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THE EUROPEAN COMMISSION’S STUDY ON POSSIBLE REFORMS TO NUCLEAR THIRD-PARTY LIABILITY INSURANCE: RECCOMENDATIONS MADE

This blog is the final of three on the EC’s study on nuclear third party liability and insurance; previously we have written about the need for the study [1] and, once the report was published late last year, we covered the current difficulties the insurance market is having with some of the revisions to the nuclear liability Conventions [2]. In this blog we look at the recommendations the study makes to alleviate these problems.

With an understanding of the major constraints on insurance provision for the full scope of the revised nuclear liability Conventions, the EC study team identified 14 options that could increase the amount of insurance available (‘capacity’). Some of these options were immediately identified as unrealistic; for example, amending the liability Conventions is unlikely in the short term. Instead the study focused on what could be achieved within the framework of the existing/revised liability Conventions and was conceivably within the power of the EC to implement across all EU member states.

Out of the original 14 options, the 5 options that the study reviewed in detail and recommended were:

  • Allow funds to accumulate to cover the 1st tier of the required liability Convention financial security amount: this arrangement is used in the USA where sufficient premium has built up to allow the required $450 million of financial security for nuclear liability to be fully funded twice over. This allows operators to receive premium rebates and allows insurers to consider their nuclear exposure as more of a catastrophic risk – this alters the modelling on their return on capital and allows them to commit higher capacity.
  • All nuclear liability policies to have single, lifetime limits: some nuclear liability policies limit insurers’ monetary exposure to once in the lifetime of each site; others offer a new policy amount each year. These latter policies will ‘stack’ with each passing year, increasing materially the insurers legacy exposure. The insurance market discovered during the asbestosis crisis that this practice is dangerous, as claimants can claim for each policy year they consider exposure may have occurred. The difference in policy type is purely an illustration of national insurance practice and the nuclear Conventions do not explicitly favour one type over the other; therefore harmonisation is possible. The nuclear liability capacity offering will increase in those countries that removed stacking annual policy limits.
  • Increase nuclear insurance mutual participation with new mechanisms for reinsurance: the nuclear insurance market’s principal competitor is the nuclear industry owned mutual insurers; if these mutuals could offer more insurance (this being backed by reinsurance), then greater capacity could be achieved. New innovative reinsurance mechanisms and new markets (such as the capital markets) could be accessed to increase capacity from the mutuals. Equally, over time, the traditional insurance markets could also develop this way.
  • Mandate a nuclear catastrophe only, EU wide, single event insurance cover to provide funds excess of the current legal regimes: all the liability Conventions mandate the holding of financial security for nuclear liability compensation up to a fixed amount. There is nothing to prevent governments or the EC mandating nuclear site operators buy a separate amount of insurance excess of this; this could be achieved using triggers, identified in the report, to activate this cover. If the use of activating triggers was introduced, significantly more capacity would be available from both the capital and traditional insurance markets. The EC would need to mandate purchase of this new insurance for all EU nuclear operators, but limiting the insurance to a single ‘catastrophic’ event would soften the premium cost, yet offer significant relief to governments (and taxpayers) who are otherwise largely on the hook for such events.
  • Establish an EU wide Protection Gap Entity: the current pandemic has revived interest in Protection Gap Entities [3]. These are entities that will manage catastrophic exposure, perhaps originating from multiple sources (e.g. weather, nuclear event, pandemic or earthquake) to optimise financial protection amongst all stakeholders. In the nuclear sector, this would include governments, insurers, capital markets and operators; sub-dividing and allocating nuclear liability exposure to those most suited would allow material increases in available capacity. For example gradually occurring environmental damage and longevity exposure could be retained within the nuclear industry with tax benefits available to allow the accumulation of funds to support any claims. Cover for only catastrophic nuclear events (similar to Chernobyl and Fukushima) could be allocated to insurers and capital markets; with only catastrophic exposure, higher financial amounts would be offered than today, as nervousness of gradual exposure or longevity risk deters many insurers. Governments could step in to provide high level loss funding, but in partnership with more risk averse capital market players. Such a mechanism would be better suited to a multinational body such as the EC and the mechanism could be used to cover any exposure with systemic loss implications.

It remains to be seen whether the EC implements any of the recommendations or acts upon any of the study content [4]. Achieving a cost-effective higher amount of private financial market contribution to a future catastrophic nuclear event is within the grasp of those willing to confront the difficulties identified in the study; such an outcome could be an opportunity for the nuclear industry, the financial services sector and governments.

Prospect Law was closely involved in the preparation of this study for the EC; for those interested in understanding any aspect of the study in more detail, please get in touch.

[1] See: The European Commission and possible reforms to Nuclear Third-Party liability insurance – Prospect Law

[2] See: Third Party Nuclear Liability Insurance – Will the Insurance Market be able to cope with the proposed changes? – Prospect Law

[3] For more detail and explanation of these entities, see: PGE-Report-FINAL.pdf (city.ac.uk)

[4] The full, published EC study can be found here:  Study on the insurance, private and financial markets in the field of nuclear third party liability – Publications Office of the EU (europa.eu)

About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

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RISK PERCEPTION: MISTAKES TO AVOID WHEN ASSESSING CORPORATE RISK

A trio of Covid-19 related risks heads up the 10th Allianz Risk Barometer 2021…’ states the introduction to this year’s eponymous survey of the key business risks of each year. 

