LMA5410: Cyber Loss Limited Exclusion Clause (Property Treaty Reinsurance) No.1

Posted on by Stephen Tomlinson

Background to LMA5410

Published on 6th March 2020 by the Lloyd’s Market Association (LMA), LMA5410 is a Cyber Exclusion Clause intended for use on Property treaty reinsurance.

LMA5410 Exclusions: Computer Systems and Data

Generally, the LMA5410 clause excludes loss in connection with:

  1. “any loss of, alteration of, or damage to or a reduction in the functionality, availability or operation of a Computer System”; or
  2. “any loss of use, reduction in functionality, repair, replacement, restoration or reproduction of any Data, including any amount pertaining to the value of such Data”.

The Computer System exclusion (i.e. 1., above) can operate as both a peril and property exclusion, i.e. it excludes loss in connection with the circumstances described, and excludes damage to a “Computer System”.

The primary intent of the Data exclusion (i.e. 2., above) appears to be to act as a property exclusion on Data, i.e. exclude damage to Data. Nonetheless, it could also act as a peril exclusion by excluding other losses in connection with the circumstances described. Unlike LMA5400 endorsement, the Data exclusion in LMA5410 is absolute in that is has no exceptions.

Exception to the Computer System Exclusion

The Computer System exclusion has an exception whereby cover is provided for:

“physical damage to property insured under the original policies and any Time Element Loss directly resulting therefrom where such physical damage is directly occasioned by any of the following perils:

fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, hail, tornado, cyclone, hurricane, earthquake, volcano, tsunami, flood, freeze or weight of snow.”

Interpretation of the words “directly occasioned by” could depend on the circumstances, but may require a listed peril to be a proximate cause of the damage for the exception to apply. However, a listed peril could be the proximate cause of the physical damage regardless of whether it occurred before OR after the circumstances described in the Computer System exclusion (i.e. “loss of, alteration of, or damage to or a reduction in the functionality, availability or operation of a Computer System”). Though it is difficult to see how the circumstances described in the Computer System exclusion could cause natural perils like windstorm, tornado, cyclone, hurricane, earthquake, volcano, tsunami, flood, freeze or weight of snow.

Operation of the exception when the Data exclusion also applies?

The exception to the Computer System exclusion, however, may not operate if the circumstances causing the loss also enliven the Data exclusion, which does not have an exception. While the internet may not need further explanation of the Wayne Tank judgment (perhaps see Spark Helmore’s “Storms, floods and exclusions: a refresher on the application of Wayne Tank principles”), it could be summarised as follows: if a loss arises from two perils – one of which is excluded and the other is not – and it is not possible to apportion the loss between the perils, then the exclusion prevails and the insured will not be indemnified. Predicting how a court may view the Computer System exception when the Data exclusion is enlivened may be a fool’s errand.

What about malicious cyber events?

An unusual aspect of LMA5410 is that is does not distinguish between malicious and non-malicious cyber events (c.f. with the absolute exclusions on “Cyber Acts” in LMA5400 and LMA5401, i.e. “an authorised malicious or criminal act or series of related unauthorised, malicious or criminal acts, regardless of time and place, or the threat or hoax thereof involving access to, processing of, use of or operation of any Computer System”). This invites the following questions:

  • do reinsurers really have an appetite to cover malicious cyber acts under Property reinsurance treaties?
  • Are malicious cyber activities considered an insurable risk? Should they be?

Given the nature of malicious cyber activities (including nation-state involvement or support), there is potential overlap with a policy’s “War” and “Terrorism” exclusions. But since 2019, the UK’s Prudential Regulation Authority (PRA) and Lloyd’s have been aligned in seeking to eliminate “silent cyber” coverage and clarifying policy positions. But when it comes to malicious cyber events (or “Cyber Acts” to use the terms of LMA5400 and LMA5410), it seems strange that LMA5410 is silent.

