Legal Review

The UK Supreme Court has found substantially in favor of the Financial Conduct Authority (FCA) in the appeal of the business interruption test case, and dismissed appeals made by insurers.

The judgement (January 2021) included the following key points:

• Notifiable disease: cover will be available under all of the notifiable disease extensions considered by the Supreme Court for losses caused by the wider COVID-19 pandemic. This outcome extends to the QBE wordings under consideration which had been given a narrower application by the High Court.
• Non-damage denial of access: these extensions were construed more widely than they had been by the High Court, in particular:
• The public authority action necessary to trigger the cover need not necessarily have the force of law (such as government guidance or announcements); and
• The prevention of access to or inability to use premises need not be absolute, meaning that closure of a discrete part of a business could be sufficient to trigger cover.
• Causation and trends: consistent with the outcome of the High Court judgment, the Supreme Court did not find favor with the narrow arguments around causation and trends clauses advanced by insurers. In practical terms, on the wordings in issue, the findings of the Supreme Court will make it difficult for insurers to limit recovery on the basis that losses would have been caused in any event by the wider COVID-19 pandemic.
• Orient Express: the Supreme Court determined that the case of Orient Express Hotels v Generali was wrongly decided and that it should be overruled.

US Appeal Court concludes a seaman may be contributorily negligent when he is complying with an order from his superior.

The case involved a seaman who was injured while following an order to replace a chafed line during bad weather, and the court found equal fault to both the seaman and tugboat owner. The judge noted the tugboat owner was negligent because “there were safer times to issue the order to change the line”. The seaman was negligent because he failed to “watch his footing while replacing the chafed stern line” and did not “move the chafed stern line to a location on the boat where he would not have stepped on it”.

In appealing the decision, the seaman cited a similar case where the Appeal Court had found that “a seaman may not be contributorily negligent for carrying out orders that result in his own injury, even if he recognizes possible danger”. However, the Appeal Court found that the cited dictum (a remark, statement, or observation by a judge that is not a binding legal precedent) could not be applied in this case as the seaman was not following a ‘specific’ order. The court defined a ‘specific’ order as one that includes a manner and method, and does not make allowances for alternative action. The court upheld the finding of contributory or comparative fault by the seaman.

US Customs and Border Protection (CBP) ruling in relation to offshore wind energy projects on the Outer Continental Shelf.

In the US, the Jones Act is a section of the Merchant Marine Act (1920) which specifies that US flag ships must be used to transport cargo and passengers (coastwise trade) between US ports. For offshore wind energy projects, one of the first requirements is for scour protection material (typically rocks). In January, CBP ruled that the Jones Act applies to vessels discharging scour material to a ‘pristine seabed’ for projects on the Outer Continental Shelf. The CBP cited 2021 amendments to federal law (Outer Continental Shelf Lands Act 1953) which now expressly includes reference to “installations and other devices permanently or temporarily attached to the seabed, which may be erected thereon for the purpose of exploring for, developing, or producing resources, including non-mineral energy resources”. Going forward, the CBP may have to consider how the Jones Act will apply to offshore wind projects compared to oil and gas projects.

Demystifying Common Clauses

In this regular feature, we take a look at common clauses found in energy insurance that are often not well understood, and try to look at what their intentions are, and what they cover or exclude.

In this article we examine expediting expenses.

Many property damage policies contain a sub-limit for expediting expenses but what does this cover?

Expediting expenses coverage is similar to extra expenses coverage and is usually an extension to a gross earnings business interruption policy. It provides indemnity for costs incurred to continue the operations of the business, to a level that is as near as possible, to the level prior to a loss (such as renting temporary properties).

Usually the coverage is limited to reasonable and necessary extra expenses incurred by the insured, subject to an agreed sub-limit of liability. However, some forms of cover may be limited to the amount of business interruption claim saved by the action. For example, cover is applied if US$90 is spent to save a loss in revenue of US$100, but if US$110 is spent to save USD$100 of revenue, the claim is limited to US$100.

It is sometimes possible to extend the business interruption section of a policy to include cover for ‘additional extra expenses’ (subject to an agreed sub-limit), if a business needs to spend more than it will save in order to continue normal business operations. For example, to avoid loss of market share.