Previous Risks

What a surprise! Strangely enough, the pandemic did not feature in the top 10 business risks in last year’s (January 2020) survey (it was 17th), whilst the 3 surveys prior to 2020 nominated business interruption as a key risk.

In 2012 (the first year of the survey) the top two business risks were economic risks and natural catastrophes, which reflected the experience in the previous year of both the aftermath of the 2010-11 financial crisis and also the devasting floods in Thailand. 

Actually, none of these rankings are that surprising, but to those of us interested in risk management what is interesting is to see how we humans frequently rate the most recently experienced risk as the most threatening.

This pattern of human behaviour is well known but can be a problem when conducting a business risk management exercise. There is a tendency to prioritise the risks that have just happened over risks that may be equally or more relevant and/or more likely to occur.

Business Interruption

The risks of business interruption feature strongly in the Allianz surveys and the current pandemic has raised their profile more; business interruption is a generic risk that can cover a multitude of events. As insurance is concerned with tagging the financial cost of any interruption to a specific insured event (or uninsured, as we have seen during the past year) it is limited to mitigating at best some of the exposure to financial loss. Other events that can cause business interruptions such as wider supply chain disruptions, staff absenteeism or economic risks will be uninsured. Therefore, a good risk management programme must address business resilience across a wide spectrum of events, from known exposures to those ‘unknown unknowns’ and mitigate these as much as possible, using insurance as well as a range of other measures.

Risk Management

Where should responsibility for risk management lie? For decades insurers and brokers have worked with company risk managers, whose role frequently was limited to managing insurance purchases and thereby minimising insurance spend. Today there is a greater recognition of business risk and the value of a strong risk management programme. This has led to boards of directors becoming more responsible for a company’s risk management strategy. 

This positive trend will continue as the insurance and financial markets become ever closer, developing products that are better suited to protecting a wider range of risks. It is also pleasing to see that the pandemic has encouraged government, financiers, insurers and academics to devise better methods of risk management and to enhancing systemic economic resilience to risks that threaten more than just a limited number of businesses. However, complacency – the ‘it’ll never happen to me’ mentality – is still often prevalent and it remains an obstacle to risk management planning in many economic sectors.

Risk perception is a wide and fascinating area of study; we all have different risk appetites and perceptions of what is risky. When conducting objective risk management exercises we need to put prejudices and pre-conceptions aside and consider what the real issues facing our business are just now. This should be an exercise that involves senior management taking a holistic view of as wide a spectrum of hazards as possible, evaluating the resilience of the business in the face of these hazards and devising an appropriately wide-ranging mitigation strategy. In short, when considering the risks your company faces, try to look around and ahead – not back.  

About the Author

Mark Tetley has wide experience gained from senior positions across the London insurance market as  both an underwriter and a broker, in a variety of sectors. He provides advice and assistance on a wide range of insurance and risk issues, including comprehensive nuclear liability and property insurance assistance, complex infrastructure project programme design and review, claims and policy reviews, assistance with project insurance design and implementation in developing countries, and many other aspects of risk mitigation.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

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THIRD PARTY NUCLEAR LIABILITY INSURANCE – WILL THE INSURANCE MARKET BE ABLE TO COPE WITH THE PROPOSED CHANGES

About a year ago we published a blog about an EC study on nuclear liability and insurance; in that blog we commented on the reasons why this subject was of interest to the EC and gave a broad outline of the report’s content.

The EC has now published the study and although there has been a delay in it doing so, the subject remains topical simply because of the continuing inadequacy of the insurance provision when measured against the soon-to-be revised liability obligation of nuclear operators.

In this blog we will analyse why the insurance provision remains inadequate and in a future blog we will look at the recommendations the study makes to alleviate these deficiencies.

It is almost certain that the liability obligations of nuclear operators in OECD countries will expand materially on 1st January 2022 when the 2004 revision to the 1960 Paris Convention on nuclear liability is ratified. The old definition of nuclear damage will be widened from just property damage and bodily injury to include economic, environmental and preventive measure damages; critically it will also offer the ability for potential claimants to bring a bodily injury claim up to 30 years after the causal incident (the existing period is generally only 10 years). The financial security amount (i.e. the amount the nuclear operators must provide and cover with insurance or some other financial guarantee) will rise to between €700 million and €1,200 million; the existing financial security in the UK is a mere £140 million.

The insurance market can easily cover the existing liability obligations in full – for the full amount, full period and full scope, but at present this will not be the case for the new regime next year – why not?