LMA5595 and LMA5596 PFAS Exclusions for Liability policies

Posted on by Stephen Tomlinson

LMA PFAS Exclusions

Lloyd’s Market Association Bulletin LMA22-024-CM was issued in August 2022 and included two PFAS exclusions – LMA5595 and LMA5596 – for liability insurance and liability reinsurance policies. This article considers the background to these PFAS exclusions before analysing the exclusions themselves.

Background to PFAS Exclusions

PFASs Definition

According to the OECD, PFASs are fluorinated substances that contain at least one fully fluorinated methyl or methylene carbon atom (without any H/Cl/Br/I atom attached to it), i.e. with a few noted exceptions, any chemical with at least a perfluorinated methyl group (–CF3) or a perfluorinated methylene group (–CF2–) is a PFAS. PFASs include perfluorosulfonic acids, such as perfluorooctanesulfonic acid (PFOS), and perfluorocarboxylic acids like perfluorooctanoic acid (PFOA).

PFAS Use

PFASs are surfactants, i.e. reduce the surface tension between a liquid and another liquid or solid, making them effective in resisting fire and repelling water, oil, and grease. PFASs are found in materials such as firefighting foam, nonstick cooking pots and pans, paints, coatings for cables and wires, lubricants, food packaging, and textiles. Furthermore, PFASs are water soluble and appear to move through soil. PFASs are commonly described as persistent organic pollutants or “forever chemicals” because they remain in the environment for long periods of time.

PFAS Health Effects

Increasing PFAS litigation – see below – has been driven by growing evidence that PFASs are harmful to the environment and health. A 2022 National Academies of Sciences, Engineering, and Medicine report noted that:

  • PFAS exposure was linked to increased risk of dyslipidemia (abnormally high cholesterol), sub-optimal antibody response, reduced infant and foetal growth, and higher rates of kidney cancer; and
  • drinking water is contaminated with PFASs in thousands of communities across the United States.

Increasing PFAS Litigation

The LMA5595 and LMA5596 PFAS exclusions are a response to increasing private tort lawsuits and government enforcement of environmental laws and regulations. In the USA, for example, more than 6,400 PFAS-related lawsuits have been filed in its federal court since 2005; of these, more than 1,000 were filed in 2021 concerning firefighting foam. Initially, the defendants in such litigation tended to be primary producers of PFAS such as chemical companies and manufacturers of fire-suppressant foams. More recent litigation, however, recent litigation has targeted secondary manufacturers, textile manufacturers, cosmetics manufacturers, fashion and fast food companies.

There has been speculation that this increasing litigation could expose insurers to unanticipated claims, akin to asbestos claims (see, for example, ‘PFAS: The Next Asbestos‘?). Two examples of significant PFAS litigation are described below.

DuPont class action and settlement (West Virigina)

In February 2017, DuPont and its spin-off Chemours paid USD $671 million to settle lawsuits for 3,550 personal injury claims related to PFOA release from their Parkersburg plant into the drinking water. The settlement came after a court-created independent scientific panel, the C8 Science Panel, found a ‘probable link‘ between PFOA (also known as C-8) exposure and six illnesses: kidney and testicular cancer, ulcerative colitis, thyroid disease, pregnancy-induced hypertension and high cholesterol.

3M settlement with Minnesota

In February 2018, 3M settled a lawsuit brought by the state of Minnesota for USD $850 million; Minnesota had sought judgment for USD $5 billion. The lawsuit alleged that:

  • 3M dumped chemicals at sites near Minneapolis for more than 40 years, enabling them to get into wildlife and drinking water; and
  • 3M knew the chemicals were harmful but concealed the effects from regulators and distorted science on them.

Analysis of the LMA5595 and LMA5956 PFAS Exclusions

Are LMA5595 and LMA5596 necessary?

As noted above, LMA5595 and LMA5596 PFAS exclusions have been developed for liability insurance and liability reinsurance policies. Whether the LMA5595 or LMA5596 are necessary will depend upon the pollution exclusion in the policy. If applied in reinsurance contracts, however, then insurers may then apply them to policies they issue to avoid reinsurance gaps.

For Liability policies written on an occurrence basis, the LMA5595 and LMA5596 PFAS exclusions would only serve to exclude liability in future policies. For past occurrences, the Liability policies in force at that time will have to respond to the claim, subject to the pollution exclusions.

