This article originally appeared in LawNews (ADLS) and is here with permission.
New Zealand’s $27.5 billion tourism sector – our biggest export industry – has been brought to the brink of collapse as travel insurers and their lawyers try to rewrite existing pandemic exclusion clauses in a bid to restore trust with consumers.
Some say the market, particularly for international travel, is unlikely to recover fully unless a solution is found. Thousands of Kiwis lost some or all of their holiday bookings thanks to Covid-19 and are now seriously out of pocket after insurers denied claims, even on policies bought in good faith before the WHO declared Covid-19 a global pandemic on 11 March.
Getting it right matters. Tourism makes a direct $16.2 billion (5.8%) contribution to our GDP, with a further $11.2b (4% of GDP) of indirect value being added by businesses supporting the tourism industry. Total annual tourism spending is $40.9b, of which $17.2b comes from international travellers.
As a result, travel insurance is about to undergo a quantum leap. But insurers may need to throw out the rulebook that says pandemics are a “known event” and therefore can’t be covered. This current re-writing of the rules is simply to make them “clearer”. The more cynical view, however, is that they’re trying to make it even harder for customers to claim next time.
It’s a Catch 22. Tourism cannot recover until tourists resume travelling. But that won’t happen unless insurers can buy insurance to cover the real risks they face. Meanwhile travel insurers’ cashflow has dwindled to almost nil, but many are too fearful to offer cover, or are stuck in an old pattern that is rapidly looking outdated.
Sorry mate, it’s a pandemic
Common exclusions used to deny claims have been epidemic/pandemic clauses, government intervention and a disinclination to travel. As one market-watcher puts it, insurers are grasping for any reasons to decline the claim.
Disinclination to travel cannot be used as the basis of a claim, says Andrew Horne, a partner at MinterEllisonRuddWatts. “You have travel insurance but you decide you don’t want to take that trip to Wuhan and it's [wet] market because that doesn’t look like a great idea any more. Insurers might argue there is nothing actually prohibiting your trip.”
If there is a specific epidemic or pandemic exclusion, declining a claim is straightforward. With many policies, the exclusion goes as far as a “likely” epidemic/pandemic or the “threat” of one.
There are a few subtleties, says Susan Taylor, a lawyer and the chief executive of Financial Services Complaints Ltd (FSCL), one of two dispute resolution services for travel insurance.
In the absence of a pandemic clause, some insurers relied on the government intervention clause. “[One complainant] thought the policy was misleading to a consumer who might think that, in the absence of a specific pandemic exclusion, they would have cover for any loss arising from a pandemic,” Taylor says.
“Sorry mate, it’s a pandemic and we’re going to find a way out of your claim” doesn’t always work. In some cases, the government interference exclusion has been invoked to decline claims when, in fact, the travel was abandoned because an airline made a commercial decision to cancel flights after customer demand collapsed.
Both FSCL and the Insurance & Financial Services Ombudsman scheme (IFSO) found in favour of some complainants.
Ombudsman and barrister Karen Stevens cites the case of “Maree” who changed her flights home when the Malaysian government announced it was about to close its borders due to Covid-19. Maree’s original flight ended up being cancelled.
The insurer argued that the border closure had indirectly interfered with its customer’s travel plans. It also relied on a clause excluding claims for “any change of plans or disinclination to travel”, saying it had been Maree’s decision to return to New Zealand earlier than planned.
“We reviewed the wording of both exclusion clauses and applied normal legal principles of contractual interpretation,” says Stevens. “In Maree’s case, the Malaysian government’s decision to close its borders would not have stopped her from getting home as she was a New Zealander who was free to leave Malaysia.
“We felt that Maree’s change of plan was not a proximate cause in its own right, but was a consequence of the increasing risk of Covid-19 and the resulting travel disruption.”
Another issue arose where airlines offered credits instead of a refund, Taylor says. “The insurer would argue that is not a loss [as] they have a credit for future travel.” As some travellers have discovered, they might never be able to use the credit. “We have said the credit is not the same as a refund.” If, however, the insurance paid out, the person must forfeit his or her right to a credit. Otherwise the traveller would be unjustly enriched.
Rescheduled travel proved problematic in some circumstances. One case investigated by the IFSO involved a man who took a credit last year for a cruise, rescheduling for this year. Unfortunately, he had used credit card insurance that covered him for the original cruise dates but didn’t automatically transfer to the new booking.
