Coverage For Next Pandemic Available For Large Insureds With Mass Exposures

"If you have a business interruption exposure of $100 million, it's certainly large enough [to prompt you] to look at this," he added.

Beyond large educational groups, potential customers could include organizations involved in the manufacturing, hospitality, food service and health care industries, he suggested.

"We did get a couple of calls in the entertainment industry, but they were too small," he said–adding, however, that "the entertainment industry is vulnerable because of the fear factor." He was referring to the fact that the fear of exposure to illness might prompt people to stay home and not attend a concert or sporting event.

In the event of a pandemic, "the entire baseball season could be jeopardized," the CEO said–confirming, however, that no one from Major League Baseball has contacted Hays Companies.

The desire to buy insurance for lost revenues and extra expenses incurred when fear prompts enough employees or customers to stay away from a business to weaken its income stream prompted the broker to craft a unique coverage trigger–one that wasn't particularly appealing to potential insurance company markets the broker approached to sell the coverage.

The brokerage executives said the policy has no physical damage trigger–a typical trigger for a traditional property business interruption policy. Instead, in addition to the WHO alert trigger, the specialty pandemic interruption policy for educational institutions has a second trigger requiring 15 percent of students and/or faculty be absent for a two-week period due to pandemic-related illness.

Mr. Kerr explained that Hays Companies designed this trigger to provide value to the first buyer–Educational and Institutional Insurance Administrators, a Chicago-based consortium of 127 religious-based colleges that approached the broker to craft the coverage.

But carriers were reluctant. "We shopped it around [and] most underwriters told us they weren't interested, or they didn't like our triggers. They wanted triggers tied to mortality or morbidity [rates], but we told them that we couldn't accept that because one of the big risks here is fear," he reported. "If there's a major pandemic, if people are sick and dying, then the healthy population won't want to go out, and that would cause a major business interruption at these universities."

Mr. Finch said one reason the EIIA sought coverage in the first place was because some member colleges were worried about problems arising from having to send students home midsemester–either having to refund tuition or facing a decrease in the number of students who might apply.

After researching the likelihood of a pandemic, using the probabilities to come up with pricing and then getting the client's approval, Hays Companies finally found a market that agreed to sign on with the broker's recommended triggers–Berkshire Hathaway, which wrote the program effective Sept. 1, 2008. The program has a three-and-a-half-year policy term, Mr. Kerr told NU recently.

Highlighting another aspect of the trigger, Mr. Finch noted that there is no requirement for the health department to order a shutdown. "We have found they're very reluctant to do that," he said.

The triggers are unique to this policy, but insureds still have to prove they had a business income loss or an extra expense as a result of a pandemic or a food-borne or water-borne illness, Mr. Finch said, noting that coverage add-ons can include business interruption claims related to such illnesses, to contamination from a pollutant, or to workplace or campus violence.

Mr. Finch also pointed out some nuances of the coverage trigger for the payout of claims related to campus violence:

o Five or more individuals must be injured as a result of the violence.

o There must be national or regional media attention.

o There must be a drop of attendance of 15 percent for two weeks or more.

He explained that the policy responds to major campus violence episodes that prompt a shutdown of the college out of fear or for other reasons. "In past events, they've always caught the perpetrator," but if the individual isn't caught, then a college could be closed for a few weeks, he noted.

The campus violence add-on was designed as an accommodation to make the pandemic policy more interesting to EIIA, but most quotes currently outstanding do not include the violence component, the broker representatives said–noting that a half-a-dozen potential buyers are considering coverage relating to future pandemics.

Mr. Finch said coverage triggers also differ slightly depending on the type of prospective insured. For a hospitality risk, such as a hotel, it would be a pandemic event 3, 4, 5, or 6 plus two weeks of closure and more than 15 percent of the employees unable to provide services.

For hospitals and nursing homes, the second trigger would be 15 percent of the employees, doctors and nurses being ill, but the coverage would be an extra-expense policy.

Unlike the other types of insureds with a similar level of absenteeism, hospitals have to stay open, he said. "They have to keep open. They would be overflowing and have a tremendous amount of extra expense," Mr. Finch explained, noting that Hays has worked with the American Hospital Association, and several hospital groups are interested.

As for schools, he said a Midwestern private college with 5,000 students has been the smallest interested buyer. "Public schools are not interested. They can rely on tax dollars to bail them out," he said.

He also noted that the private college took the coverage proposal to their consortium. "All these colleges have buying groups [and if] we can write a policy for the buying group, it's a little cheaper for everybody [since] they can spread the cost. They would also spread the limits," he said.

Mr. Kerr said the brokerage firm also recommends three-year policies with an annual premium payment. "We don't want the underwriter to have the option to cancel or nonrenew when something is in the works," he said, noting that it took a few weeks for the Swine flu outbreak in Mexico City to move into the United States.

He said that the smallest limit available is $5 million, and the rate is about 5.5 cents per million, or $275,000–adding that most quotes currently outstanding are for premium over $1 million with a business interruption capability of $100 million.

"This is for larger clients," Mr. Finch said. "It's not for the middle market or the small [market]. The Markel product is probably suitable for smaller accounts," he said, referring to the Outbreak Extra Expense Coverage offered by Deerfield, Ill.-based Markel Corp., featured in the May edition of NU's E&S/Specialty Lines Extra e-newsletter.

The Markel product targets customers needing per-day limits ranging from $2,500 per day up to $50,000 per location for a maximum of 30 days. The product developed by the Hays Companies is for customers who need $10 million to $150 million of limits. (See related textbox, "Other Policies," for details of Markel's Outbreak Coverage and Lexington's Pandemic Rx for health care facilities.)

Like the Markel product, Hays' product can address outbreaks other than pandemic flu. "We have one price for pandemic only and another to include the broad range of illnesses," like SARS (a respiratory disease epidemic) or MRSA (a contagious skin infection), Mr. Finch said.

Explaining the contamination component of coverage, Mr. Kerr gave the example of a contaminated water supply resulting in bodily injury, illness or death to five individuals, prompting 15 percent of students at an insured college to stay home for a period of two weeks for fear of being exposed to the pollutant.

Noting that this would likely impact a limited region, he said the contamination coverage would have a sublimit–of perhaps $5-to-$10 million on a $50 million pandemic policy. In addition, $1 million for cleanup costs would also be included, Mr. Kerr said.

Sublimits apply for the food-borne illness and violence coverage also, he said, noting that levels are negotiable.

While there is no deductible on the pandemic coverage, the food- and water-borne illness and contamination coverages carry a $250,000 deductible.

"That gives you an idea of the size of a customer this would have to be," he said, noting that the insured would have to be large enough to reach $250,000 in a couple of days or weeks for a major event.