However, ‘expediting expenses’ differ from extra expenses as they are usually an extension to the property damage section of a policy.

Expediting expenses clauses usually cover the expenses of temporary repairs, and costs incurred to speed up the permanent repair or replacement of covered property or equipment. This could include measures such as overtime or additional costs incurred for express or rapid transportation.

Unlike extra expense clauses, expediting expenses are not restricted to having to reduce a business interruption loss. However, expediting expenses will typically be subject to a sub-limit of liability.

The above is provided as a general overview of some of the coverage often provided by the aforementioned clauses. This is not intended to be an extensive and exhaustive analysis of the insurance coverage provided by such clauses. The comments above are the opinion of the Marsh Specialty only, and should not be relied on as a definitive or legal interpretation. We would encourage you to read the terms and conditions of your particular policy and seek professional advice if in any doubt.

If readers have particular clauses they would like us to consider including in this feature, or have any comments on the above, please contact john.cooper@marsh.com

State of the Market Overview

Insurance markets, like most commodity markets, are cyclical. The commodity in the insurance market is an insurer’s capacity to underwrite risk, and the limits they place on those risks.

Like all cyclical markets, pricing is driven by supply and demand - supply being insurers’ capacity, and demand being the limits of insurance companies want. Limited capacity leads to higher pricing, and additional capacity forces competition leading to lower pricing. At a certain point in a downward rating environment, insurers cut-back capacity or withdraw, enabling remaining participants to increase prices, which over time attracts new capacity. And the cycle repeats.

Clearly, this is an overly simplistic description of the insurance market cycle which is actually influenced by various complex, external factors, that impact available capacity and drive demand. Capital flowed to insurance markets following the financial crisis of 2007-08, because of record low interest rates and poor investment returns from financial markets. This increase in supply led to a softening of insurance markets across the board. For nearly a decade premium levels (rates) reduced year-on-year, and terms and conditions improved in buyers’ favour.

While capacity in the insurance markets has remained relatively steady over the last few years, overall loss levels in many sectors have gradually led to capacity withdrawals and the onset of a hardening market. This is characterised by premium increases year-on-year, tightening of terms and conditions, and in some cases, increases in deductibles, in insurers’ favour.

Sectors where overall premium values are not sufficient to cover the actual or prevailing losses, have seen year-on-year double-digit increases to “correct” the insurers’ book. However, despite this hardening market, rate increases in certain sectors, such as downstream property insurance, are decelerating as capacity levels stabilize. New entrants are returning to other sectors where demand is increasing however, at the same time some insureds are exploring alternative risk strategies such as self-insurance or the use of captives and mutuals. Typical of a hardening market, there are more restrictive terms and conditions for certain perils, such as lower sub-limits or absolute exclusions. Cyber exclusions in particular have gained traction with insurers, and unsurprisingly, the pandemic has led to the introduction of communicable disease exclusions on virtually all policies.

• Upstream
• Downstream
• Power
• Terrorism

• Overview
• Bermuda

Energy Marine Exposures

The rapidly escalating pricing of the last few years has now settled into a more consistent and predictable pattern as capacity withdrawals, and syndicate closures, diminish. Despite this, most insureds are looking at low, double digit increases in the near-term.

Underwriters are disengaging with accounts that have a poor loss record, limited spread of risk, low premium level or deductibles that are perceived to be inadequate. On larger or better performing accounts, leading underwriters are balancing the interests of the following market, with the risk of losing a favored client. Often, following markets are only prepared to support a competitive lead-line with higher alternative pricing, and there can be high uncertainty about the final price until the end of the placement process. In this situation, accounts that have regularly changed insurers are unlikely to receive any preferential treatment.

Overall, focus continues on deductibles, with terms and conditions continuing to tighten, and the inclusion of increasingly standard clauses such as:

• Automatic identification system (AIS) operation clause which aims to detect whether a vessel enters the waters of sanctioned countries (a policy exclusion), or enters a high-risk area (a war breach exclusion requiring additional premium to reinstate coverage).
• Revised cyber clauses to clarify the issue of silent cyber coverage.
• Communicable disease exclusions to address pandemic type events.

