2011-11-16
By staff reporter
Insurers of Japanese earthquake losses are facing unexpected increases in claims from manufacturers who moved production and/or sourcing of supplies to Thailand, says law firm RPC (Reynolds Porter Chamberlain LLP).
Many Japanese companies, particularly in the automotive and electronics sectors, moved production to Thailand, and/or found alternative component suppliers in Thailand after the Tōhoku earthquake to minimise their business interruption losses. However, the recent flooding may lead to a substantial increase in insurers’ liability for those claims.
RPC explains that with business interruption claims, the insured business must mitigate its losses in order to recover under its insurance. Many Japanese manufacturers moved production from earthquake and tsunami-hit regions of Japan to Thailand in order to mitigate those losses.
Daniel Saville, legal director in reinsurance and corporate insurance at RPC, comments: “It is very unusual for two large manufacturing centres to be hit separately by such large natural disasters in such a short space of time.”
“The problem for insurers who provide business interruption cover to Japanese manufacturers is that they have to cover the losses stemming from the Thai flooding because so many businesses moved some or all of their supply chain there.”
“Moving production from Japan to Thailand was a ‘Plan B’. The question now is whether those businesses have a ‘Plan C’. The insurance market will be working with insureds to implement cost effective contingency plans as soon as possible.”
RPC points out that much of these losses are reinsured in the London market, so it is not just a regional issue. “At this early stage it is not yet possible to quantify the extra damages businesses are claiming but there is a lot of concern about this in the insurance market,” Saville explains.
The scale and duration of flooding could lead to insurance disputes, he adds: “Apart from issues relating to increases in earlier Japanese losses, the scale of damage to industrial areas from the Thai floods may give rise to coverage disputes in respect of new claims.”
“Insurers could, in principle, exclude claims where a building collapsed or was washed away due to design or structural defects. Even if there is no express exclusion in the policy, such losses would automatically be excluded under Thai law.”
RPC says that for reinsurers, when the losses occurred will be very important. A typical “hours” provision in a reinsurance contract limits damage caused by one event to 168 hours, but some Thai policies are limited to a 72 hour period.
As the flooding spread across most Thai provinces over a period of several weeks, then the losses may constitute several events under the hours provisions, leading to issues regarding the number of applicable deductibles and policy limits.
Partner at RPC, Victoria Sherratt, adds: “An additional factor in business interruption claims, especially those arising from electronics manufacturers, is that production may have been scaled up to deliver goods to the Christmas market. Losses in those cases could be even higher.”
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