By William Eustace, Senior Vice President, U.S. Casualty Practice

The March 11, 2011, earthquake and tsunami in Japan (the event)¹ have caused unprecedented damage to that country and its people. A significant amount of property damage has occurred, and normal business activity has been interrupted. The full impact of the event upon the environment, private property, and commercial interests is still unknown. However, it is clear that the event will have direct and indirect ramifications for many organizations in Japan and globally.

Even as efforts continue to assist survivors and contain the damage, affected organizations should begin to consider the insurance actions they will need to take in response to the event. Specifically, clients should be aware that certain time element provisions of their policies may require a first notice of loss on or before May 30, 2011.

Examining Insurance Policies

Organizations that have not already done so should examine their insurance policies and business contracts to determine whether their companies face an exposure. There are several items to consider as insureds review potential liability exposure for the event, including:

1. whether exposure exists, and the extent of potential civil liability, for natural catastrophes;
2. the extent of potential civil liability for allegedly faulty event preparation;
3. the extent of potential civil liability for allegedly improper response to the event;
4. potentially multiple causes of loss, depending on line of coverage;
5. the impact of Japanese law, including whether liability is established via the court system or by order of the Japanese government;
6. whether injured parties can establish jurisdiction outside Japan (particularly in the U.S.);
7. the impact of preexisting government regulations and mandates (including government specs) regarding sea walls, earthquake building codes, and other pre-event loss control measures;
8. any immunity provided by the government of Japan to potential defendants;
9. the impact of any applicable statute of limitations or repose; and
10. private contractual arrangements (such as indemnity, defense and hold harmless), and how they could alter the above. 

 
Likewise, there are several variables that could impact how an insurance policy responds to the event, including:

1. policy conditions, with particular emphasis on prompt notice, though compliance may be difficult in the post-event environment;
2. the number and timing of occurrences;
3. exclusions—particularly pollution exclusions;
4. named peril time element pollution endorsements;
5. nuclear exclusions;
6. availability of government-sponsored nuclear industry insurance; and
7. additional insured, other insurance and coverage for indemnities as required by contract.

Named Peril Time Element Endorsements

Risk managers should pay special attention to those general liability policies which contain carve back coverage within named peril time element endorsements. Clients should examine their policies for the list of named perils to determine whether earthquake, flood and windstorm, among others, are included with no time reporting restrictions.

If the list of named perils does not include those as suggested, then the time element provisions may be triggered. These provisions require written notice to the carrier within a limited amount of time—in some instances, within 80 days or less—from the first day of the discharge of a pollutant. A strict reading of such 80-day notice provisions with respect to the event would require that written notice be provided to the carrier on or before May 30, 2011.

Carriers are likely to enforce these time limits strictly. As such, it is imperative that clients, with the assistance of their legal counsel, analyze their potential exposure to damages arising from the event, and review all current excess and primary policies in order to comply with notice provisions.

If a client opts to provide notice of the event in order to comply with the time limit, it should be aware that its carrier is very likely to attempt to limit its exposure prospectively, via an endorsement that excludes the event. The carrier may also try to cap its exposure prospectively by decreasing its limits or increasing its attachment point. Finally, the carrier could also reserve its rights on the grounds that a claim has not yet developed, or on the basis that the insured has not presented sufficient information. Those clients with upcoming occurrences reported renewals will need to consider laundry listing “occurrences” or purchasing an extended reporting period to protect their rights under their current policies. Clients should discuss this strategy with their brokers as part of the renewal process.

Conversely, if the client opts not to notice the event until all damage is established, or if the client is not yet aware that it faces potential exposure arising from the event, the client may miss time deadlines, which may be strictly enforced by insurers. Furthermore, even if the client opts not to notice the event, there is still a risk that the carrier will add event exclusions to its 2011 renewals. Additionally, the client may run up against standard policy provisions at renewal, such as known loss provisions.

Marsh strongly recommends that all clients and their legal counsel review all potential exposures arising from the event, as well as all reporting and notification provisions in all potentially applicable primary and excess policies, to determine whether to notice event claims or losses immediately.

For more information on the Japan event or time element pollution provisions on policy forms, please contact your Marsh client executive or visit our Disaster Recovery Portal at global.marsh.com/disasterrecovery.