Travel Insurers Face Headwinds From Reinsurers Over COVID Losses

Insurance litigation stemming from COVID-19 has offered few jurisprudential surprises:  exclusions were largely enforced, defense costs mostly paid. While policyholders almost immediately sued their insurers under a variety of policies (e.g., CGL, D&O, WC, EPL, Health, Event, Business Interruption, and Travel), the litigation costs, judgments, and settlements are only now being presented as covered (and paid) loss to the reinsurance industry. Inevitably, reinsurers and their cedents will disagree as to how and to what extent reinsurance applies to this loss(es). Many of these negotiations are ongoing and may result in litigation, mostly in arbitral forums. Reinsurance disputes involving travel insurance and travel protection will likely be more contentious than any other line of business affected by COVID-19.

Travel insurance is big business, accounting for more than $4B in annual U.S. premium alone. It provides a variety of covers for specific, usually short-term trips, vacations, and overseas work assignments. The policies typically include medical and non-medical coverage. Travel insurance is a high frequency, low severity cover. The policies many triggers for loss are as varied as the destinations of travel.

Enter the global pandemic, which has resulted in a nearly universal and simultaneous loss(es) for the industry. There is no precedent for a nearly complete cessation of worldwide travel. The closest example would be Iceland’s 2010 volcanic eruption, which intermittently caused weekly disruptions to air travel throughout much of northern Europe. While the payment of losses and reinsurance reimbursements from that event will be a guide, it will likely be limited.

Any dispute between a ceding travel insurer and its reinsurer(s) in connection with COVID-19 will depend on the multiple circumstances for the insurer’s loss, the terms of the policies, and the application of the reinsurance. The treaties will inevitably differ significantly in form, terms, and exclusions from the underlying policies. Legal arguments for, and disclaimers of, reinsurance coverage for travel claims will involve civil authority orders, ex gratia payments, the ceding carrier’s discretion to determine loss in the first instance, treaty versus policy exclusions, single versus multiple loss occurrence(s), clash cover, date of loss, follow the fortunes and follow the settlements, as well as the duty of utmost good faith.

While pandemic-related litigation generated little in the way of edifying jurisprudence, reinsurance litigation (mostly arbitrated) should prove more interesting and, perhaps, comprehensive. Through interlocutory appeals on questions of state law, the courts may create a new body of reinsurance caselaw that could affect the industry for decades.

The views and opinions expressed in the article represent the view of the author and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice.