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  • Writer's pictureMark Geoghegan

A complete lack of imaginaton

By Greenleaf Publishing / Malcolm Smith -, Public Domain,

We are supposed to be the experts, but when it comes down to it, we aren’t very good at insurance, are we?

Why do I say this?

If we were better at doing insurance there wouldn’t be so much insurance-related litigation.

Court cases are the living proof that we as an industry lack the imagination to plan for extraordinary circumstances.

And when I say extraordinary, I am using the word literally. Just out of the ordinary, not unforeseeable.

The UK conduct regulator’s pandemic BI test case this week is the latest example of mass

failure in the sector.

Technical legal arguments aside, the real indictment is that the UK industry failed miserably to plan for the eventuality of a pandemic. If it had, its wordings would have been unambiguous.

It’s not an everyday thing but Covid was not an unforeseeable event.

Let’s not get bogged down in actuarial probabilities, but a pandemic is almost certainly likely to happen in the average human’s lifetime. Policies should contemplate this and make it clear what they cover and what they don’t. We have no excuse.

Carriers could have sold cover with a blanket pandemic exclusion and that would have been fine.

Dissecting the minutiae of the judgment, I was very annoyed by litigation referred to by insurers as setting major precedents for their defence.

This was the renowned Orient-Express Hotels v Generali case.

I wasn’t annoyed by the legal principles it outlined, but what got my goat was the subject matter of the case.

The case was about damage from a hurricane. In this one the Hotel had damage and BI cover, but the area it was in was devastated.

So the wrangling was about how much BI it should get; the BI relating to its own damage as if it were from a loss that had affected it alone, or the greater BI arising from the whole neighbourhood being effectively shut down to visitors. Both were caused by the same thing.

Hurricanes are not extraordinary at all – they happen every year. And we all know that hurricanes cause more than one loss at a time.

So why, after centuries of giving storm cover was the industry unable to provide a wording which made it crystal clear how much business interruption a hotel was entitled to in the event of a hurricane?

A clear lack of imagination.

So where else in our portfolios are we baking in the near certainty of failure?

An obvious place to look is in quake wordings, especially in a place like California where low insurance penetration is going to be a major factor after a loss. Many businesses may be insured but they may well be located in towns that simply never recover because there is not enough general insurance. The business will be up and running, but most of the customers will not.

What are we going to do then?

We already know the answer – litigate of course.

The scenario I described above is wholly predictable. I have just predicted it!

So let us please draft policy language that envisions predictable scenarios and tries to legislate for them.

For example for a premium could we offer demolition and full relocation to somewhere else? Or could BI cover be extended to make sure the increased loss of turnover due to delays in reconstruction of the surrounding area is fully contemplated?

Or how about an agreed total loss cash value option in the event of a certain percentage of an area being destroyed so that the insured can simply take the money and decide for themselves what to do?

We may not be very good at this, but at least we are always being given a chance to improve quickly from a low base.

Let’s resolve to do a bit better next time. Maybe use a little imagination?


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