The whole of Germany is facing considerable challenges due to the Corona pandemic. In order to mitigate the economic consequences, in many areas of life and business insurance protection is available, e.g. in the private sector health insurance and life insurance, in the business sector, among others, in individual cases a business interruption insurance or a D&O insurance (see « Power of disposal of the right to do insurance coverage when the policyholder is insolvent »). The question arises, however, whether the Corona pandemic itself could not be the cause for premium increases, exclusions or terminations of these insurances and whether the theoretical mitigation would thus be practically in vain.
I. The insurers’ option to increase premiums, to exclude and to terminate in the event of a so-called aggravation of risk
However, this insurance cover is not unassailable in all cases, as German insurance law provides, in case of unforeseeable risk situations, for possibilities for insurers to withdraw from an existing insurance contract, to exclude a risk or to increase the premium. These are the provisions of sections 23-25 of the German Insurance Contract Act (hereinafter “VVG”). According to these provisions, the insurer may, in the event of a so-called aggravation of risk, within one month of becoming aware of it, terminate the insurance contract, increase the premium or exclude coverfor the aggravation of risk.
II. Can a pandemic aggravate the risk?
An aggravation of risk within the meaning of section 23 VVG is deemed to exist if
- the so-called “risk-relevant circumstances” (in simple terms: the risk which the insurer is supposed to/was willing to insure),
- which existed at the time when the policyholder made the application or accepted an offer from the insurer,
- have subsequently changed to such extend, that
- either the occurrence of the insured event, or
- the increase of the insured loss or
- an unjustified claim against the insurer
- have become more probable (see e.g. Prölss/Martin/Armbrüster, 30th edition 2018, VVG section 23 marginal 7 with further references).
The answer to the question therefore depends on the one hand on what risk the insurer has assumed and on the other hand on whether the risk has subsequently changed in such a way that an insured event, a major loss or an unlawful claim against the insurer must be expected. At a first glance, one might be tempted – regardless of the insurance product in question – to answer in the affirmative in view of the Corona pandemic, which is causing everyone to feel and experience that they are exposed to more risks than “before” and must therefore accept restrictions.
However, this provision, which after all grants the insurer considerable rights, is not about whether “life” or “the world” in general is more dangerous than “before”. It is rather a question of whether the insurer included the possibility that a certain risk might increase or even materialise in its original premium calculation and its decision to offer a certain insurance product in this form to this policyholder, or whether this was so unforeseeable that its entire calculation and risk assessment must be reconsidered.
The risk of a pandemic, i.e. the spread of a human (infectious) disease beyond national borders and continents, has been known for a very long time, at least in expert circles.
Insurers have therefore been able to include, and often have done so, the risk of a pandemic in their calculations, as can be seen from the fact that many insurance products include an exclusion clause for the event of a pandemic. In such a case, therefore, there is no insurance cover, irrespective of the type of pandemic, i.e. the underlying cause and the disease it causes.
In 2008, the Münchener Rück (Munich Re) also launched a US$ 1.5bn bond programme to place extreme mortality risks on the capital market. With this transaction, Munich Re hedged against high losses that could result from an extraordinary increase in mortality rates following severe pandemics or similar events. The protection included possible losses in the USA, Canada, England and Wales, and Germany (source: https://www.munichre.com/de/unternehmen/media-relations/medieninformationen-und-unternehmensnachrichten/medieninformationen/2008/2008-02-20-muenchener-rueck-verbrieft-erstmals-pandemierisiken-auf-dem-kapitalmarkt.html, last accessed: 23 April 2020).
It follows from all this that a pandemic is not completely unpredictable and thus not generally an aggravation of risk.
III. For which insurance products could the Corona pandemic in individual cases pose an aggravation of risk?
However, this does not rule out the possibility that a pandemic such as the current Corona pandemic could in individual cases aggravate the risk. As explained above, this also depends on the insurance product in question and the hazards/risks assumed there and the calculations made by the insurer in individual cases. In the following, we present the potential effects on the most important commercial or industrial insurance policies:
- Business interruption/insurance against loss of income
These insurance products generally are supplements to pure property insurance. In these property insurances, objects (e.g. buildings or machines) are insured against individually listed risks (usually fire, lightning strike, storm and hail, tap water, vehicle impact, smoke and sonic boom, burglary, vandalism and robbery, in some cases flood, earthquake, landslide, etc.). If a business interruption or loss of income occurs due to one of these risks, it is also insured within certain limits. Business interruption/loss of income due to the Corona pandemic is therefore not covered from the outset, so that the question of terminations/premium-increases/exclusions due to an aggravation of risk does not arise.
- Business closure insurance
Under a so-called business closure insurance policy, companies (usually in particular hospitals, doctors’ surgeries and certain companies in the food industry) are insured against the risk of an official order to close down a business due to a disease that must be reported under the Infection Protection Act, by the insurer covering the on-going operating costs for a certain period of time in such cases. This insurance product only offers insurance cover in a few individual cases during the current Corona pandemic, as most companies were not closed down on the basis of an individual official order, but on the basis of so-called general measures under the Infection Protection Act, which are not insured. Even in those cases in which there is an individual official order, insurance cover often does not apply, as the insured diseases/pathogens are listed in the insurance conditions in most cases and Corona is not covered due to its novelty.