In the USA, it is understood that most insurers inserted ‘absolute’ or ‘total’ pollution exclusions after 1985. According to Pillsbury, however, ‘[i]n nearly half the states, policies containing this form of pollution exclusion have been held to be ambiguous and to provide coverage for pollution that was not expected or intended.’

LMA5595 and LMA5596: broad exclusions on PFAS liability

Broadly, paragraph 1 of the LMA5595 and LMA5596 endorsements exclude claims in connection with any PFAS – please refer to the endorsements for the exact wording. The LMA5595 and LMA5596 also contain anti-concurrent terms (see ‘regardless of any other cause contributing concurrently or in any sequence’). Paragraph 2 then acts as a clarification that the exclusion applies to costs to clean-up, monitor or assess the effect of any PFAS.

Difference: LMA5596 reverses the burden of proof

The difference between LMA5595 and LMA5596 is that LMA5596 has an additional paragraph which reverses the onus of proof (‘If UNDERWRITERS allege that this Exclusion applies to any claim under this POLICY the burden of proving the contrary shall be upon the INSURED’). Here, it may be appropriate to consider:

  1. what would be required for the ‘underwriters’ to allege that the exclusion applies?
  2. if there is more than one insurer for the policy, how would this clause operate?
  3. what justifies reversing the onus of proof? Parties to an insurance contract may specify who bears the onus of proving a particular fact, even if this involves reversing the onus of proof: see Levy v Assicurazione Generali [1940] AC 791. However, reversing the onus of proof is contrary to the interests of insureds and conflicts with the traditional position whereby the insurer must prove that an exclusion applies. Given the resources and expertise of insurance companies, it is difficult to see how reversing the burden of proof could lead to more equitable outcomes.

LMA5595 and LMA5596 definition of ‘PFAS’

In their final paragraphs, LMA5595 and LMA5596 define ‘PFAS’ as ‘any organic molecule, salt, free radical or ion, the composition of which includes at least one:

a. perfluorinated methyl group (-CF3); or

b. perfluorinated methylene group (-CF2-).’

This definition differs from that use by the OECD (see ‘PFASs Definition‘, above) due to its use of ‘organic molecule, salt, free radical or ion’. While the difference may not be material, the source of the LMA definition is not known (to this author) and it is unclear why the LMA would not use the more common OECD definition.

LMA5394: Communicable Disease Exclusion for property treaty reinsurance

Posted on by Stephen Tomlinson

Analysis of LMA5394

About LMA5394

Drafted by the Lloyd’s Market Association (LMA) and released in March 2020, LMA5394 is a Communicable Disease Exclusion for property treaty reinsurance.

Clause 1: the Communicable Disease Exclusion

At its broadest, LMA5394 excludes damage or loss ‘in connection with’:

  1. a Communicable Disease; or
  2. the fear or threat of a Communicable Disease.

Furthermore, LMA5394 is explicit that this exclusion will apply regardless of any other cause or event which may have contributed to the damage or loss.

Clause 2: definition of ‘Communicable Disease’

In clause 2 of LMA5394, ‘Communicable Disease’ is defined as ‘any disease which can be transmitted… from any organism to another organism’.  Requiring the disease to be transmissible between organisms does qualify the scope of the definition; food poisoning, for example, would not be excluded as a ‘Communicable Disease’ because it is transmitted by the ingestion of contaminated food or water, not by a pathogen that is transmitted between organisms.

Beyond this,

  • sub-clause 2.1 inclusively identifies types of pathogens;
  • sub-clause 2.2 inclusively identifies means of transmission; and,
  • sub-clause 2.3 identifies possible effects of the disease or pathogen.

None of these sub-clauses, however, are essential to the operation of the endorsement.

LMA5502 and LMA5503: Communicable Disease (Property Treaty Reinsurance)

Posted on by Stephen Tomlinson

LMA5502 and LMA5503 Analysis

About LMA5502 and LMA5503

Drafted by the Lloyd’s Market Association (LMA) and released in May 2020, LMA5502 and LMA5503 are limited communicable disease exclusions for Property Treaty Reinsurance.

