Communicable disease exclusion clauses found their way into marine insurance policies very quickly after Covid-19 began its spread in the spring of 2020.
In the early phase of this most recent pandemic, these clauses served an important function and allowed insurers to manage the uncertainty associated with what was an unprecedented situation. Now, four years later, the time has come to ask the marine insurance market if the exclusion of communicable disease is still warranted. We would argue that the answer is ‘no’ and will challenge the market to remove any such clauses going forward. Our justification for this position is as follows:
Exclusion is much too simple a solution.
Pandemics and communicable diseases have been around forever and always posed a threat to trade and shipping. However, until 2020 these risks were never excluded from marine insurance policies. To do so was a strategy that could be excused in the frantic and uncertain period in the early part of the Covid-19 pandemic. Four years on, our industry has accumulated a meaningful amount of experience and data on how a communicable disease influences marine insurances. It is not acceptable to use this data to support a continued exclusion, it should rather be incorporated within existing underwriting models.
The insurers should be more concerned about offering a comprehensive product.
Communicable disease and pandemics are an infrequent occurrence that is part of the natural risk picture faced by ship owners. The insurances they buy should reflect that and insurers should be focused on responding to that demand.
It goes against the all-risks nature of the Nordic market.
The Nordic Plan is the backbone of Hull & Machinery and Loss of Hire underwriting in the Nordic market; and for many shipowners around the world. This is an all-risks form that is very careful to only include very specific exclusions, largely ones that are uninsurable. There has never been a communicable disease exclusion under the Nordic Plan, nor was one introduced in the latest (2023) revision.
It is not a systemic risk for a Hull & Machinery and Loss of Hire insurer.
The strongest argument for excluding communicable disease is that it is by definition, a systemic risk and one that can create aggregated claims that are impossible for an insurer or a reinsurer to handle. However, under a Hull & Machinery – or a Loss of Hire – policy, a communicable disease can only appear contingent a peril already insured against. The most prominent examples are repairs that are either prolonged or made more expensive by lockdowns or the spread of a disease. In a worst-case scenario then, ordinary claims could be made more expensive – but not uncontrollably so – nor is there any reason to believe that claims will occur more frequently due to a communicable disease. To the contrary, we believe that the data collected during the Covid- 19 pandemic will show that claims occurred with lower frequency in view of lay ups or inactivity as a consequence of lockdown; or loss of market.
The reinsurers should not dictate what is offered by specialist, direct insurers.
As reinsurers often cover a lot of risks where communicable disease might be a direct peril (life, health, events etc.) an exclusion makes a lot of sense from their perspective. However, for the direct, marine insurer, where the risk for reasons set out above is manageable, it does not. Some of the specialist marine insurers have a significant self-retention, which should be leveraged to allow them to write marine without the exclusion for the benefit of their clients or members. For the world’s largest Loss of Hire insurers, the risk is largely retained anyway and thus the reinsurance pressures should be negligible. It is also worth mentioning that the P&I clubs, where communicable disease is a far more direct risk have resisted the inclusion of any exclusions for the benefit of their members.