Insurance cover can only be provided in the few individual cases in which an official order has been issued and the insurance conditions refer to the diseases and/or pathogens in accordance with the current Infection Protection Act, since the Corona virus since February 2020 has been included by the Corona Virus Ordinance on Mandatory Notification in the mandatory notification catalogue under Section 6 of the Infection Protection Act .
In these individual cases – which, of course, has not yet been clarified in court -, the question of the insurer’s possibilities of withdrawing from insurance cover due to the Corona pandemic because of an aggravation of risk may be answered with relative legal certainty with a “no”. In these cases, the insurer has assumed precisely the – constantly changing – risk of infectious diseases for which there is a reporting obligation in Germany or for which a new reporting requirement is being introduced. This risk has merely materialised through Corona diseases, although it is irrelevant that this is a pandemic. The fact that it is a new virus is equally irrelevant, because with this product the insurer had to reckon with the possibility of the appearance of new viruses or generally new pathogens that could trigger a reporting obligation at any time and had to include this in its calculations. Its risk situation has therefore not changed compared to “before“.
- Credit Insurance
Under the collective term “credit insurance”, insurance products are summarized, that protect suppliers or service providers against the risk of payment defaults on the part of their customers (commercial credit insurance, del-credere insurance, export credit insurance, capital goods credit insurance). Insurance cover only exists for clearly unjustified non-payments or delays in payment, so that in case a customer raises objections to an invoice (e.g. notifications of defects), under most insurance terms and conditions no insured event exists. The risk situation for unjustified payment defaults is likely to have increased for credit insurers as a result of the Corona pandemic in relation to “before”.
However, credit insurers have no need to resort to the provisions of Sections 23-25 of the VVG. This is because the object of their insurance, as a so-called jumbo risk according to section 210 VVG, is subject to fewer restrictions in the design of the insurance conditions than the object of insurance of other insurance products. For this reason, all credit insurances contractually provide that the so-called credit limit for a customer of the policyholder can be cancelled at any time – even without stating reasons – with effect for the future and within a short cancellation period, so that there is then no longer any insurance cover for this customer. If payment defaults increase due to the Corona Pandemic, a credit insurer can also lift the credit limits for all customers of a policyholder and thus release itself from the contractual risk much more easily than by invoking an aggravation of risk, so that the question of the possible existence of rights out of an aggravation of risk does not arise with this product either.
- D&O insurance
a) Insured risk: Breach of duty of care by the management
D&O insurance is a special form of financial loss liability insurance by means of which a company insures the members of its management and/or, if applicable, its supervisory board against claims for damages due to a breach of duty of care. Insurance cover can be obtained against claims from outside (claims by third parties) as well as from inside (claims by the company itself).
The duties of care of the management and/or supervisory boards are very far-reaching. This also includes all important management decisions which have to be made in connection with the current Corona pandemic and the constant changes in the legal situation resulting from it (see e.g. « Power of disposal of the right to do insurance coverage when the policyholder is insolvent », « Corona – suspension of obligation to file for insolvency: liability risks and other problems for managers and directors » ), e.g. the question of whether employees should work entirely in home office and how data protection is guaranteed there.
b) Increased liability risk due to the Corona pandemic?
Already in this still quite young century, as well as towards the end of the last century, there have been various pandemics (spread of HIV/AIDS since the early 1980s, SAR pandemic 2002/2003, various influenza pandemics, most recently the so-called “swine flu” 2009/2010).
The current Corona pandemic differs significantly from these because of the nature and speed of transmission, the lack of drugs and vaccines, the lethality rate and the resulting completely unique and novel administrative and political measures, especially in view of the massive governmental restrictions on economic activity. As a result, managers and supervisory board members cannot rely on legal and/or actual experience. Therefore, in any decisions, that they have to make within the scope of the duties of care and that are nevertheless incumbent upon them, they are exposed to a significantly higher risk that these decisions might be assessed in review as violations of said duties of care. The liability risk for actions in breach of duty in connection with corporate management can therefore be classified as significantly higher. This could also result in a relevant aggravation of risk for D&O insurers within the meaning of Sections 23-25 of the VVG, with the consequence that premium increases, terminations or exclusions could possibly be implemented.
IV. Conclusion: Corona pandemic can lead to premium increases, exclusions or terminations in individual cases
When considering whether the insurers are entitled to premium increases, exclusions or terminations, it should be borne in mind that the insurers can only make use of these options within one month of becoming aware of them. Knowledge of different facts may be relevant in this respect.
The spread of the SARS-CoV-2 virus since December 2019 was declared a pandemic by the World Health Organization on 11 March, 2020, after it had already declared the infection to be an international health emergency on 30 January 2020, so that the monthly deadline for insurers to take action at this point in time would already have expired at the end of April 2020.
However, the dangers resulting from the Corona pandemic only gradually became apparent in Germany, even though the first confirmed case occurred at the end of January 2020. The ban on contact was only issued nationwide on 22 March 2020 and new regulations have been in force since then, so that policyholders and insurers alike are confronted with a risk situation that is constantly changing and, due to the volume of changes, has been steadily increasing to date, and which furthermore completely varies from one sector to another.
This means that, depending on the insured company and the regulations applicable to this sector and depending on the further development of the sector-specific and Germany-country-wide situation, insurers may always gain new insights that lead to a new deadline for the assertion of rights due to an aggravation of risk. It remains to be seen to what extent they will make use of the resulting rights.
It is therefore advisable for companies to keep a close eye on further developments, which we also report on in our Corona Newsletter, and to get information at an early stage about the possibilities of taking out new insurance cover, if necessary.