June 1, 2003 by Craig Harris
The insurance implications of the severe acute respiratory syndrome (SARS) epidemic in Toronto are about as unclear as the nature of the disease itself. While scientists and medical researchers in countries around the world are still frantically searching to isolate the cause of the virus and develop effective vaccines, insurers are putting the pieces together of real and potential areas of exposure.
By now, the SARS scare has quieted down in Canada, with the Word Health Organization (WHO) officially taking Toronto off the list of affected areas as of May 14 of this year. But, the lingering economic damage to the city and the linkages in terms of travel, tourism and retail trade will be felt for many months and perhaps years to come. “The problem with things like event planning is that people look one or two years down the road for a major conference,” says Jim Stirling, a vice president with Montreal-based brokerage B.F. Lorenzetti & Associates Inc., and specialist in commercial coverage. “And, right now, the publicity around SARS is affecting decisions. I think Toronto will get pounded on this for awhile.”
As of mid-May, SARS had officially caused 24 deaths in Canada, all in the Toronto region. The virus spread quickly among healthcare workers and others after it was introduced at Scarborough Grace Hospital in early March via a woman returning from Hong Kong. The WHO issued a travel advisory for Toronto on April 23, which was lifted April 29. By then, however, much of the damage was already done.
The economic hit of SARS on Toronto will be substantial. The Conference Board of Canada has estimated that the outbreak will shave nearly $1 billion off of Toronto’s real gross domestic product (GDP) for 2003. The organization indicates that the three most affected industries will be tourism, transportation and retail trade sectors. The Conference Board projects SARS will result in about $350 million in tourism-related losses, while non-tourism-related sales are expected to drop by $380 million. Reduced traffic through Pearson Airport could account for $220 million in losses. In addition, more than 800 bus tours have been cancelled, with an estimated economic loss of $6 million.
Some areas of affected insurance operations are clear – event cancellations coverage, travel insurance and life and health policies. It is also evident that business interruption (BI) claims will be virtually non-existent due to standard policy wordings, which only cover physical damage caused by named perils. “It’s clear that hotels were at very low vacancy rates during the SARS epidemic, and we insure the CP hotels across Canada,” says Gary McMillan, president of AIG’s Canadian operations. “But, we don’t expect any BI claims due to the exclusions.”
Homeowners policies, as well, contain exclusions for communicable diseases going back at least 15 years, according to Insurance Bureau of Canada (IBC) general counsel Randy Bundus. After that, it is “up in the air” where potential liability claims, or lawsuits, may emerge and how insurers would be expected to respond. For example, disease is covered in most commercial general liability (CGL) policies under bodily injury wordings. But, most commercial policies also contain exclusions related to viruses and other agents that can cause illness, such as mold. For example, courts in the U.S. have held that Legionnaire’s disease and E. Coli could not be covered under the CGL policy.
What about the liability implications of contracting of a disease at a specific facility or event? “It is possible that liability could come from, for example, a healthcare facility or other operation that did not properly wipe down or sterilize its equipment and was thus negligent,” says Bundus. He adds, however, that he is not aware of any such claims or lawsuits and therefore does not expect to see any.
Fred Shubagi, senior vice president of commercial lines for Chubb Insurance Co. of Canada, says his company looked at the potential exposures related to employment practices liability (EPL), especially for healthcare workers who contracted the virus on the job. “But I think there are two mitigating factors – one is that EPL is still a contingent coverage in Canada and two public Workers Compensation systems will likely be the first line of defense for SARS claims.”
One of the more bizarre linkages to potential coverage was made in a “white paper” released by brokers Aon. Jeffery Hanneman, a lawyer based in Houston, Texas and author of the paper, contends that SARS-like epidemics could be theoretically insured under an “environmental impairment policy”. The SARS virus may qualify as “an irritant or contaminant” under a typical pollution definition.
This interpretation was greeted with skepticism by Canadian sources. “I think that is a pretty big stretch,” says Stirling. What is not a stretch is the effect of SARS on event cancellation insurance, a specialty lines market of the property and casualty insurance industry – which is dominated in Canada by Lloyd’s of London and Chubb. The spread of the virus led to the postponement or cancellation of several exhibitions, conventions and sporting and entertainment events (see chart 1). Event cancellation insurers, fearful of an aggregation of claims, moved quickly to exclude SARS from policies.
Chubb’s national manager of film and entertainment, Susan MacEachern, says “we placed a moratorium on writing this line of business (event cancellation) shortly after the SARS epidemic first emerged, which we have since lifted. Still, we are being much more selective in writing it.” She notes that, the whole point of event cancellation insurance “is to protect against unforeseeable risks – clearly holding conferences in SARS-affected regions is a foreseeable risk”.
Chubb, which mainly writes trade shows and conventions as a relatively small part of its overall business, was not on any of the event cancellations in Toronto. The company issued a worldwide SARS exclusion for event cancellation insurance policies, as have most other carriers, including Lloyd’s.
MacEachern says she has seen “a rush of people trying to get event cancellation coverage at the last minute, but most insurers require that the policy be placed at least two or three months before the actual event occurs. If you want to buy it at the last minute to cover against a known risk, by then it’s too late.”
SARS-related concerns about trade shows, concerts and exhibitions have also extended to the $1.6 billion Canadian film and TV production industry. Already, the virus has been blamed for the departure of two Toronto productions – “Shall We Dance”, featuring Jennifer Lopez, and a remake of “The Goodbye Girl”.
