This blog post provides some thoughts on addressing COVID-19 losses from the reinsurer’s perspective. A reinsurer does not issue the underlying policies and does not handle the underlying claims. A reinsurer relies upon its reinsured to adjust claims within the terms and conditions of the reinsured policies and the reinsurance contract. Just like the ceding company, the reinsurer has two main considerations when faced with a request for reinsurance coverage: (1) was the underlying loss a covered loss under the reinsured insurance policy? and, (2) if the loss was a covered loss, is it also covered under the reinsurance contract? The explosion of business interruption claims because of civil stay-at-home orders has made this a major issue for cedents and reinsurers.
Reinsurers are likely to see two types of communications from their cedents. First, a reinsurer may receive a precautionary notice advising of the possibility that the cedent will be submitting reinsurance billings on COVID-19 business interruption losses. Second, if COVID-19 business interruption losses are paid, the reinsurer will receive a reinsurance billing requesting reimbursement under the reinsurance contract for those paid losses. Should a precautionary notice be received, a reinsurer should consider the following practices:
- Document the receipt and acknowledgement of all precautionary notices (and any follow-on communications).
- Determine if the reinsurance contract requires precautionary notices and, if so, whether all pertinent information has been provided.
- If the reinsurance contract does not require precautionary notices, simply acknowledge receipt without any coverage commitment.
- Obtain sufficient information to understand where the losses that underlie the precautionary notice are coming from (policies, geographic location, insureds, policy terms, policy limits), along with an estimate of the size of the loss.
- Obtain periodic updates on those losses, including the status of any coverage actions.
- Keep in contact with cedent to determine if it intends to change its position on the interpretation of relevant policy provisions.
When the actual reinsurance billing comes in, the reinsurer should go through its normal due diligence on the receipt of any reinsurance billing, but on an enhanced basis. Because COVID-19 raises additional issues, reinsurers should consider the following practices:
- Determine the factual and contractual reasons for the cedent’s payment of COVID-19 business interruption losses.
- Obtain the underlying policy wording to perform an independent evaluation of whether the loss payment comes within the ceded policy.
- If payment was mandated by court judgment, obtain the judgment.
- If payment was made because of legislative or other governmental mandate, obtain proof that the order applied and determine whether rejecting the loss cession on the basis of an ex gratia payment is warranted.
- If COVID-19 business interruption losses were paid by settlement (no court judgment or governmental mandate), determine the nature and extent of the cedent’s claim investigation, including whether proof of direct physical loss of or damage to property was obtained, how the loss was calculated and what economic mitigation factors were considered (including CARES Act or other payments to the insured).
- If the COVID-19 business interruption losses were paid based on civil authority order coverage, obtain sufficient documentation of how the loss was calculated based on the date and scope of the civil order, any relevant waiting periods and sub-limits.
- Determine how the loss cession was calculated based on the geographic and hours limitations of the aggregation provision of the reinsurance contract.
Although most cedents have made it clear that they never underwrote for a global pandemic and have denied business interruption coverage for most COVID-19 claims based the lack of direct physical loss and other bases, reinsurers also should prepare for scenarios that may require them to cover these losses. For example, some losses may be covered under the specific facts of a claim and the terms and conditions of individual policies. Additionally, courts could find that coverage is required for COVID-19 losses under certain circumstances. Finally, legislation could be enacted that retroactively forces insurance companies to cover these claims (assuming no stay of enforcement and/or no finding of unconstitutionality of these proposed laws).
To prepare for these scenarios, reinsurers should be doing the following now:
- Identify all in-force reinsurance contracts that reinsure the cedent’s property or other business policies that contain business interruption-type coverage grants.
- Examine the coverage grants under each reinsurance contract to determine if COVID-19 losses could be ceded under those contracts should the cedent have to pay COVID-19 losses.
- Examine the notice requirements for loss cessions under each reinsurance contract and monitor loss cessions for compliance.
- Review all definitions of “loss occurrence” and similar terms to determine whether COVID-19 losses, if paid, could fit within those definitions.
- Review aggregation provisions, which are often contained within the definition of “loss occurrence” in property catastrophe reinsurance contracts, to determine the basis (cause-based or event-based) for aggregating individual losses into one single reinsurance claim. Determine any geographic and hours limitations in aggregating losses (e.g., within the state, 168 consecutive hours).
- Identify all exclusions in the reinsurance contract, particularly those concerning pollution, contamination, bacteria or virus, that might preclude cession of COVID-19 losses.
- Review all provisions in the reinsurance contract that grant the cedent authority to make claim determinations to evaluate whether that authority is broad or narrow. For example, the reinsurance contract may provide that the insurance company is the “sole judge” as to the interpretation of the terms and conditions of the ceded policies and the coverage provided under the reinsurance contract.
- Review all provisions in the reinsurance contract that incorporate the terms and conditions of the ceded policies into the reinsurance contract to determine the extent to which the reinsurance contract follows the form of the ceded policies.
- Review any “follow-the-fortunes” or “follow-the-settlements” provisions in the reinsurance contract to determine whether those provisions exist and whether they are broad or narrow.
- Determine whether the reinsurance contract has any provisions addressing ex gratia payments.
- Review all extra contractual obligations and excess of policy limits coverage that the reinsurance contract may provide in case of any bad faith judgments on COVID-19 business interruption cases are ceded.
By considering these and similar actions, reinsurers will be prepared to respond to COVID-19 loss cessions and determine whether any reinsurance recoveries are warranted under their reinsurance contracts.