The study identifies the major blocks on providing this revised liability insurance for nuclear sites as:

  • Ambiguity of language – the Convention’s new, wider scope of cover is less definitively worded than the limited existing cover; for example under one of the new heads of damage operators are liable forcosts of measures of reinstatement of impaired environment but it is not easy for insurers to make provision for exactly how much reinstatement may be required.
  • Volatility – insurers need to make provision for future claims arising under policies underwritten today. The extension of the time to bring a claim for nuclear damage from 10 to 30 years materially increases volatility of outcome for insurers as predicting losses so far into the future becomes guesswork; therefore insurers must allocate disproportionate reserves for such events to cater for unexpected losses.
  • Judicial inflation – insurers are nervous that judicial decisions for claims made decades ahead may be driven by different social and medical values, so increasing the value of claims substantially. This further complicates today’s provision for future liability claims.
  • Other factors such as relatively poor perception of the nuclear sector, the lack of actuarial loss data (there have been very few nuclear insurance losses) and uncompetitive returns on capital have disincentivised insurers from entering the nuclear insurance market, thus restricting innovation and any broadening of the market.
  • Small size of nuclear insurance market – insurance of nuclear risks is mostly provided by nuclear insurance pools; these are national groups containing many insurers in an individual specialist insurance entity that provides cover for most nuclear sites globally. Given that normally competing insurers are grouped into a single entity (a pool), it is axiomatic that these pools are not subject to the normal cut-throat competition seen elsewhere in the insurance sector and this too has limited the development of a fully competitive insurance market for nuclear.

All these factors have challenged the insurers of nuclear liability to provide the required cover for the forthcoming liability Convention revisions. At present the insurers can offer enough financial limit to cover the revised financial security amounts but cannot offer the full scope of the revised nuclear liability language.

As with any market the insurance availability situation is fluid, but it remains unlikely that the full scope of cover will be available for the full amount of €1.2billion in time for next year.

In the next blog we will look at the recommendations the EC study makes to alleviate this situation.

About the Author

Mark Tetley has wide experience gained from senior positions across the London insurance market as  both an underwriter and a broker, in a variety of sectors. He provides advice and assistance on a wide range of insurance and risk issues, including comprehensive nuclear liability and property insurance assistance, complex infrastructure project programme design and review, claims and policy reviews, assistance with project insurance design and implementation in developing countries, and many other aspects of risk mitigation.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

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CORONAVIRUS: THE INTERACTION BETWEEN A PANDEMIC AND INSURANCE COVERAGE, PART V

The insurer utterly abandoned us and sought to mitigate their losses to zero’. These words, spoken by Mr Murray Pulman [1] of the Posh Partridge café in Dorset, capture the feelings of many of the hundreds of thousands of UK policyholders denied coverage by their insurers for Covid-19 business interruption claims. Relief might be coming for some of these policyholders following this week’s High Court judgement in the Financial Conduct Authority’s (FCA) business interruption (BI) insurance test case [2].

At the height of the UK’s pandemic lockdown BI insurance coverage (or lack of it) was a hot topic; in our April blog on the subject we noted ‘Coverage for business interruption has become the focus of criticism for insurers in the past few weeks, with several interesting legal cases looming already‘. Sensibly, during the summer, the FCA acted quickly by bringing a test case on behalf of policyholders to resolve the lack of clarity that was evident when many policyholders made business interruption claims. At the time, the insurers Hiscox and QBE were particularly in the firing line, but ultimately the defendants in the test case also included other well-known insurers such as Royal & Sun Alliance, Zurich and Ecclesiastical.

So, has the test-case resolved the BI coverage issue? Will all those unfortunate claimants now be able to imagine their businesses surviving thanks to an insurance claim payment? Typically, it depends. In simple terms, the FCA hailed the judgment as ‘a significant step in resolving the uncertainty being faced by policyholders[3], which we must believe is true; certainly, the judgement went strongly against the insurance industry’s arguments. However, true certainty for policyholders depends on what sort of disease or denial of access clause each policy has and the judgment did not find each of the eight defendant insurers liable across all of the 21 sample policy wording variations. For example, the Hiscox press release stated: ‘The Judgment has now been delivered by the High Court of England and Wales – the High Court found that there could be cover for some Hiscox policyholders in certain circumstances.  Each customer’s claim is different and the ultimate outcome will depend on each claimant’s policy and individual circumstances’. It went on to say that ’fewer than one third of Hiscox’s 34,000 UK business interruption policies may respond’. The Australian insurer QBE commented similarly: ‘The court ruled in favour of QBE with respect to two out of three of QBE’s notifiable disease policy wordings examined and in favour of insurers generally with respect to denial of access policy wordings. However, the Court ruled in favour of insureds with respect to one of QBE’s notifiable disease policy wordings’.

Thus more pain is likely for some, but overall it must surely be viewed as a positive outcome for policyholders and many of those affected will now receive at least some claim payments. The Hiscox Action Group observed that ‘hundreds of Hiscox Action Group members who were forced to close their premises during the pandemic should now receive an insurance pay out from Hiscox Insurance’.  The Action group’s lawyer stated that it is writing to Hiscox Insurance ‘demanding immediate interim payments for many clients who are struggling to survive’.  The judgment has also clarified some key points:

  • Most of the disease and so-called hybrid [4] clauses in the sample of insurance policies do provide cover;
  • The denial of access clauses are more restrictive and only some will provide cover, depending on the detail of the clause wording;
  • The Coronavirus pandemic and government’s response were a single cause of the covered loss. The insurers had sought to reject some BI claims using a causal test decided in Orient Express Hotels Ltd v Assicurazioni Generali SpA (2010) [5] during the aftermath of Hurricane Katrina; this judgment rejected these arguments.

