The Pennsylvania Supreme Court has ruled that the Covid-19 pandemic constitutes a “natural disaster” potentially setting an unwelcome precedent for some in reinsurance and insurance-linked securities (ILS).
As concerns remain about the potential for a tidal wave of business interruption claims as a result of the coronavirus pandemic, every ruling is being closely watched to see whether it heightens the risk of Covid-19 shutdown claims qualifying under catastrophe reinsurance arrangements.
As we explained yesterday, it is likely to be the insurance or reinsurance policies and programs that lack exclusions, or have poorly worded exclusions, that find themselves carrying any claims through to the reinsurance and ILS market.
But legal precedents also cannot be discounted as a source of some claim leakage and the fact the coronavirus outbreak has been ruled to be a “natural disaster” is perhaps the most concerning one seen to-date.
The Supreme Court in Pennsylvania ruled that Covid-19 is a “natural disaster” because it poses a serious threat to human life.
Petitioners were trying to overturn the state Governors executive order which shutdown all non-life essential businesses in Pennsylvania.
The authority in statute to issue that shutdown order comes from the the Commonwealth’s “Emergency Code” which states that it can only be triggered by man-made, war related or natural disasters and the petitioners argued that the coronavirus is none of these.
The Emergency Code defines “natural disaster” as events including “hurricane, tornado, storm, flood, high water, wind-driven water, tidal wave, earthquake, landslide, mudslide, snowstorm, drought, fire, explosion or other catastrophe which results in substantial damage to property, hardship, suffering or possible loss of life.”
The Court rejected the petition, as it concluded that the pandemic fits within the bucket of other catastrophe, saying that the threat to life, hardship it caused and suffering all fit within that descriptor.
We highlighted the ambiguity of “other” in catastrophe peril definitions in a recent article here, as we explained that there are catastrophe bonds and other ILS deals that use this catch-all without explicitly defining what fits into the category, or doesn’t.
The same goes for statute it seems, as the Court also explained that by definition the “other catastrophe” category has to include all other natural disasters, which it believes a pandemic fits into for its purposes of state authority and emergency laws.
Lawyers at Faegre Drinker explained what this ruling could mean more broadly, for other sectors that have contractual law surrounding natural disasters (read insurance and reinsurance).
“Looking beyond the decision’s immediate impact, however, it may prove significant that the Court has held that the COVID-19 pandemic is a natural disaster under the Emergency Code — a conclusion that may be cited in other contexts when addressing whether the pandemic qualifies as a “natural disaster,” “catastrophic event,” or “act of God” in other statutory, regulatory, or contractual contexts,” they explained.
Adding, “Also noteworthy is the fact that the Court based its holding exclusively on the pandemic’s threat to human life and welfare and thus eschewed any holding that it involved damage to property — a question of potential import in many commercial contracts.”
Of course, there’s nothing to say this ruling has any widespread significance for the reinsurance and insurance-linked securities (ILS) marketplaces, but it does highlight the way some courts may lean should cases be brought to try and force Covid-19 claims under natural catastrophe programs and policies.
As we explained yesterday, if suitably robust exclusions and wording do not exist, there is a chance of claims leaking into property policies, towers and ultimately into the reinsurance programs supporting them.
This risk seems at its greatest in quota shares, pro-rata covers and of course the collateralised reinsurance sidecar, but there are almost certain to be some cases where claims leak into excess-of-loss collateralised reinsurance arrangements as well.
Still, the general opinion is that industry-wide the total losses from these kinds of wording-related cases won’t be too significant.
But, for any ILS funds or vehicles taking some of those claims that do leak through and who haven’t adequately explained to investors that at the extreme tail there is a risk of correlation and unexpected losses, this could result in challenging conversations needing to be had.