Onshore Construction

The market is at a steady rate of change edging rates up, and limits down. There has not been a step change, or overreaction to treaty renewals, indicating that both treaty reinsurers and insurers are comfortable with their forward view. In global markets, there are signs the gaps between policy terms, conditions and pricing offered in London compared to other regions are narrowing.

Obtaining timely responses to underwriting submissions continues to be a challenge with renewals taking longer than many clients had become accustomed to during the soft market.

In some areas, difficulty in securing a consensus on policy wordings is also taking time as there are marked variances in relation to cyber and communicable disease exclusions.

If there are no large losses, which have not been allowed for within insurers’ models, the market conditions could be nearing a plateau.

• Middle East
• Asia

Business Interruption Insurance: One Size Does Not Fit All

Business interruption (BI) insurance is a complex topic and even the most experienced risk professionals can find it difficult to navigate both the intricacies of cover, and the often onerous claims process.

In most cases, BI insurance is designed to compensate a business for its net loss of income as well as for any unplanned increases in operating expenses, such as the cost of using temporary facilities. While this may sound simple, getting it right is not straightforward for large industrial organizations. There are many variables in financial forecasting, and predicting reductions or increases in operating expenses in the event of property damage, often requires making the intangible, tangible.

Most ‘off-the-shelf’ BI coverages fall short in meeting the specific circumstances of energy and power operations – for such a wide range of usage cases it’s impossible to apply a ‘one size fits all’ approach. The rapid pace of growth in the renewable energy sector, the increasing interdependencies at multi-site facilities, and the sheer range of contractual arrangements across complicated energy value chains, have resulted in a mixture of approaches to BI coverage.

Aligning a BI policy mechanism with the actual commercial arrangements of a business is essential to ensuring adequate cover and a smooth claims process. Historical and forecast data – beyond standard accounting metrics – is critical, but so too is aligning calculations with the basis specified in the policy wording. Too often during a claims process, an organization is unaware that the value insured by the policy is different to the basis that has been used by accounting teams for budgeting and forecasting. The onus is on risk professionals to ensure that accounting standards, metrics, and calculations defined in the policy terms are aligned, and are appropriate for their organization’s commercial and regulatory arrangements. More importantly, an organization needs to ensure it has the information, systems, and capability to prepare loss data on the basis defined in the policy. Or, to modify the policy definitions to align with the basis of the business forecasts.

The following are some examples that different segments of the energy and power industry should consider, and factor into BI policy mechanisms, to ensure that claims will reflect the actual loss suffered by the insured.

Traditional or renewable power facilities are subject to a wide variety of contractual arrangements. Operator obligations often reflect local regulatory requirements and variables such as the power mix, generation hierarchies (for example, baseload versus peak shaving), power purchase agreements, and use of grid infrastructure. Power risks can also feature financial exposures that lag property damage events by months or even years, and standard BI coverages rarely cater for these circumstances.

In the offshore segment, BI coverages typically assume a steady production rate over time, and apply daily limits based on this principle. Upstream operations that are in the process of bringing additional production on-stream from a new field, need to ensure full coverage for their changing production profile. Otherwise, higher production rates during the ramp-up may not be covered, and a BI loss could be capped at the average production value for the period.

Midstream operators of transmission or storage systems are often faced with unique commercial circumstances. Regulators may define the terms of agreements with shippers and off-takers, and the contractual obligations on the operator can be complex. Traditional BI coverages are rarely well-suited to the unique range of exposures or the contractual obligations of the systems at risk.

Many downstream BI policy mechanisms use reduction in revenue as a proxy to calculate the relative impact of a BI loss, and to scale BI claim payments. This isn’t always the most appropriate measure for complex, margin-based businesses, which can suffer a substantial financial loss while maintaining a constant revenue. Oil refineries for example, do not typically use revenue to measure financial health therefore, reduction in revenue would be a poor indicator of the overall impact of a loss.

If you aren’t confident in the specifics of how your BI policy mechanism works, it may be time to take another look.

Our Energy & Power practice includes a dedicated BI engineering team and policy wording specialists, who regularly collaborate to develop best-in-class BI coverages for Marsh Specialty clients.