Although the judgment could be appealed and many affected policies will be subject to extensive negotiations before claims payments are made, this judgment is a victory of sorts for policyholders. With some insurers now licking their wounds, the industry is now assessing whether the now more likely payments will damage the insurance sector financially; the credit rating agencies’ assessment so far is that this development is manageable and will have little to no effect on their financial ratings. However, reputations are harder to repair; insurers such as Hiscox must be wondering whether rejecting these claims was worth the almost overnight shredding of a hitherto well-deserved strong brand name built up over 40 years.

The wider lesson for the insurance industry is that clarity of intent, policy language and action after an event are all basic requirements for policyholders; on this theme the last word about this judgment must go to the CEO of the London and International Brokers Association: ‘clients deserve clarity, and the fact that this case had to take place at all is a rebuke to our industry and the often obscure language we use. Customers deserve to understand exactly what it is they are getting in language they recognise[6].

About the Author

Mark Tetley has wide experience gained from senior positions across the London insurance market as  both an underwriter and a broker, in a variety of sectors. He provides advice and assistance on a wide range of insurance and risk issues, including comprehensive nuclear liability and property insurance assistance, complex infrastructure project programme design and review, claims and policy reviews, assistance with project insurance design and implementation in developing countries, and many other aspects of risk mitigation.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.


[1] See: https://uk.reuters.com/article/idUKKBN266315?utm_source=slipcase&utm_medium=affiliate&utm_campaign=slipcase

[2] https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-judgment.pdf

[3] https://www.fca.org.uk/news/press-releases/result-fca-business-interruption-test-case

[4] The case defined a hybrid clause as one that combined elements of both disease and denial of access clauses.

[5] See: https://www.casemine.com/judgement/uk/5a8ff7d160d03e7f57eb2494

[6] See: https://www.linkedin.com/feed/update/urn:li:share:6711617923334598656/

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CORONAVIRUS: THE INTERACTION BETWEEN A PANDEMIC AND INSURANCE COVERAGE, PART III

I said whatever it takes – and I meant it”. These memorable words from our Chancellor, Rishi Sunak, were made earlier this week as he unveiled his ‘unprecedented’ financial rescue package for the economy in response to the rapidly evolving coronavirus situation. 

Further on in the same speech, he also said: “let me confirm that, for those businesses which do have a policy that covers pandemics, the government’s action is sufficient and will allow businesses to make an insurance claim against their policy”. In our previous blogs on this topic, the position of most insurance policies on business interruption has been explained, as there have been (and remain) misconceptions about the availability of cover; here, at last, is the government’s recognition that insurance policies for coronavirus are not universal. In response to the Chancellor’s speech, the Association of British Insurers (ABI – the UK insurance trade body) said “the Chancellor’s statement today is consistent with our statement this morning where we said in the event businesses have the right cover, this type of notification could help make a claim. But, as the Chancellor acknowledged, the vast majority won’t have purchased extended cover and this remains unchanged.”

Prior to the Chancellor’s speech the ABI had already clarified that standard business interruption cover does not include forced closure by authorities; it also stressed that irrespective of whether or not the government orders closure of a business, the majority of businesses won’t have bought cover that will allow them to be compensated for their operations being halted by the coronavirus. As we’ve already described in previous blogs, business interruption cover generally needs to be triggered by insured physical damage. 

Thus, to cover the financial effects of a pandemic, specific insurance needs to be purchased . So, who has purchased such insurance? Seemingly almost no-one; in a report this week , insurance broker Marsh reported no takers for its pandemic product launched in 2018. However, now the situation is obviously different with demand soaring.

Insurance is a risk mitigation tool, to be used to protect businesses and people from financial losses caused by extreme events; such protection can often be the difference between a business surviving or not. Yet our understanding of extreme events is framed by our experience of them. Therefore very rare events for most of us (such as pandemics, terrorist attacks or nuclear accidents) are often either not insured or under insured, because the perception is that ‘it won’t happen to me’, whereas events that we see and experience more regularly are fully insured (such as fires and car accidents).  Typically, after a rare event demand for insurance products offering protection spike; for example insurance for terrorism increases dramatically after a high profile event but tails off as the memory of the event recedes and complacency sets in again.  The sudden and almost universal recognition of the severe impact of coronavirus is what is driving new demand for Marsh’s pandemic product today.

One lesson from this coronavirus outbreak should be that, as part of their risk management process, businesses need to improve modelling for the ‘unknown unknowns’ and take a proactive rather than reactive approach to insurance purchases. It is certain now that the financial intervention demanded of the government during this crisis is going to be way beyond the means of the UK insurance market; nevertheless, there will be a few businesses that will claim for pandemic loss having bought the right product at the right time.  The insurance may not respond for the full financial cost of the loss, but any claim payment could be a valuable financial contribution towards the survival of the business, so rewarding prudent risk management practice undertaken calmly and thoroughly before the event occurs.