Clause 1: the exclusion

At its broadest, Clause 1 of LMA5502 and LMA5503 exclude damage and loss ‘in connection with’:

  • a Communicable Disease; or
  • the fear or threat (whether actual or perceived) of a Communicable Disease.

Because all that is required between the damage/loss and Communicable Disease is a ‘connection’, the Communicable Disease may not have to be a cause of the damage/loss for the exclusion to apply. This intended breadth of the exclusion is further demonstrated by the words ‘regardless of any other cause contributing concurrently or in any sequence thereto’ in clause 1.

Clause 2: exception to the exclusion

Clause 2 of LMA5502 provides an exception to the exclusion of clause 1 such that the reinsurance agreement will cover:

  • physical damage to property insured; and,
  • business interruption (‘Time Element Loss’)

that arise from the listed perils, i.e. fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, rainstorm, hail, tornado, cyclone, typhoon, hurricane, earthquake, seaquake, seismic and/or volcanic disturbance/eruption, tsunami, flood, freeze, ice storm, weight of snow or ice, avalanche, meteor/asteroid impact, landslip, landslide, mudslide, bush fire and forest fire.

LMA5503 preferable to LMA5502 for insureds

The exception for LMA5503, however, extends to the following additional perils: riot, riot attending a strike, civil commotion, vandalism and malicious mischief. As such, LMA5503 is preferred to LMA5502 from an insured’s perspective.

Clause 3: definition of ‘Communicable Disease’

In clause 3 of LMA5502 and LMA5503, ‘Communicable Disease’ is defined as ‘any disease which can be transmitted… from any organism to another organism’.  Requiring the disease to be transmissible between organisms does qualify the scope of the definition; food poisoning, for example, would not be excluded as a ‘Communicable Disease’ because it is transmitted by the ingestion of contaminated food or water, not by a pathogen that is transmitted between organisms.

Beyond this,

  • sub-clause 3.1 inclusively identifies types of pathogens;
  • sub-clause 3.2 inclusively identifies means of transmission; and,
  • sub-clause 3.3 identifies possible effects of the disease or pathogen.

None of these sub-clauses, however, are essential to the operation of the endorsement.

Clause 4: definition of ‘Time Element Loss’

Finally, clause 4 of LMA5502 and LMA5503 define ‘Time Element Loss’ as business interruption, contingent business interruption or any other consequential losses.

LMA5399: Communicable Disease Exclusion (Casualty Treaty Reinsurance)

Posted on by Stephen Tomlinson

Analysis of LMA5399

About LMA5399

Drafted by the Lloyd’s Market Association (LMA) and released in May 2020, LMA5399 is a communicable disease exclusion for Casualty (Liability) Treaty Reinsurance.

Clause 1: LMA5399 exclusion

At its broadest, Clause 1 of LMA5399 excludes loss and liability ‘in connection with’:

  • a Communicable Disease; or
  • the fear or threat, whether actual or perceived, of a Communicable Disease.

Because all that is required between the loss/liability and Communicable Disease is a ‘connection’, the Communicable Disease may not have to be a cause of loss for the exclusion to apply. This intended effect of the exclusion is demonstrated by the words ‘regardless of any other cause contributing concurrently or in any sequence’ in clause 1.

Clause 2: definition of ‘Communicable Disease’

In clause 2 of LMA5399, ‘Communicable Disease’ is defined as ‘any disease which can be transmitted… from any organism to another organism’.  Requiring the disease to be transmissible between organisms does qualify the scope of the definition; food poisoning, for example, would not be excluded as a ‘Communicable Disease’ because it is transmitted by the ingestion of contaminated food or water, not by a pathogen that is transmitted between organisms.

Beyond this,

  • sub-clause 2.1 inclusively identifies types of pathogens;
  • sub-clause 2.2 inclusively identifies means of transmission; and,
  • sub-clause 2.3 identifies possible effects of the disease or pathogen.

None of these sub-clauses, however, are essential to the operation of the endorsement.