Travel insurance isn’t the only product in the gun. Insurers and their lawyers the world over are also rewriting pandemic and related clauses in business interruption and other policies.
They had a dummy run with SARS in 2003, but only in 2020 have these clauses been put to the test. Policies that lacked pandemic exclusions before the start of this year almost certainly have them now.
Stevens says it’s only when the legal wording is tested that you can determine if it works. There were similar problems with household policies in the aftermath of the Christchurch earthquakes.
The rewriting began, says Horne, with insurance companies redrafting policies to avoid any possible lack of clarity on what constitutes an epidemic or pandemic and when the exclusion is triggered.
While some policies refer to ‘pandemic’, there is no real need to, he says. The word ‘epidemic’ suffices. “If you have a pandemic, you also have an epidemic,” he says. Words such as ‘epidemic’ and ‘pandemic’ have had no widely accepted legal definition until now, and these definitions are slowly creeping into policies.
The pandemic has also shone a light on the subtle differences between policies. “Allianz (for example) had a policy that excluded losses directly or indirectly from an epidemic,” says Horne. “I have seen policies that are triggered by notifiable disease.” Or they might refer to the broader infectious diseases.
Since Covid-19 broke out, some insurers have chosen to add extras to their existing lists of excluded events. “If you had only ‘epidemic’, you might extend that to include ‘infectious disease’ because what constitutes infectious disease is clearer than an epidemic.”
One issue that lawyers began to consider earlier this year was whether a disease qualified as an epidemic for insurance purposes even if it wasn’t currently an epidemic in New Zealand. “Most lawyers [now] think it’s an epidemic if it’s an epidemic anywhere. It doesn’t have to be an epidemic in any particular place.”
“Another issue insurers have had to grapple with is whether when there are notifiable disease clauses, was the insured person covered before the disease was notified. I would expect insurers to tidy up any clauses that talk about notifiable diseases.”
Does insurance need a new paradigm for known risk?
Insurers’ default position is that Covid-19 is a known event and therefore can’t be covered. The reality is that only a small percentage of customers would need to claim, in the same way as only a few insured travellers every year will suffer from a serious event like a heart attack and end up in ICU.
Likewise, there is an actuarial risk that a small percentage of travellers might catch Covid-19 and, of those, 1% to 2% might end up in hospital overseas. Even fewer will be in an ICU.
AUT law lecturer Christopher Whitehead says the point of insurance is to pay a benefit if an uncertain event actually happens. “So if the customer catches Covid, that is uncertain. When [insurers] say ‘we can’t pay for this’, [what they really mean is] ‘we don’t want to’ or ‘if we do, it’s going to be too expensive’.”
Insurers are looking for ways to start selling policies again. But just because insurers issue new policies doesn’t mean they’ll be worth the paper they’re written on.
When the go-to insurer for many Kiwis, Southern Cross Travel Insurance (SCTI), resumed domestic cover in September, Covid-19 cover was excluded.
That ruled out the very things Kiwis are currently most worried about when booking travel: Covid-19- related cancellation costs, curtailment, travel delay, missed connections and related additional expenses.
“The motivation to sell [junk insurance] could be simply a need to sell something rather than nothing,” Whitehead says, although not commenting directly or specifically about the SCTI policy. “To keep [companies] afloat. They are not products to serve an actual need.”
The customer isn’t always front and centre in the insurer’s mind, says Whitehead, who worked as inhouse counsel for insurance companies in France before becoming an academic. In the Nordic countries, the fair dealing concept of “Kulanse” means insurers go one step further than ex gratia and as a result are held in high regard by the public.
Whitehead questions the oft-cited doctrine that people need to read the policy and ensure it meets their needs. “I don’t know how anybody could know what their needs are in advance,” he says. “Comparing two policies is almost impossible. They can be very similar but you can write a whole thesis on how they are different.”
Likewise, travellers didn’t understand the government intervention clauses, says Stevens. “I don’t know that many people would have anticipated something like that happening. Even if they had read the policy, they wouldn’t have understood what it meant.”
Whitehead adds that there is a failure by insurers to understand that customers don’t want the exclusion to be there in the first place. “They want their insurer to be there to help them when they need it.”