About the Author

Mark Tetley has wide experience gained from senior positions across the London insurance market as  both an underwriter  and a broker , in a variety of sectors. He provides advice and assistance on a wide range of insurance and risk issues, including comprehensive nuclear liability and property insurance assistance, complex infrastructure project programme design and review, claims and policy reviews, assistance with project insurance design and implementation in developing countries, and many other aspects of risk mitigation.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

Click here to read Part I in this series

Click here to read Part II in this series

For a PDF of this blog click here

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CORONAVIRUS: THE INTERACTION BETWEEN A PANDEMIC AND INSURANCE COVERAGE, PART II

There’s a lot of panic at that moment that’s not warranted. Short-term economic activity will contract and it will have an impact on global GDP, but it’s not like the world will end tomorrow.” These were the words of global insurer Allianz’s CEO in late February; his words at the time contrast with the decision on 12th March by Allianz’s wholly owned subsidiary LV= to stop selling travel insurance because of coronavirus . The Post Office, Insure and Go and others have also advised they will restrict cover for or exclude claims from coronavirus after the 11th March. It seems a measure of panic has set in amongst insurers after all.

Meanwhile there are reports that many policyholders are shocked to find that their general business insurance policies mostly do not cover any of the increasingly large financial impacts of this health emergency; as outlined in our previous blog, most insurance policies will not respond unless a specific cover extension has been bought.

Given these and other recent headlines highlighting the insurance industry’s apparent desire to dodge claims whenever possible, significant reputational damage to the sector is likely. Without wishing to endorse individual insurer tactics during these uncertain times, a defence and explanation of the general approach taken by the insurance sector during this pandemic (and other similar events) is appropriate; here are some points to consider:

  • There’s an old saying in insurance: ”You can’t insure a burning house”. Insurance exists to cover the future occurrence of selected fortuitous events; now that coronavirus is established it is a certainty that it is causing (and will continue to cause) significant financial loss. No insurer will offer new cover for the financial effects of the virus now; it would be mad to do so.
  • Most insurance policies issued to businesses cover risks that cause physical damage and any resulting financial loss (business interruption – if purchased); the physical risks covered typically include fire, natural hazards, accidents, explosions and breakdowns. Adding subsequent financial loss comes at a cost, even for these simple physical damage risks. Our previous blog noted that some limited supplier and customer extensions to this cover may be available, but these are contract specific and any extensions of cover for (e.g.) pandemic will need to have been negotiated at the time of policy preparation or renewal; generally insurers are wary of offering financial loss cover without any initiating physical loss. Therefore, open ended financial loss insurance cover for coronavirus impact, absent of any physical loss, will be rare.
  • A conscious decision by a business to buy these extensions to cover in advance is essential; the insurance market and wider financial services sector have rightly been held to account for mis-selling covers that are not required, desired or authorised, the most recent example being PPI
  • Although many insurers are restricting or not offering future travel insurance cover during the coronavirus emergency, it should be remembered that they must honour any cover and claims up to the date of any change of approach. Thus, in the case of LV=, the Post Office or any other insurer, valid claims for coronavirus travel disruption made before 11th March should be covered.
  • Insurance companies are private sector businesses; as such they are not bottomless pits of money and cannot just keep paying unlimited claims. They are capitalised in accordance with regulatory models and need to manage their funds carefully. Policies are underwritten based on realistic modelling of a wide range of scenarios; monitoring accumulation of multiple policies to specific events is of particular importance to prevent a run on funds. New events, such as coronavirus, challenge models and assumptions and it is natural for insurers to exercise caution and restrict cover when faced with such uncertainties. In addition, most insurers invest premiums in the financial markets; the recent rout of stock markets globally will have materially dented their reserves, so causing further concern.
  • Notwithstanding any restrictions of cover or perceived failure to offer ‘enough’ insurance, the sector will pay out significant claims for this coronavirus pandemic. Travel and cancellation insurances will see significant claims as the impact spreads, as will specific pandemic covers purchased in advance as extensions to standard policies. Also, the credit insurance market, which provides cover for trading partner insolvencies, will see significant losses as a result of this virus outbreak.

It is easy to criticise the insurance sector when it does not perform as many would like it to and undoubtedly it has often presented itself badly; however, as with many other economic sectors, the impact of coronavirus on insurers will be both challenging and uncertain. It should be recognised that insurance cover is available for extreme events such as coronavirus for those businesses that are well prepared and that practice good risk management – a vital tool for identifying risks and potential gaps in financial cover. This work allows them to consider the best risk mitigation measures, including the advance purchase of appropriate insurance cover for many unknown events – such as pandemics.

About the Author

Mark Tetley has wide experience gained from senior positions across the London insurance market as  both an underwriter  and a broker , in a variety of sectors. He provides advice and assistance on a wide range of insurance and risk issues, including comprehensive nuclear liability and property insurance assistance, complex infrastructure project programme design and review, claims and policy reviews, assistance with project insurance design and implementation in developing countries, and many other aspects of risk mitigation.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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CORONAVIRUS: THE INTERACTION BETWEEN A PANDEMIC AND INSURANCE COVERAGE

Each day brings further grim news of the spread of coronavirus in China and elsewhere; today mentions of the virus have moved well beyond being the subject of internet jokes about Mexican beer now that Chinese deaths alone from the virus are around 2,200. Arguments will doubtless rage for a long time on whether the Chinese were too slow initially in dealing with the problem, however, that doesn’t help those suffering already from the effects, whether they are bereaved families or businesses suffering a loss of revenue and, as things stand today, the impact of the virus is spreading at a seemingly unstoppable rate. Last week the Mobile Congress World (MWC) in Barcelona was cancelled after several high-profile exhibitors pulled out – in the past the event has attracted up to 100,000 people and this cancellation will be a blow to many. However, it isn’t just conferences that have been affected, more recently rumours and facts have emerged about significant impacts to markets and manufacturing supply chains, from products as diverse as cars, oil and mobile telephones.

