According to the data of the latest annual report by the Insurance Compensation Consortium, of 2018, around 40% of compensations related to extraordinary risks arise in the last quarter of the year and, especially, from September to November.
The reason of this claim concentration in the last quarter of the year is the intensification of extreme natural occurrences; in Spain, 62.3% of claims are related to floods, followed by 19.9% arising from atypical cyclonic storms.
Insurance industry is not unfamiliar to the intensification of the phenomenon known as climate change that, except from some diverging opinions, has been taken on by scientific and social consensus. In this sense, the intensification of the extreme weather events (in scale and frequency) creates new demands in the insurance market, which insurance and reinsurance entities, as well as brokers and agents, have identified and analysed.
In order to synthesise, there are two aspects of particular interest when addressing an analysis of the coverage of extraordinary risks: (i) the particulars of risks management and insurance product design and (ii) the legal particulars of the proof.
Firstly, regarding the design of this kind of products, it should be noted that, in Spain, the Insurance Compensation Consortium is responsible, by law, of covering extraordinary risks provided that they are not covered by a private insurance policy or that, in the event of being covered by a private insurance policy, the insurance entity is not able to cover the compensations established in the policy. The Insurance Compensation Consortium shall cover the same sums insured for extraordinary risks than those covered by the particular Insurer for ordinary risks.
Secondly, when designing the insurance product for extraordinary risks, its core characteristics should be noted: its complete unpredictability and tendency to concentrate in time. In other words, extreme climate hazards, in the event of taking place, represent a high concentration in claims.
Thirdly, when designing an insurance product for extreme risks, the subject-matter of the contract of insurance must be clearly determined: whether damage to property, persons and pecuniary losses arising from this kind of claims, or all three at the same time, will be covered. Similarly, it must be determined if a specific product is to be designed for extreme weather risks or if, on the contrary, a specific coverage is included within the general framework of a damage insurance policy.
In this sense, it is important to bear in mind that the extraordinary risks policy has been increasingly incorporated into damage insurances, although with restrictions regarding the insured sums.
In short, when designing an insurance product that may offer coverage for extreme weather risks, beyond the actuarial calculation of risk/benefit, it should be taken into account the way in which the coverage will be provided: as a specific product or as an “extension” of a general damage insurance policy (1).
Moreover, this kind of claims has a number of legal peculiarities.
We should differentiate whether a damage policy includes a coverage for extraordinary risks or it is an ad-hoc policy for extraordinary damages. This distinction is fundamental when determining the scope of the insurance contract and the shape and effect of the limiting and delimiting clauses.
In this respect, on the ruling of the Civil Chamber of the Spanish Supreme Court, of 1 October 2010 (EDJ 2010/218712), the High Court, when analysing a damage insurance, pointed that the sublimits introduced for extraordinary risks policies should be considered, to some extent, “surprising” and, in all events, clauses limiting the rights of the Policyholder subject to the requirements of article 3 of the Spanish Law 50/1980, of 8 October, regarding insurance contracts (“LCS”, in Spanish). Namely: for it to be valid and effective, the clauses should stand out from the rest of the clauses and should be expressly accepted by the Policyholder.
In the ruling mentioned above, the Supreme Court stated that: “(…) the insurance company covered material damages to the contents and structure of the damaged building (…) up to the quantitative limit of 40 and 15 million respectively, so the coverage reduction intended by UMAS, included in the general terms and conditions (drawn up by the entity) that entail limiting the maximum sum in case the risk arose from the rain or wind of a certain intensity, could not be expected or considered as usual or normally flowing from those particular or special clauses, truly known by the policyholder, and especially when they clearly stated the insured property, the guarantees and the commitment taken by the company at the compensation level in case that the event, whose risk was covered, happens.”
According to the foregoing, it is evident that, when setting different insurance products, it should be noted the way in which sublimits work, under the subject-matter of the insurance contract.
