In March, the Lloyd’s Market Association (LMA) – a membership organisation for Lloyd’s managing agents and associates – reacted to the ongoing coronavirus pandemic by writing clause LMA5391 for underwriters to use in policy wordings, either for new policies or at renewal.

This clause, also known as the coronavirus exclusion, clearly prevents Covid-19 from being covered in personal accident (PA) or travel insurance policies.

It reads:

“Your Insurance Policy does not / This Insurance does not {delete as applicable} cover any claim in any way caused by or resulting from:

a) Coronavirus disease (COVID-19);

b) Severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2);

c) any mutation or variation of SARS-CoV-2;

d) any fear or threat of a), b) or c) above.”

According to the LMA’s deputy director of underwriting Patrick Davison, the clause was designed to clarify “what people are prepared and not prepared to cover, in the same way as you would on any other type of exposure”.

He continued: “Covid-19 was clearly becoming a major, major problem and the view was taken that unfortunately a risk of that systemic nature is frankly uninsurable. It’s no longer an unforeseen event; no underwriter – unless they were very, very restricted in how many policies they wrote – would be able to cover it.

“The insurance industry has taken the view, particularly in PA, life and probably the contingency market, that it’s not really something that people are going to be able to cover, because you can’t from an insurance perspective risk select.

“It’s affecting every single country in the world, in exactly the same way, at exactly the same time, which is an insurance company’s worst nightmare – it just presents too great a risk for the insurance industry. It’s fair to say the majority opinion in the market is the exposure needs to be clearly addressed in policy wording.”

As well as this clause for travel and PA policies, the LMA has also published similar clauses covering contingency and event cancellation, as well as property. Davison added that although the industry will be “paying some significant claims” in the event cancellation arena due to coronavirus, “[insurers are] unlikely to be covering it going forwards”.

SME impacts

Although LMA5391 and subsequent clauses are clearly designed to protect insurers from the financial exposure of coronavirus risks, small businesses, on the other hand, could suffer financially if they are unable to recoup losses through insurance.

Hannah Tankard, director of the business emergency resilience group at charity Business in the Community (BITC), said it was “disappointing” that SMEs would be “penalised” in these unprecedented times.

She said: “We understand why the LMA has taken this position with insurance policies: every insurance company will be making tough decisions on what they will underwrite in an extremely uncertain future, ultimately in response to Covid-19.

“However, it is disappointing that small businesses, who are fighting for their own survival during these unprecedented times, will be penalised.

“In light of Covid-19, some small businesses have adapted their business models to secure their cash flow. However, many simply cannot do this.

“Where insurance companies are unable to underwrite ongoing and future risks such as coronavirus, we urge them to take other responsible business measures to support their small business customers. This could be as simple as signposting to existing business continuity advice or providing more complex holistic risk mitigation support, including providing a helpline, mentoring or tools and resources for small businesses to access to reduce their uninsurable risks.”

Luigi Maggio, managing director at Kennett Insurance Brokers, added that aiding these types of businesses should be viewed as an opportunity by insurers rather than a dead weight.

He said: “Overnight, certain sectors have been severely affected and require the help of insurers to find ways of assistance. This could prove to be invaluable in allowing clients to be financially viable while the crisis continues. Insurers should see this as an opportunity to build some continuity and loyalty with those clients for the long-term future.

“While the vast majority of insurers have been quick to respond on their position and also looked at short-term ways to assist where they can, there have certainly been examples of using the pandemic as a way to penalise clients with little sympathy or empathy, which will leave a bad taste in the mouth when the industry has recovered.”

Insurer business models

The main problem with potentially covering the coronavirus risk, said Maggio, is that it does not provide a viable business model for insurers.

“We must remember the premise of insurance – the premiums of many pay the claims of few. In a pandemic, this simply couldn’t apply and therefore it would be unreasonable to expect insurers to pay for a risk that could not be underwritten and therefore accordingly calculated when setting premiums,” he said.

“The government should have worked with our various trade bodies at the outset to ensure there was a clear, concise message. But their handling of this is yet another blow to our industry [and] its perception.”

Davison agreed that the insurance model is not suited to a risk such as Covid-19. “It’s a difficult time without question, because a lot of people are suffering out there and the insurance industry likes to think that it can help in these times. If you compare it to 9/11, for example, the insurance industry did pay out a lot of money, but you can’t pay claims on the losses that you haven’t received premium for – it’s not a viable business model unfortunately,” he added.

But Maggio believes the coronavirus exclusion clause could do more harm than good.

He said: “The implications of the clause will have a far-reaching affect both financially and reputationally for the industry, although some of the government’s recent statements on the cover itself and how insurance policies react has been both disappointing and without justification, which to those purchasing cover has given false hope and caused significant confusion.

“Nobody will benefit from the clause. Unfortunately, not all clients will survive and those that do, in the short-term, will be operating on reduced financials. Insurers themselves will have to scale down budgets to reflect this and it will cause them to review risk profiling of customers and how they manage their underwriting strategy.

“The only benefit to insurers is that, in the main, they won’t see a direct spike in claims from the pandemic. But indirectly it will put greater pressure on them to achieve their own targets in certain shrinking market sectors. They must find ways to adapt to set them out from the crowd.”

Looking forward

Despite the apparent lack of viable triggers for coronavirus-related claims for now, Davison doesn’t write off being able to cover this risk later.

He said: “In a few months’ time or a years’ time, when this particular outbreak has died down, the insurance industry will review the position and begin to try and provide some coverage, but it’s like giving terrorism cover on 12 September 2001 – the risk is too great.”

Steve Whitfield, senior consultant at Altus, added: “It’s hard to say where things will land in terms of the appetite to provide that cover within the industry, the extent to which policy wordings may be tightened or made clearer.

“It will definitely mean a tightening of policy wordings where [exclusions are] intended, but also maybe a greater demand for this kind of cover in future as well.”

Davison noted that the LMA has been involved in initial discussions about creating a Pool Re-type structure for pandemics. He added, however, that this will not be a quick process.

“If you consider risks that people would generally consider to be uninsurable, this being a good one, and terrorism 10 or 15 years ago, they lend themselves to government backstops. That’s what we’re seeing now with coronavirus, which is the government stepping in, so one argument says why wouldn’t you just formalise that?” he said.


US litigation risks

Patrick Davison, The Lloyd’s Market Association’s deputy director of underwriting, flagged the concern surrounding property claims in the US, with policyholders arguing that coronavirus should activate the damage trigger within their policies.

He said: “We’ve seen this before around asbestos and things like chemical spills, where there’s no actual damage to the property, but there’s contamination with the smell of ammonia or whatever has been deemed property damage.

“The issue is if the claim is that their surfaces have been contaminated with coronavirus, and that amounts to property damage. Proving that is going to be very difficult, because the nature of the virus is that is doesn’t survive very long on surfaces. So unless you test within 48 hours, or however long it is, you’re not going to be able to prove it, I suspect.

“Even if the premise of the claim is true, which I think most people would argue anyway, physical damage is what it sounds like, it’s not contamination. That’s certainly not the intent of the policies.”

Davison is further concerned about litigation in America forcing insurers to pay out for coronavirus-related claims, regardless of whether they are covered by insurance policies.

“We’ve seen legislation being brought forward, including legislation that just says ‘we don’t actually care what your insurance policy says, you’re going to be paying these claims’. Now that’s a deep concern for obvious reasons,” he added.

“There’s every chance that the large insurers would go bust very quickly, because they haven’t received any premium for the risk and therefore won’t have the capital.”