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Buyers expected to face tough fight on flu claims

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The number of H1N1 virus cases rose last week amid continuing worries about a possible pandemic, and risk managers may have another reason for concern: difficulty getting coverage for some related losses, coverage experts say.

Although coverage for income losses and other claims ultimately may be decided on a case-by-case basis in the wake of any eventual pandemic, proving that a loss is covered will be an uphill battle, they say. Even claims that don't fall under a property policy--such as general liability, workers compensation and directors and officer liability policies--would be subject to scrutiny (see story, page 21). Specific coverage for flu-related losses is rare, though there are some products, say observers. Lexington Insurance Co., for example, offers an endorsement to its commercial property policy for acute care medical facilities to cover business income loss and extra expenses incurred during a declared pandemic influenza public health emergency. And Berkshire Hathaway Inc. underwrites a program that includes pandemic coverage for a group of colleges (see related story). But "there are very few risk transfer answers for (pandemics) in the traditional property market," said Dave Finnis, national property practice leader for Willis HRH, based in Atlanta. "I think that the marketplace is in the same state that it was for (severe acute respiratory syndrome). The traditional property market is probably not intending to cover that type of event. Usually, they're looking for some kind of physical damage as trigger under the property policy."

There are certain policies in the market that provide communicable disease coverage, but such policies are "not ubiquitous in the marketplace," said William Shelley, chairman of the global insurance group at Cozen O'Connor P.C. in Philadelphia, who represents insurers.

Underwriters are monitoring the situation closely, said Vivienne Hexter, a technical consultant at Aon Ltd. in London. There are probably "pockets of cover" that will respond to a H1N1 flu outbreak, she said, if public authorities close buildings, for example.

"This issue was addressed by many insurers in response to the avian flu and the SARS outbreak," said Peter Gillon, a partner at Pillsbury Winthrop Shaw Pittman L.L.P. in Washington, who represents policyholders. "As you would expect, insurers modified many of their definitions, such as 'contamination,' to specify that damages resulting from virus outbreaks are excluded in general under property policies."

In addition, there will likely be little coverage for events that have to be canceled because of a flu outbreak, experts say.

After the SARS outbreak of 2003 and foot-and-mouth disease outbreaks in the United Kingdom in 2001 and 2007, exclusions for communicable diseases became common, said Elizabeth Seeger, a contingency underwriter at Hiscox Ltd., the Bermuda-based company that underwrites at Lloyd's of London. The avian flu fears of the past few years also have led to pandemic exclusions from contingency policies, she added.

"Our experience with previous pandemic threats and outbreaks of communicable diseases is that coverage can be available but at a price," said Lennox Batten, managing director in the personal accident, contingency and entertainment practice at brokerage Marsh Inc. in London. "However, companies might need to be selective in what they buy and be mindful that the overall level of capacity will be restricted with each risk being looked at on its own merits," he added.

"Prior to the most recent outbreaks, there was a fairly substantial debate over whether infectious disease outbreaks were covered under property policies, and there was some case law suggesting it was covered but the policy definitions have shored up the defense to that potential coverage," Mr. Gillon said.

With regard to first-party property coverage, "a business suffering economic loses alone does not trigger coverage under a property policy," said Mr. Shelley.

"You need physical loss or damage, so the more specific question becomes whether the presence of a virus would constitute physical loss," he said.

Even in cases of contingent business interruption, coverage would still hinge on physical loss or damage at the supplier, he said.

Although courts have divided somewhat on what constitutes a physical loss, policyholders seeking coverage "are going to be climbing uphill. It's going to be a stretch, and it's going to be very difficult to show that."

Coverage possible

But there may be some cases where a risk manager could find coverage for pandemic-related business interruption, said a policyholder lawyer.

"I've never seen an endorsement dealing with swine flu, but I've seen plenty of cases where contamination of a building with bacteria or dust constitutes physical loss or damage," said Rich Lewis, a partner in the New York office of Reed Smith L.L.P. "Any loss of profit while your building is being cleaned or decontaminated would be covered by first-party business interruption," he said.

"We've seen coverages written under the time element extensions of coverage that include business interruption-type of loss based on a trigger of coverage of infectious disease," said Marshall Gilinsky, a shareholder of Anderson Kill & Olick P.C. in New York. "The idea being if there's an infectious disease, it impacts your business and causes you to lose business income. It's a unique type of coverage, because it doesn't require the property damage trigger you see under most time element coverages." Mr. Gilinsky added, however, that he does not believe such coverage is very common.

Some risk managers may have been able to take advantage of soft market conditions to provide coverage for pandemic-related exposures in unexpected places, said Mr. Gilinsky. "When the market's soft, a smart risk manager might make an adjustment to a policy wording that would provide enhanced coverage for this type of situation," he said. "Even when the market tightens, nobody notices it and it never gets taken back out."

In general, coverage involving a pandemic "will have to be looked at case by case, because the coverages vary widely and the exclusions are different. In general, you're going to have a lot of permutations on coverage for these types of claims," said Mr. Shelley.