New risks, new dangers
Re/insurance industry leaders are increasingly talking about the importance of innovation in the industry. As the world becomes faster-moving and more interconnected, the re/insurance industry is catching up and responding to new exposures.
The new risks facing businesses are very different from those of a generation ago. Insurers are in the business of assuming risk and must find ways of providing coverage for these new risks or they will become gradually less relevant to the very clients they serve. This message is being delivered with increasing regularity by industry executives.
But moving into new risk-generating territory does not come without its perils, says John Nonna, partner at US law fi rm Patton Boggs, specialising in dispute resolution, arbitration and litigation for the insurance and reinsurance industry. He notes that the number of large disputes between insurers and reinsurers has dropped in recent years.
He says industry participants have become more professional in their use of legal resources, and insurance and reinsurance contracts are better written as a result—leaving less room for ambiguity over claims and lowering the odds of disputes over wording. This trend could start to reverse as the industry increasingly takes on new risks, however. Nonna identifies a number of areas where he believes an increase in disputes could likely occur in years to come.
The first is cyber risks. This is clearly a massive potential exposure for the industry, but also one that is very fast moving and dangerously difficult to underwrite. “There are risks arising from hacking, which the industry is beginning to address,” Nonna says. “In the healthcare field, for example, unauthorised access to financial information and medical records can give rise to liability on the part of fi nancial institutions and healthcare providers.
Coverage for this liability will depend upon specific policy wording. Insurers need to consider the many scenarios that may arise from the risks that they intend to insure and their policy wording.”
He gives an example of where disputes can arise around hacking. “Many insurance policies will exclude acts of terrorism in their wording,” he says. “But when it comes to hacking, how do you define that? Even if you can identify the group or individuals responsible, it can be impossible to determine their motives and the extent to which their actions might be categorised as terrorism.”
He adds that the potential impacts of cybercrime can also be very tangible, thanks to an increased reliance on computer controls and digital networks in many industries. He says that hackers could potentially cause cataclysmic damage to infrastructure in some sectors.
“By targeting power companies, hackers could shut entire grids down. Explosions could be triggered in pharmaceutical plants or oil supplies disrupted by targeted assaults in that sector. Are the outcomes of these attacks covered by cyber policies? These attacks can range from state-sponsored actions to the work of computer hacking groups to attacks by terrorists. This is a major opportunity for the industry, but policy wordings will be crucial. Insurers will require detailed disclosure of the risks being assumed.
Supply chain risks
A second area Nonna sees where disputes may arise relates to insurance for disruption to an assured’s supply chains—a risk insurers have started underwriting in recent years. He notes that this coverage is different from traditional business interruption, as this coverage addresses the risk of being unable to produce goods because of a disruption experienced by a supplier.
“A component is unavailable due to the inability of a component supplier to ship to a manufacturer of a finished product. The disruption could be caused by a natural catastrophe such as a hurricane or tsunami or by human action such as a strike or riot. But the upshot is that an assured is unable to manufacture its product. From an insurer’s perspective, this is an opportunity because there is a need for coverage, but the scope of coverage is a critical issue. How far down the supply chain do you go? And will you exclude terrorism?”
A third area where he foresees greater risk is the impact of climate change and the way this could affect the type and frequency of claims hitting insurers.
The right advice
Meanwhile, he notes that other interesting cases also emerge from time to time that have the potential not only for a dispute, but to change the way insurance works when covering the entire sector.
He is currently involved in a case involving a dispute between a number of insurers and the NFL —the American football league in the US. The NFL has been sued by many thousands of former players who claim the long-term risks of concussions were hidden from them during their playing days. The NFL is in dispute with its insurers over whether these claims are covered.
“The case is a very interesting one in its own right, but it also has ramifications for many other sports,” Nonna says.
Nonna says disputes can arise when insurers move into previously unchartered territory without carefully considering whether the policy wording accurately reflects the scope of coverage they intend to provide.
“The industry must innovate and respond to the need for new coverages, but it must take care to develop clear wordings and perceive potential areas of policy language ambiguity before moving into new lines of business.”
“The industry must innovate and respond to the need for new coverages, but it must take care to develop clear wordings and perceive potential areas of policy language ambiguity before moving into new lines of business,” he says.
“Most large insurers and reinsurers are very sophisticated with very good in-house teams. But the same is not always true of smaller players which follow the market. It is worth taking care when entering a new line of business to get everything right from the start.” Nevertheless, says Nonna, an insurer can never anticipate the unintended consequences of affording coverage for new risks and what events may trigger coverage that are not intended to do so.
John Nonna, managing partner of the Patton Boggs New York office, litigates complex commercial disputes, particularly those involving insurance and reinsurance, involving a range business matters. He is particularly well known for his work in the reinsurance area: he has handled several of the largest reinsurance arbitrations on record.
As a litigator, Nonna is known for his innovative approaches to complex cases involving accountants’ malpractice, fraud, breach of fiduciary duty, breaches of warranties and representations, employment discrimination, distributorship agreements, stock and asset purchase agreements, and M&A disputes.
Nonna is a Fellow of the American College of Trial lawyers. He has lectured at numerous conferences on topics including trial practice, arbitration and mediation, insurance and reinsurance coverage, commercial torts and the attorney-client privilege.
Nonna served as Mayor of Pleasantville, New York and as a Westchester County Legislator where he chaired the Legislation Committee.