The Role of Insurance

Other than the virus itself, a common thread through all these stories could be insurance. Indeed, many businesses that rely on global supply chains will be checking their insurance policies for cover that insures a loss of production arising from supply chain problems; meanwhile event organisers, tourists and business travellers will also be checking their polices for cover, if an event is compromised by the virus. Most large businesses with a global reach should have cover in place for supply chain difficulties, but for many smaller firms that haven’t considered the need for such cover before, evidence of any cover may be buried in the policy smallprint that insurers are so famous for.

Some businesses may be lucky enough to have purchased specific cover to include losses caused by pandemics. For those that have not, the business interruption element of their property insurance policy is the first place to look to for supply chain coverage; this normally insures a business for revenue loss following physical damage to a firm’s own assets, although some policies offer extensions to cover suppliers and customers (i.e. events that affect a key supplier or customer – in this case a shutdown due to a health pandemic).  The limits (amounts of insurance available) will almost certainly be lower than the amount available for own-asset damage; this is to limit the insurers’ exposure from many policies arising from the same event.  Even normal business interruption insurance is often inadequate to cover major losses – perhaps at a key production facility; however, what many companies are facing from coronavirus is complete shutdown; just this week Jaguar Land Rover announced that it has two weeks supply of some components – it is not alone. Therefore, the supplier and customer extensions may not offer adequate financial cover.

Exclusion Clauses

Another section of a policy to check is the exclusions, both those that apply to the suppliers’ extension specifically (if provided) and those which apply to the whole policy; be warned, some insurers already have exclusions for pandemic alongside the more usual exclusions such as war.

For impacts on key staff, business trips or other personnel issues, normal travel, personal accident, key man or life insurance policies may offer some cover – these should be checked, though again with caution as pandemics or other similar global events that could lead to runaway losses may be excluded. 

Pandemic Policies

Some specific pandemic insurance policies are available. For example, in 2019 Marsh launched a product called PathogenRX, which provides global protection for US-based businesses affected by an infectious disease outbreak; the insurance is provided by Munich Re and uses a specific metric to trigger the cover. Also, most big events (such as the Tokyo Olympics in July 2020) will probably buy specific cancellation insurance, which again could offer compensation should an epidemic result in cancellation; however buying now could be expensive.

From the insurers’ perspective, the lesson for many businesses of all sizes from such ‘unknown unknown’ events is that comprehensive business resilience too often is only retrospectively assessed and possible mitigating insurance cover is either unknown, ignored or investigated too late. Risk transfer solutions that could reduce the financial impact of coronavirus on business bottom lines are available; meanwhile ample good advice on business risk management can also be found on the internet, for example at the US Centers for Disease Control and Prevention.

About the Author  

Mark Tetley has wide experience gained from senior positions across the London insurance market as  both an underwriter  and a broker , in a variety of sectors. He provides advice and assistance on a wide range of insurance and risk issues, including comprehensive nuclear liability and property insurance assistance, complex infrastructure project programme design and review, claims and policy reviews, assistance with project insurance design and implementation in developing countries, and many other aspects of risk mitigation.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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THE EUROPEAN COMMISSION AND POSSIBLE REFORMS TO NUCLEAR THIRD-PARTY LIABILITY INSURANCE

Prospect Group experts have recently contributed to a study completed for the European Commission on nuclear third-party liability (NTPL) insurance. The EC’s interest in more work on this topic was driven by the following factors:

  • The differing legal regimes for NTPL evident within EU member states have led to wide disparity between the amounts of statutory financial security required by nuclear operators to pay for compensation to off-site victims that suffer nuclear damage (perhaps from a severe accident).  For EU countries with nuclear power plants, these amounts range from €43.9 million in Bulgaria to €2.5 billion in Germany (the UK amount is currently £140 million). To fulfil their statutory obligations, nuclear operators normally buy insurance to cover these financial security amounts.
  • A recognition that although the highest of these financial security amounts existing today globally apparently correspond to the insurance market’s available capacity, they do not match the potential total costs resulting from a severe nuclear accident. For example, at the time of Japan’s Fukushima accident in 2011, the financial security amount required of the operator was ¥120 billion (c. £844 million/$1.1billion) yet the compensation paid has already exceeded ¥9.33 trillion ($85 billion/£66 billion).
  • There is currently some uncertainty as to whether the nuclear insurance market can offer insurance cover for the full scope of the revised liability regimes, due when the 2004 revisions to the 1960 Paris Convention are ratified – probably early in 2021. The insurers have expressed concerns over the insurability of some of the revised heads of damage and at present most have refused to cover the extension of the time limit to bring a claim for bodily injury or death from 10 to 30 years.