Secondly, the key element in damage insurances (from the point of view of extraordinary risks) is the means of evidence that allow to verify that damages were a consequence of an extraordinary weather phenomenon and, therefore, the clauses regarding this kind of claims are applicable.
The Spanish Royal Decree 300/2004, of 20 February, approving the Extraordinary Insurance Risks Regulations (hereinafter, “RD 300/2004”), on article 2, clearly defines the requirements to consider a weather phenomenon as an extraordinary risk.
Similarly, section 2 of article 2 of RD 300/2004 brings us on track to appropriate means of evidence to verify that an extreme weather event took place. Thus:
“2. Data of atmospheric and seismic phenomena, as well as volcanic eruption and fall of sidereal bodies and aerolites, will be obtained from the Insurance Compensation Consortium by means of certified reports issued by the National Institute of Meteorology, the National Geographic Institute and other concerned public bodies.”
In this case, the Decision of the Appeal Court of Valencia, of 21 September 2012 (EDJ 2012/276950) serves as example, because the court dismissed the damages claim by the Insurance Company before the Insurance Compensation Consortium, recalling that it must be unequivocally verified that an extraordinary weather event has taken place in order that the paid amounts are repaid by the policy’s Insurance company:
“THREE.- And, in this case, it has not been verified that the damages in the premises of the Cooperative insured by the claimant were caused by an atypical cyclonic storm. After verifying the reality of the damages and the contractual relationship between the Cooperative and XXX, it is clear that, in principle, the latter should respond as an insurance company and that, according to the reiterated and well-known doctrine of reversal of the burden of proof regarding non-contractual liability, it must be XXX the party verifying that if was an extraordinary risk for which the Insurance Compensation Consortium must respond. The lack of evidence of factual circumstances that would enable to assess the cause for liability exclusion defines the impossibility of assessment and, therefore, the chances of complaining.
Well, the claimant has not verified that on 7 and 8 March 2007, in the place where the warehouse and premises of the agricultural cooperative Cooperativa Agrícola de Villar del Arzobispo, there were the meteorological circumstances required by the Extraordinary Insurance Risks Regulations.
It is true that the weather conditions that day were very adverse and harsh and, as stated in the AEMET report, in that area winds with an intensity up to 120 and 135 km/h. were recorded. However, despite the praiseworthy effort by the claimant, the expert opinions provided, due to their contents and the explanations provided by the experts in the proceedings, are not enough to determine that damages to the Cooperative’s premises were caused by wind gusts of over 135 km/h., or due to a local phenomenon, such a tornado.”
In a similar vein, in the Decision of Teruel’s Provincial Court, of 14 September 2004 EDJ 2004/133717), it was stated that: “as can be seen, the standard precisely defines the concept of atypical cyclonic storms as the occurrence of weather phenomena perfectly quantified that leave the Judge little room for interpretation. Well, as the applicant states, the phenomenon that happened on 16 August 2003 in the city of Alcañiz is defined by the Royal Decree-Law 5/2003, of 19 September, that applies urgent measures to repair damages caused by such a phenomenon, as “a large hailstorm accompanied by heavy rains with 118 litres/m2 in the span of 3 hours, causing serious damages”, which is a concept that is not included in any of the cases covered by the Extraordinary Insurance Risks Regulations as atypical cyclonic storms.”
To sum up, according to minor case law, and while not intended to be an exhaustive analysis, when addressing the legal issues regarding extraordinary risks and damage policies, it should be noted that the particularly valued system of proof avoids the dilution of case-law criteria and, ultimately, should reduce the litigiousness around this kind of claims.
At the Insurance Law Department, we will be paying particular attention to the last quarter of the year and to that awkward (and concerning) travel companion: the extreme climate risks.
(1) Insurance entities have incorporated to extraordinary risks policies packs of services to help with the comprehensive management in the event of a claim (technical and financial advice, maintenance and repairs…), which are not analysed.
Belzuz Abogados SLP
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