As home and business owners from the Whitsunday Islands to the New South Wales border in Australia tried to fathom the extent of damage done by Cyclone Debbie and her aftermath in March this year, insurance actuaries and claims handlers the world over were trying to calculate their ultimate exposure. All interested parties could be forgiven for wondering whether policy wordings – largely unchanged since the Queensland Floods of 2008 and 2011/12, and the Thai Floods of 2013 – would be fit for providing appropriate indemnities.
The industry’s latest challenge arising from wide area damage relates to how property damage/business interruption (PD/BI) and contingent business interruption (CBI) wordings will perform for claims across business as diverse as SME property, property Industrial Special Risks and the (re)insurance of personal lines (motor, travel, and domestic home and contents).
The ghosts of previous wide area damage incidents should remind us that events like Debbie raise issues of fact and principle which are not that easily resolved.
Here are some preliminary issues to consider:
- Policy trigger: has there been damage to the insured’s property or (in the case of CBI) to the property of a third party which has interrupted the chain of supply/production/enjoyment? In the alternative, for prevention of access covers - has damage to third party property prevented access to the insured’s property?
- Cause of damage: what was the cause - storm, wind, tidal surge, action of the sea, flood, damage to public utilities, intervention of local authorities; or a combination of such events? Are some events excluded or sub limited? Will the ‘Wayne Tank principle’ apply to exclude repairs (and consequential financial loss) if both insured and excluded causes were in play? (The “Wayne Tank” principle is that, where there are two or more proximate causes of loss, but one of those causes is the subject of an exclusion, the insurer is not liable to indemnify the insured for the loss).
- CBI cover: how remote is the third party damage? Is it to a named or unnamed supplier or customer? Will that affect applicable sub-limits? What is the impact if the limits refer to “direct and indirect” customers and suppliers? What do those terms mean? Is a direct contractual relationship required or is it enough, for example, that the supplies emanate from that supplier and are passed down a chain to the insured, unchanged?
- Third party property: if access has been prevented by damage to third party property, was the damage within the geographic area contemplated by the policy? Some policies provide limits in precise distances. Other policies speak of damage “in the vicinity of the premises”. However, what does “in the vicinity of” mean?
- Mitigation: has the insured attempted to mitigate the property damage either before or after the event or incident? Was the effort and expense reasonable?
- Extent of loss: depending on the cause of the damage, how many ‘events’ or ‘occurrences’ or ‘losses’ are there? How many limits and deductibles? Most commercial PD/BI or CBI policies will include a time clause (often 72 hours) to deal with weather events. However, as flood waters often rise over longer periods, and as some insured’s properties (like the mines of the Bowen Basin) cover vast distances, could there be more than one event?
It is in the measurement of financial losses that complexities really arise. PD/BI and CBI policies are designed to indemnify losses arising where businesses are interrupted in consequence of damage to property insured. However, wide area damage incidents often change the market. For instance, a hotel operator on an island can claim that, but for the damage to its resort, it would have been fully occupied. However, what if no-one could get to the island because there were no flights or ferries? And what if no-one wants to stay because the beach has been washed away? Indeed, in Australia, Airlie Beach was “open for business” shortly after the aftermath of Debbie had subsided. However, operators were frightened that media reports of damage would scare people off. Is that an intervening cause?
Alternatively, what if there is a spike in the price of commodities (like met coal) or fruit (like bananas) because of a shortfall caused by damage? What if the port is closed, or (as here, rail and road links are damaged so the product cannot get to market?
Events like Debbie and the issues they raise are not new. The Boxing Day Tsunami, the Japan Earthquake, the Thai floods and the Queensland floods of 2008 and 2011/12 were all well publicised events. They are typically grappled with both as matters of causation in fact and law, and under the so-called ‘trends’ or ‘other circumstances’ clause. However, the “proper” response to them remains uncertain.
The English precedent which exists leans towards assuming that the damage to the particular insured did not happen but that losses caused by “other damage resulting from the same cause” did occur (Orient-Express Hotels v Generali ). That underpinning decision has limitations and can be described, at best, as a ‘persuasive authority’ only. Nevertheless, satisfying the “but for” test for causation remains troublesome.
When the writer was younger, he had a friend called Debbie. She shared many characteristics with the eponymously named cyclone: she was compelling, furious, short lived and left a confusing aftermath (thankfully with no major casualties). 2017’s Debbie is imbued with the ghosts of issues past, which once again will need grappling with.