Stirling says the event cancellation insurance market “shut down” for about six months after 9/11. With the uncertainty brought on by the war in Iraq, he says interest in the product has emerged and it is more available now. “People can get it, but it is obviously more expensive, subject to much more careful underwriting and possible exclusions.”
Travel insurers have taken much the same kind of approach to the SARS scare as event cancellation markets. Stan Seggie, president of RBC Travel Insurance, says “the two basic parts of a travel insurance policy, unlimited medical and trip cancellation or interruption, were designed to cover against unforeseen events. Once a travel advisory is issued regarding a known virus, it is no longer unforeseen.”
RBC Travel, which issues more than 3 million policies each year, has put exclusions on its travel coverage for SARS-affected areas, as have many travel insurers in North America and Europe. Seggie says it is important that travelers clarify what they are covered for before purchasing insurance. Travel insurers typically do not cover things such as war (declared or undeclared), pre-existing medical conditions, mental, psychological or nervous disorders, normal pregnancy or childbirth and any government regulation or prohibition.
Furthermore, Seggie cites studies showing that up
to 25% of Canadians travel without any insurance, especially in younger age groups. He says unexpected events, such as the spread of SARS, may actually boost sales and “raise the awareness of this product”.
But, one gray area in both event cancellation and travel insurance is the timing of claims. If, for example, a scheduled tour cancelled due to fears about SARS before the WHO issued its advisories for affected areas, some insurers could contest the claim. Most insurers, however, have stated that SARS would be an insured peril for policies written before the virus was identified and the consequent exclusion by underwriters.
Aviation insurance will also be affected by the SARS crisis, but in an indirect way. There are no significant “claims” due to the disease, but domestic and international traffic volume is dramatically down and airlines like Air Canada are bleeding “red ink”. The impact of SARS and the war in Iraq have combined for a “one-two punch” to the already beleaguered industry, causing reduced air traffic (see chart 2). Air Canada estimates it lost $152 million in April alone – of which $125 million of which was attributable to SARS. “SARS will clearly have a sustained impact in every affected area of the world and has already has a ruinous effect on our summer 2003,” said Air Canada president Robert Milton, commenting on the company’s first quarter loss of $354 million.
Although telephone calls to Canadian brokers and aviation underwriters were not returned, the U.S. publication “Business Insurance” notes that, in the near term, brokers are negotiating with aviation underwriters to postpone quarterly premium payments for some cash-strapped airlines. On a broader level, airlines could be facing rate increases at renewals, which typically take place in October.
Premiums are based on the airline’s estimates of its exposure for the following year, stated in terms such as number of passengers carried, kilometers traveled or flights flown. If the actual kilometers or number of flights differed, the airline and insurer would then adjust premium as needed. But aviation reinsurance polices are less flexible. As a result, primary insurers might find themselves squeezed by a downturn in airline travel.
Annual aviation losses average about US$2 billion. With the cost of reinsurance, the aviation insurance market needs to write at least US$2.5 billion a year in premiums to be sustainable, according to comments made in BI by Willis Group Holding Ltd. Asia regional director Mark Hue-Williams. “SARS will have very significant implications,” Hue-Williams says. “Underwriters had anticipated a level of income which is unlikely to be met.”
The impact of SARS on life and health insurers in Canada has not been significant in terms of claims, but it has prompted the industry to clarify wordings for disability plans and health-travel policies. Some life insurance companies with extensive operations in Asia, such as Manulife Financial, have already paid SARS-related death and health claims in Hong Kong. But, the “number of claims has been very modest”, says Manulife CEO Dominic D’Alessandro. His concern is more that the virus could be “a major inhibitor” to the company’s business in Asia.
Irene Klatt, a spokesperson for the Canadian Life and Health Insurance Association (CLHIA), says the industry agreed early on in the SARS crisis to accommodate quarantined patients. Under a typical indemnity policy, a person who is quarantined and symptom-free would not be considered “disabled”. However, the life industry recognized them as being eligible for weekly indemnity payments. “That was an initial step we took right away to help those people who were in quarantine,” Klatt points out.
Some life and health insurers have excluded SARS for future travel-related health polices for those going to affected areas identified by WHO, but not for existing policies. In addition, insurers will not be accepting new applications for life or critical illness coverage for anyone planning to travel to the most affected areas. Beyond that, Klatt says for other life and health coverages, “we would essentially treat SARS as any other disease and ask the same questions regarding illness, health or out of country travel”.
Although the spread of SARS cases continues in Asia, most Canadians, particularly Torontonians, are breathing a sigh of relief about an epidemic that could have been much worse. For now, there is a sense that the insurance industry will not be greatly affected by the social and economic toll of SARS. Exclusions in standard wordings related to physical damage and communicable disease have served their purpose in terms of containing risk and exposure.
The bigger picture, however, is not so clear. Warnings from groups such as WHO and epidemiologists about the future spread of disease could mean potential liability for both life and non-life insurers. With the increasingly litigious environment in North America, it may be a matter of time before lawyers break through some of the policy exclusions and target liability in specific policies, especially the CGL. “If you believe what health experts are saying – that SARS is here to stay – then we will have to take that into account in our policy wordings as we move forward,” says McMillan.