is markedly in excess of the usual incidence, an outbreak is usually considered to exist.

2) Taber’s Medical Dictionary: Outbreak — sudden increase in the incidence of a disease or condition in a specific area.

3) Webster’s: Outbreak (1602) — b: a sudden rise in the incidence of a disease (e.g., an —— of measles).

With regard to smallpox, the CDC has considered just one case of smallpox to constitute an outbreak. Depending on the policy form at issue, an insured might argue that even one case of avian flu in the U.S. constitutes an outbreak.

Civil Authority Coverage

“Civil authority” coverage often refers to circumstances where access to the insured’s premises is “prevented” or “prohibited” by order of a civil authority because of damage to a qualifying property. The terms “prevented” and “prohibited” are typically interpreted to require complete prevention of access to the insured’s premises. Moreover, the prohibition of access must be causally related to the qualifying physical loss or damage for the coverage to apply. Civil authority coverage is therefore not likely apply, in many cases, to avian-flu related losses unless the virus physically damages a qualifying property causing a civil authority to completely prevent or prohibit access to that qualifying property.

Sue and Labor

The Sue and Labor clause is a centuries-old provision that originated in marine policies. Today the provision is found in many types of insurance policies, most commonly in traditional property insurance, including all-risk and commercial inland marine policies. The Sue and Labor clause functions to reimburse an insured for those expenditures that are made primarily for the benefit of the insurer to reduce or eliminate a covered loss.

In the event of an avian flu pandemic, insureds might seek to recover expenses incurred for the purpose of preventing an outbreak on their premises. This possibly could include upgrades of processing, sanitation or ventilation equipment in businesses that handle or process poultry. To recover under a Sue and Labor clause, an insured would have to establish: 1) that the expenses were incurred to avoid an “imminent” loss; and 2) that the Sue and Labor efforts performed and costs incurred were primarily for the insurer’s benefit, i.e., to avoid or minimize a loss that otherwise would be covered under the policy in question.

For a more detailed analysis of virus-related claims under commercial property insurance policies, please request a copy of the Mound Cotton Wollan & Greengrass May 2003 SARS White Paper entitled Sars: First-Party Insurance Implications.

Liability Insurance

Homeowners Multi-Peril Section II (Liability Coverage)

It certainly is possible that liability claims will be asserted against homeowners for negligently spreading the avian flu virus to others and/or failing to take proper precautions to prevent the spread of infection. Claims of this nature tend to be inherently fact sensitive. We recommend that the exclusions contained in the underlying coverage forms be reviewed carefully to evaluate an insurer’s exposure to avian flu-related liability claims. Standardform policy wording for Homeowners Multi-Peril Section II coverage often contains an exclusion for “Communicable Disease” defined as “’Bodily injury’ or ‘property damage’ which arises out of the transmission of a communicable disease by an ‘insured.’” It appears that this exclusion could be directly applied to and precludes avian flu-related liability claims.

Conclusion

No one can predict whether or not the United States and other parts of the world will be struck by an avian flu pandemic. We do know, however, that health agencies such as the WHO and CDC consider the pandemic threat to be serious.

In the event of an avian flu pandemic, the impact to the various lines of insurance could vary greatly. Insurers and reinsurers could be exposed to significant losses from commercial first-party property insurance business providing cover for business income losses arising from “outbreaks” of “infectious” or “communicable” diseases. They generally should have much less exposure from homeowners property and liability policies. As typically is the case, particular attention should be given to the specific wording of the insurance contracts at issue, which could significantly alter the extent of a company’s exposure. In addition to those provisions discussed in this paper, there are a number of other contractual provisions that could impact an insurer’s exposure to avian flu claims, such as “occurrence” provisions, which tend to vary greatly from contract to contract. The insurance contracts, therefore, need to be carefully examined to properly assess the insurers’ and reinsurers’ possible exposure to avian flu pandemic losses.

Read Avian Flu: Assessing the Risk (Part 1)

ABOUT THE AUTHORS

Messrs. Greengrass and Kolb are Partners at Mound Cotton Wollan & Greengrass.

Reprinted with permission from the Fall 2006 issue of Newsletter, a publication of Mound Cotton Wollan & Greengrass.

riskVue | The webzine for risk management professionals
December 2006