Liability insurers frequently use exclusions to help address emerging risks that are viewed as unpredictable, intractable and potentially very large.

Executive Summary

While demand for pandemic-related insurance is growing, broad pathogen exclusions on liability insurance policies are proliferating, creating financial risks for customers and lost opportunities for carriers that could potentially write this business. Noting that liability insurance promotes good behavior and risk management as well, executives of Praedicat and Metabiota suggest that putting together fully probabilistic models of pandemic frequency and severity with exposure and loss development information from liability models reflecting business and industrial footprints provides a framework for seizing opportunities rather than shying away from them.

It comes as no surprise, then, that the emergence of SARS-CoV-2, the virus causing COVID-19, has led many insurers to add exclusions meant to remove viruses from the scope of their insuring agreements.

Simultaneously, scientific evidence indicates that climate change and other factors will result in epidemics and pandemics becoming more frequent, driven both by old threats as well as new pathogens like SARS-CoV-2. With demand for pandemic-related insurance growing and insurance options decreasing, a marketwide problem becomes evident: a coverage gap. This gap represents a financial risk to customers and a lost opportunity to carriers that could potentially write this business.

And yet the liability exclusions have proliferated.

A COVID-19 liability exclusion might be reasonable due to considerations like adverse selection, but the exclusions that are emerging from COVID-19 on liability are much broader and far more diverse. There are broad pathogen exclusions, for example, which will sweep up foodborne illness. There are exclusions for specific infectious diseases, any infectious disease, pandemic exclusions and coronavirus exclusions. In addition to differing in wording and intent, the exclusions sometimes even differ at different points in a liability tower.

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