He says the issue is a lack of imagination by the insurers. “At the very least, the insurance industry should ask ‘can we actually do this?’ Do we think it’s important enough to stop doing what we’re used to doing and do things differently?’ That’s what innovation is.”
Countries dependent on tourism, tourism providers, economists, politicians and many more are looking long and hard at how to get travellers and tourists moving again. Insurance innovation is one piece of that puzzle.
Traditionally, insurers have argued that they can’t cover a “known event”. A change in thinking might well be forced upon them by markets and/or governments.
Solutions are already starting to emerge. Emirates, for example, includes Covid-19 insurance in its ticket prices. Are Covid-19 and future epidemics/ pandemics the bogeymen they think?
Stevens says: “Insurers are thinking ‘can I offer something that will make sense?’ They have to work out a new way of earning income.”
LawNews posed a series of questions to the Insurance Council of New Zealand (ICNZ). We wanted to know why travellers should trust insurers, given the industry’s refusal to cover a large chunk of Covid-19-related claims. And because insurers are in the business of assessing and pricing risk, how did they get it so wrong in this instance (the council has previously stated the industry could not afford to cover Covid-related claims)? We wanted to know why they thought future travellers would buy policies with pandemic or epidemic exclusions. And we asked why insurers refused to honour claims from travellers who bought their policies in good faith before the pandemic broke out.
The council did not answer most of the questions on our list. But in a written statement it said insurers in New Zealand were looking at options.
“We understand the industry is looking at developing new travel products with limited cover for Covid-related costs. It is likely that these products would only be available for travel to certain countries, depending on the level of risk. For example, because of the extent of the outbreak it’s unlikely travel to the US would be covered for the foreseeable future.”
SCTI is considering pandemic insurance as an option. Chief executive Jo McCauley says the rarity of the pandemic means it’s challenging to accurately price cover in contrast to events that happen on a more frequent basis, such as losing your luggage.
Taylor says in her opinion Covid cover is a relatively low risk for insurers unless the policyholder has underlying conditions.
The words “public-private partnership” are starting to be heard around the concept of Covid-19 insurance cover for travel and, more importantly for many economies, business interruption insurance as well.
In New Zealand we have ACC and EQC, which show it’s possible. “It’s a question of political will [and] industry will,” Whitehead says. France, the UK and other countries have working models of such partnerships in other areas of insurance.
According to the Chiangrai Times, the Thai insurance regulator has approved Covid-19 travel insurance coverage for foreigners entering Thailand, including those from high-risk countries. The policy offers cover of approximately NZ$150,000 for death and medical treatment related to Covid-19.
Horne points to the UK’s Pool Re, the government backed provider of terrorism reinsurance, that was set up in the wake of 9/11 and has been extended to cyber terrorism. Likewise, he says, Australia has the state-backed Australian Reinsurance Pool Corporation for terrorism.
“The actuaries over in the UK have been thinking about how they could usefully extend that [to travel insurance]. There is no reason you couldn’t do that. It has worked for terrorism insurance [and] it could work for travel insurance. It could be Pandemic Re.”
Cover at a price
Whitehead points out that in other countries such as Canada, insurers cover pandemics. “Provided that the event such as a pandemic is actually random or uncertain, then the technique of insurance can actually cover it,” he says.
“The question is how much is it going to cost. If a product is too expensive it might be difficult to market. It might be legitimate to say, ‘we don’t want to cover this’. But saying ‘we can’t’ – I’m not sure that’s accurate.”
Taylor says the insurers will have to come up with something. “But it is really just a little bit early yet to gauge the risk on an ongoing basis. Maybe they won’t offer any Covid-19 cover to people aged over 65/70 [for example] – the age group much more at risk of complications.”
Where to from here?
Whitehead argues that the regulators should take a more hands-on approach in New Zealand, as is happening in countries such as the UK.
For example, standard policy forms would prevent some of the ‘ordeal by insurance’ that many Kiwis suffered in the wake of the Christchurch earthquakes. Insurers would have to price in risks they weren’t normally inclined to cover. “The FMA could say ‘you need to have Covid cover in it’,” he says. “The government and insurers can work together to make it happen.” Insurers would then compete on price and service.
Another option posed by several interviewees was that the insurers use excesses and claim caps to offer Covid-19 cover.
Diana Clement is a freelance journalist. This article originally appeared in LawNews (ADLS) and is here with permission.