Despite these difficulties with the provision of nuclear insurance, insurers can meet much larger loss amounts for other events that cause widespread damage to businesses and homes, such as natural catastrophes, for which claims totalling more than $50 billion per event are now quite frequently paid. With other events easily able to call upon such sizeable amounts, the EC commissioned this latest study to discover whether insurers could provide substantially more insurance for severe nuclear accidents, and if so, under what conditions.

The previous EC work on this subject revealed some interest from certain insurers in providing materially higher insurance amounts for catastrophic nuclear losses, but with this insurance cover activated by a trigger of some sort. Of course, at present using a trigger to activate a nuclear site operator’s required financial security for NTPL compensation is not permissible – the funds must be available for all nuclear damage, no matter how it arises.

However, if triggers are combined with other mechanisms or if new capacity is used to supplement the existing financial security requirements, could governments (and ultimately taxpayers), as the payers of last resort, be moved further away from the cost of a severe nuclear accident? The EC thinks the subject is worthy of further study, which is timely as the gradual merging of the capital and insurance markets is opening up new sources of capital and new ways of looking at risk.

In addition, the EC feels that it has made progress on other fronts that could have relevance to the field of nuclear liability. For example, in the EC’s view significant enhancements have been introduced to the EU legal framework, with the adoption of the revised Nuclear Safety directive and the revised Basic Safety Standards (BSS) directive; in particular, the revised BSS directive lays down uniform dose limits covering public exposures and occupational exposures and requires EU members to ensure that reference levels for emergency and existing exposure situations are established.

Will these changes permit greater EC intervention in the field of nuclear liability and will market developments encourage insurers to commit higher insurance capacity to nuclear liability?  To find out, the EC commissioned the study to assess the latest structure and capacity of the insurance and financial markets in the nuclear third party liability arena, with a view to evaluating how and to what extent these private market providers could increase cover in the event of severe nuclear accident.

Two future blogs will follow the EC study, examining firstly the current state of the NTPL insurance market and then possible mechanisms that might see more private capital and insurance backing NTPL financial security amounts.

About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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REPAIR, RENOVATION AND PROJECT RISK MANAGEMENT: NOTRE DAME AND ITS RELEVANCE TO ENERGY INFRASTRUCTURE INSURANCE

Few could have been unmoved by the images of the Notre Dame Cathedral fire in Paris, which filled news bulletins in April 2019. The cathedral was under renovation at the time and, although the official investigation report is not due until 2020, speculation as to the cause of the fire has been rife. The latest view is that it could have been an electrical fault or perhaps even a discarded cigarette. Whatever the cause, the changed risk environment, introduced by the renovation work, will have been a contributory factor.

A recent article in Historic Churches magazine summarises some of the hazards that this renovation work probably introduced or increased, such as the presence of hot works, alternative electrical arrangements, the propping open of doors leading to reduced fire separation, disabling or altering alarm systems and increased smoking on site.

The fire started in the roof of the cathedral, where it found a tinder dry, massive wooden superstructure to feast on; a good alarm or sprinkler system could have nipped the fire in the bud – but alas the alarm was not fit for purpose and sprinklers weren’t fitted. Historic buildings are particularly prone to fires as they often contain a lot of wood and are not necessarily designed with fires or other hazards in mind; therefore, retrofitting of modern risk management systems is common.

Insurance for Energy & Infrastructure Sites

Whilst Notre Dame Cathedral may not seem relevant when considering energy infrastructure and its insurance, lessons can be learned from this fire (as they can from almost any other event during renovation or repair). It is important to remember that any project that is not part of the normal operation of a plant, such as a repair outage, plant renovation, or a life extension project, will materially alter the risk profile of the site; as such the work should be reported in detail to the site insurers. Crucially, cover may be denied if insurers are not notified of what is happening. Sites should expect to pay an additional premium to reflect the changed and increased risk profile that insurers face during a large project.

What sort of changes to the risk profile occur during construction, outage and major project work? Examples include reduced plant automation during outages, work in confined spaces, plant disassembly and assembly, performance of new or unusual tasks, working under time pressure and inevitable changes to the health and safety environment. However, the increased use of contractors and (often related) human performance issues are perhaps the greatest changes.

Case Studies

Two examples in the power sector offer demonstrations of the potential cost of human performance risk during projects:

  • On December 25th 2005, Unit 1 of Koeberg nuclear power station in South Africa was undergoing an outage. Due to poor cleaning controls, a bolt was left in a generator by mistake; when the generator restarted, extensive damage was caused and the ensuing delay in securing a replacement caused hundreds of millions of South African Rands in damage, to both the operator, Eskom, and to the city of Cape Town, which suffered power shortages for about 6 months afterwards. Although sabotage was at one stage considered a cause, ultimately this expensive event was established as a human performance issue.
  • More recently, in 2017, at Unchahar coal fired power station in India, following a troublesome commissioning of the new power plant, a catastrophic explosion caused by ash build-up and over-pressurisation resulted in the deaths of 47 workers. Whilst the plant owner and the operators were all experienced, the plant was relying on visual ash inspections and was operating under time pressure – both dangerous ingredients that can magnify the risk of human error. 

