The global insurance and reinsurance communities are justbeginning to grasp the enormity of loss from the March earthquakeand tsunami in Japan. For an overview of the potentialramifications, Claims' Christina Bramlet spoke withattorneys Robin Cohen and Randy Paar, partners with Kasowitz,Benson, Torres & Friedman's insurance recovery litigation groupin New York.

Bramlet: What coverage(s) may betriggered as a result of these events?

|

Cohen and Paar: Most large commercialpolicyholders purchase first-party property insurance, which issometimes referred to as “all risk” insurance. Those policiesgenerally provide insurance under the following grants ofcoverage:

• Property damage coverage: Insures the value of thepolicyholder's property.
• Business interruption (BI) coverage: For the insured'sloss of earnings or revenue resulting from the interruption of thepolicyholder's business because of loss or damage to thepolicyholder's property.
• Contingent business interruption (CBI) coverage: Forloss, including lost earnings or revenue, as a result of damage tothe property of third parties such as suppliers and receivers.
• Civil authority coverage: For losses arising from anorder of a governmental authority that interferes with normalbusiness operations.
  Third-party property coverage: For the property of thirdparties in the care, custody, or control of the policyholder.
• Ingress and egress coverage: For the loss caused whenaccess to a business premises or location of the policyholder isblocked for a time.
• Service interruption coverage:  For lossesrelated to the interruption of electric or other powersupplies.
• Claim preparation coverage: For the costs associatedwith compiling and certifying a claim.

All of these coverages may be potentially implicated bythe recent catastrophic earthquake and its resultant tsunami,flooding and fires in Japan. However, the most significant grant ofinsurance coverage for U.S. policyholders and their insurers isCBI. The total amount of loss from these covered perils has beenestimated to exceed $325 billion (estimated by World Bank). Ofcourse, any estimate of loss is entirely speculative, particularlygiven that losses are still accruing for BI.

|

 

|

Bramlet: How does the fact that theevents happened in Japan differ from the consequences of a U.S.catastrophe?

|

Cohen and Paar: Because the property loss occurred in Japan, the insurance market will beimpacted less than if the loss had occurred in the U.S. Forcomparison purposes, the loss from Hurricane Katrina wasapproximately $120 billion, 50 percent of which was insured.Assuming the loss from the Japan catastrophe is projected to be$235 billion, the estimates being circulated by insurance companymodelers anticipate the insured loss to be between $15 and $35billion, less than 15 percent of the total loss.

|

There are two reasons for this. First, the amount of insurancepurchased by Japanese policyholders for a given exposure is lessthan that purchased by policyholders in the U.S. Most of theearthquake loss will be submitted to the Japanese EarthquakeReinsurance Pool, a semi-public entity.  Second,residential and personal lines insurance in Japan is generallylimited to companies in the Japanese insurance market. Even large Japanese policyholders tend to place most of theirinsurance with Japanese insurers such as Tokia Marine, MitsuiSumitomo and Sompo.

|

Bramlet: What specific types oflosses do you expect?  What impact (if any) have thedisasters had on U.S. businesses?

|

|

Cohen and Paar: Although all of the types ofcoverages listed previously may be implicated in some way by theJapanese events, the most important for U.S. policyholders andtheir insurers is CBI coverage, which applies when the policyholdersuffers an interruption in its business because the property of athird party, such as a supplier or receiver, is damaged ordestroyed. Accordingly, an American auto manufacturer may have aninterruption in its business and a resulting loss, if it relies onparts manufactured and shipped from Japan. These types of lossesstemming from a break in the chain of supply already have causedsome U.S. manufacturers to either cut back in production or closeplants entirely.

|

 

|

Bramlet: What type ofissues do you anticipate will be raised by the Japanese earthquakeclaims?

|

Cohen and Paar: Issues surrounding what causedthe loss are likely to dominate claims handling, along with thecalculation of the amount of loss. There are a number of relevantperils that arguably caused a loss, including fire, earthquake,flooding, the tsunami, orders of the civilian authorities limitingaccess, and contamination from nuclear radiation. A property insurance program is generallywritten on overall limit, but losses caused by certain perils arecapped with a much smaller sublimit.  There is generallyno sublimit on a fire loss. However, earthquake and floodinggenerally have significant sub limits—for instance, although theinsurance program provides $500 million in insurance, the policymay pay only $50 million for a loss due to earthquake.Additionally, damage from radiation is generally excluded from anycoverage. Therefore, how the policyholder presents its claim, andwhether a portion of a loss can be attributed to a covered peril,will make a difference as to which and how many sub limit(s) can beapplied.

|

The cause of the loss also may make a difference in calculatingthe amount of the deductible. For instance, the deductible for anearthquake claim may be based on a percentage of the value of theproperty lost or destroyed. In a straight BI claim, where theproperty of the policyholder was damaged, the value of thepolicyholder's property will likely be disclosed in theunderwriting material, or on a schedule referenced by the policy.In the case of a CBI loss, the property that is damaged belongs toa third party and its value may be difficult to determine.

|

Finally, the calculation of loss can involveconsideration of many aspects of the policyholders business. In thecase of a CBI loss where damage to the property of a Japanese thirdparty affects the global supply chain of a U.S. business, there arenumerous factors to be considered. It often takes a verysophisticated analysis to determine what portion of the loss iscovered and what is not. 

|

 

|

Bramlet: Will these claims arisingout of the earthquake affect global insurance/reinsurance markets?How so and to what extent?

|

Cohen and Paar: This has not been a great timefor those selling insurance for catastrophe losses. Prior to theJapanese earthquake, there was an earthquake in Christchurch, New Zealand causing an estimated$20 million in property losses, $10 million of which may beinsured. The last few months also have seen significant lossesbecause of floods in Australia. However, despite the severity ofthe losses from the Japanese earthquake, a relatively small portionof the losses are insured. Therefore, the impact on the globalinsurance and reinsurance markets is not likely to be significant.Indeed, after Hurricane Katrina, which resulted in larger insurancepayouts than what are expected from the Japanese earthquake, theprice of property insurance and the financial strength of insurersand reinsurers was not materially affected.

|

Bramlet: Could the earthquakepotentially change the way insurers approach BI claims or managingrisks?

|

Cohen and Paar: Every time there is asignificant loss, insurers modify their approach to underwriting arisk. After Japan, insurers will undoubtedly re-examinetheir policy language to correct what they believe areunanticipated ambiguities that resulted in coverage. For instance,to prevent the possibility of multiple sublimits, an insurer maydefine “earthquake” to include the related tsunami. The events inJapan undoubtedly will affect the underwriting and investigationthat is done before a policy is sold. At a minimum, insurers arelikely to inquire into what operations, or supply chain links thepolicyholder has to Japan or other companies on the Pacific Rimprone to earthquakes. Perhaps even more important, the events inJapan should alert policyholders to potential risks that they needto manage by moving away from, or finding possible substitutes for,Japanese suppliers.