Specialty Insurance Cover Available For Flu Outbreaks, Other Contagions

Years before Warren Buffett suggested in early May that Berkshire-Hathaway might consider offering insurance coverage for flu pandemics, a specialty insurer developed the first property-casualty product related to disease outbreaks in 2006.

Barrett Hubbard, managing director of Markel Risk Solutions in Glen Allen, Va.–who is also the developer of Markel's Outbreak Extra Expense Coverage–explained the policy, which pays out a preset dollar amount for expenses incurred when a business or public entity is shut down by a public health official because of an outbreak of disease like Swine flu.

Mr. Hubbard coincidentally spoke to NU on the same day that Swine flu cases worldwide reached the 1,000 mark, and as press services widely reported Mr. Buffett's remarks stating that his insurance operations could offer a form of pandemic coverage.

While Mr. Buffett's statements reported by Reuters and other news services suggested that Berkshire's offering would be a form of life insurance or reinsurance–a policy that would be triggered by a U.S. mortality rising by 25 percent in 2010–Markel's offering is a form of business interruption coverage.

Contrasting statements attributed to Mr. Buffett suggesting that the price of the coverage he proposed would be exorbitant, Mr. Hubbard said Markel's intent was to offer a policy that was affordable to a wide range of small-to-medium-size businesses.

In addition, Markel's coverage is not triggered by a global pandemic but instead responds when a specific contagion–such as flu, meningitis, mononucleosis, MRSA (an antibiotic-resistant skin infection), SARS (Severe Acute Respiratory Syndrome), and bacteria like salmonella or e-coli (which trigger food-borne illnesses)–closes a specific insured business location, Mr. Hubbard said. “We can insure you against that,” he noted.

“What insureds wish for, what society wishes for is…the magic bullet”–insurance that will respond “if there is a true global pandemic, a true outbreak of a massive nature,” Mr. Hubbard said.

Referring to some U.S. government documents put together when the Avian flu was spreading some years back, he noted the documents reveal that the economic impact of a pandemic is somewhere between 5 percent and 12 percent of gross domestic product.

“That is a massive, massive number,” he said. “There is what insurance can do, and what society will have to do.”

For instance, an insurance policy cannot respond to a situation like one in which officials decide they don't want anyone to go into downtown Manhattan for several days to control the spread of disease. “Our policy does not respond to quarantines, or sweeping geographic closures ordered for prophylactic measures,” Mr. Hubbard said.

Markel's policy will respond if a public health official orders a specific insured building or operation to close, he noted. He explained that contagions are not entirely fortuitous, such as other events covered by insurance, prompting the need to have this coverage triggered by an authority that acts independently from the insured.

Covered contagions and public health officials are broadly defined in the policy, he said, noting that the latter can include anyone from local county officials to officials of the Department of Agriculture and the Centers for Disease Control.

“We didn't want it to be a law enforcement officer [or] a political official. We felt that was opening up a door we didn't want to go through in regard to how this product would work,” Mr. Hubbard said.

Asked about the example of a high school in Queens, N.Y., which was reportedly closed initially on the actions of the school principal after some students returned from a trip to Mexico and more than 100 students visited the school nurse, Mr. Hubbard confirmed that such a situation would not trigger coverage.

On the other hand, there were some Texas school closures related to Swine flu ordered by health officials that would have triggered claims payments had they purchased Markel's policy, he said–noting, however, that the most frequent buyers so far have been restaurants and health care facilities, rather than educational facilities.

Another “perfect example of what we would trigger coverage on” occurred in Hong Kong, when a government health official quarantined a hotel, which had a group of guests who had visited Mexico–one of whom had gotten sick.

“We can pay them because of the fortuitousness of that event. When it becomes a societal event, when it becomes closures that are designed to be voluntary and protective–for that no insurance company could possibly offer the kind of limits everyone would need,” he said, referencing reports of Mr. Buffett's remarks with regard to insuring pandemics.

“He may come up with something creative. But as they look at this, everyone has to be aware of what insurance can do, and what insurance cannot do,” he said.

Further explaining the trigger of Markel's Outbreak Coverage, Mr. Hubbard said in addition to having a public health official's order, the disease or bacteria prompting the closure must “be on your premises,” noting that this aspect of the coverage trigger is one people often miss. “It can't be something down the street…and they decide to close you.”

He also explained that unlike a traditional business interruption policy, Markel's policyholders are not required to provide numerical details of their economic losses to the insurer.

“We tried to keep the coverage simple– to avoid contentious business interruption claims, which can be very labor-intensive for both the lawyers and the accountants,” he said, explaining that the policy pays a selected per-day limit ranging from $2,500 per day up to $50,000 per day, per location for a maximum of 30 days.

“We felt the real purpose of this was [to provide] a bridge to get [insureds] through, not…to indemnify them to get them back to their original spot,” he said, adding that insureds use the per-day amount at their discretion for whatever extra expenses they choose, such as public relations costs, decontamination expenses, or costs to continuing paying employees, for example.

Giving a sense of the cost of coverage, Mr. Hubbard said a $5,000 per-day limit, providing $150,000 of coverage for the 30-day maximum time frame, would roughly cost $1,500 for each location.

Markel has not yet incurred any claims under policies in-force, he noted.

“We've had three years of modest renewals,” he reported, likening the level of demand until recently to that in the early years of employment practices liability insurance before the headline sexual harassment cases. “There was demand, but not overwhelming demand,” he said.

“This modest outbreak of Swine flu has certainly raised the specter of contagion risk to a new level for insurance buyers,” according to Mr. Hubbard. “The volume of phone calls across Markel has picked up dramatically over the last 10 days.”

Markel's Outbreak Extra Expense Coverage is available through all its distribution partners–wholesalers and retailers, although sales so far all come through wholesalers.

Letha Heaton, senior director of marketing for Markel in Deerfield, Ill., noted that the product is a natural offering to pair with some admitted policies sold to camps and child care facilities through retail agents.