Both events were insured, but the message is simple: recognise the changed risk profile caused by any project, big or small, and discuss its implications with its insurers; this will help prevent misunderstandings and perhaps ensure that a claim is not denied.

About the Author

Mark Tetley has wide experience gained from senior positions across the London insurance market as  both an underwriter  and a broker , in a variety of sectors. He provides advice and assistance on a wide range of insurance and risk issues, including comprehensive nuclear liability and property insurance assistance, complex infrastructure project programme design and review, claims and policy reviews, assistance with project insurance design and implementation in developing countries, and many other aspects of risk mitigation.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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CYBER RISK – INSURANCE AS A RISK MITIGATOR IN THE ENERGY AND POWER SECTORS: PART III

In the first article of this series, reference was made to the CyRim report that suggested a concerted global cyber-attack could cost between $85 and $193 billion, whilst also suggesting that only 14% of this amount would be insured.

This low proportion can partially be explained by confusion in the insurance market, over how to offer the correct cyber insurance products at the right price.  An understanding of the insurance market’s current position on cyber exposure will help energy businesses considering risk mitigation measures.

Non-Affirmative Cyber Cover

The Mondelez case mentioned in the previous article illustrates one category of cyber insurance: so called non-affirmative (or ‘silent’) cyber cover.

This is where insurance cover is offered either inadvertently, inexplicitly or as a limited extension to an existing policy. For example, a typical property insurance policy may offer cover for ‘all risks of physical loss…’ and one could assume that, perhaps following a cyber-attack that resulted in physical loss to a key component, this would be insured. It may equally be (as in the Mondelez case) that cover may be excluded if the loss occurred as part of a systemic ‘hostile’ attack.  Overall non-affirmative cover is not ideal and indicates some laxity by both insurer and insured; even if cover is added to an existing policy, the applicable conditions on the extension of cover (i.e. the small print) will generally be those found on the original, master policy.

During 2018 the UK insurance regulator surveyed cyber underwriting practices and earlier this year wrote to all general insurance firms, outlining its findings and expressing concern about many insurers’ unmanaged exposure to policies offering non-affirmative cyber cover. In short, the systemic exposure to insurers from inadvertent cyber insurance cover is a concern and could mean critical infrastructure assets may have inadequate or no insurance cover.

Silent cyber cover is thankfully rare in the energy sector, as most physical damage polices have an explicit cyber exclusion clause that means cyber cover must be purchased separately. Whilst Cyber insurance is a developing sector, some cover is readily available, although often not for very high limits (i.e. financial amounts). For example, cyber liability insurance covers risks such as IT breaches, data theft/loss and ransomware, and is competitively provided; policies may offer several additional benefits including loss of revenue, reputation damage, data recovery and cyber expertise to help with possible claims.  However, cover for physical damage as a result of cyber and for cyber losses to the supply chain is more limited because of the obvious systemic risk to the insurer; these exposures will be carefully underwritten and could be expensive.

Conclusion

It is apparent that the cyber risk environment is evolving rapidly, for both the energy sector and the insurance market that serves it; a transparent, competitive insurance market will undoubtedly develop as experience of cyber risk grows. However, despite very high cyber risk awareness in all sectors, confusion over insurance cover is still apparent. In the short term, pending the development of a substantive cyber insurance market, cyber exposure can be managed and mitigated through some simple steps that could include the following:

  • Putting cyber awareness at the heart of risk management, with constant review to keep abreast of the fast-moving cyber threat environment.
  • Auditing key processes and systems to help identify vulnerabilities or weaknesses, or where the greatest exposure lies.
  • Considering risk mitigation measures to address these key exposures, including insurance if available.
  • Checking all insurances and don’t rely on silent cyber cover; instead seek out affirmative, specific new cyber cover.
  • If insurance is already in place, checking it is fit for purpose and will respond; challenging brokers and underwriters with loss scenarios to verify this.
  • Checking the limits, excesses and waiting periods of all cyber-specific insurances, again challenging the broker or underwriter.
  • Considering which extensions, such as legal funding, post-event PR, business interruption or (if available) physical damage would be of benefit.
  • Understanding how any claims will be handled before the event and ensure comfort with post-attack procedures; make sure cyber events are part of the Business Continuity Plan.
  • Not opting for the cheapest insurance cover; better quality insurance cover provided by more solvent insurers will cost more, but such policies will be more secure and responsive to exposure.  

Click here to read the first article in this series

Click here to read the second article in this series

About the Author

Mark Tetley has wide experience gained from senior positions across the London insurance market as  both an underwriter  and a broker , in a variety of sectors. He provides advice and assistance on a wide range of insurance and risk issues, including comprehensive nuclear liability and property insurance assistance, complex infrastructure project programme design and review, claims and policy reviews, assistance with project insurance design and implementation in developing countries, and many other aspects of risk mitigation.

Prospect Group is an award winning Multi-Disciplinary Practice combining the legal services of Prospect Law with the consultancy services of Prospect Advisory. Our lawyers and technical experts provide a single point of reference for clients involved in energy, infrastructure and other development projects.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here