Analysis of LMA5393
About LMA5393
Drafted by the Lloyd’s Market Association (LMA) and released in March 2020, LMA5393 has become a widely applied communicable disease endorsement for Property policies. This is unfortunate because, as demonstrated below, LMA5393 has a drafting deficiency that creates uncertainty for insureds, insurers and reinsurers.
Clause 1: the Communicable Disease Exclusion
A drafting deficiency
Interpreted literally, LMA5393 excludes loss or damage occurring at the same time as (‘concurrently with’):
- a ‘Communicable Disease’; or
- the fear or threat of a ‘Communicable Disease’.
Since LMA5393 does not literally require any connection or causation between the Communicable Disease, there would be no cover under the policy if, at the time of loss, someone – somewhere – had a Communicable Disease or feared a Communicable Disease. If an insurer applied this literal interpretation, the policy would no longer provide effective cover and, if challenged, a court would be likely to ‘read down’ or re-interpret the exclusion by determining the intention of the parties. A less likely alternative, however, would be for a court to strike out the endorsement in its entirety.
LMA5393 is the only LMA Communicable Disease exclusion to have this drafting deficiency.
What does clause 1 intend?
Determining the intention of the parties – and identifying the appropriate parties – is difficult because:
- the clause was drafted by the LMA;
- insurers applying LMA5393 may not have understood its drafting deficiency;
- insurers may have recognised the drafting deficiency in LMA5393, but were required by reinsurers to apply it;
- the insured is unlikely to have had any ability to negotiate the clause; and,
- insurance brokers may have served as intermediaries between the insured and its insurers.
‘Read down’ version of LMA5393 clause 1
Prima facie, the simplest solution would be to ‘read down’ LMA5393 by:
- removing the offending words, i.e. ‘or occurring concurrently or in any sequence with’; and,
- moving them to the end of clause 1 for their intended effect, i.e. adding the words ‘, regardless of any other cause or event contributing concurrently or in any other sequence thereto’ after the words ‘(whether actual or perceived) of a Communicable Disease’.
An example of this ‘read down’ version of LMA5393 clause 1 is as follows:
This policy, subject to all applicable terms, conditions and exclusions, covers losses attributable to direct physical loss or physical damage occurring during the period of insurance. Consequently and notwithstanding any other provision of this policy to the contrary, this policy does not insure any loss, damage, claim, cost, expense or other sum, directly or indirectly arising out of, attributable to a Communicable Disease or the fear or threat (whether actual or perceived) of a Communicable Disease, regardless of any other cause or event contributing concurrently or in any other sequence thereto.
In most scenarios, this ‘read down’ version of LMA5393 clause 1 would be adequate to determine whether the exclusion applied. Nonetheless, this simple solution may not be the correct one if it does not give effect to the intention of the parties.
Re-drafting LMA5393 clause 1
Putting aside the drafting deficiency of ‘concurrently with’, LMA5393 is unusual in that its attribution language is limited to ‘arising out of’ and ‘attributable to’. LMA5394, for example, uses the words ’caused by’, ‘contributed to by’, ‘resulting from’, ‘arising out of’ and ‘in connection with’. LMA5394 therefore offers a guide to remedying LMA5393 and an amended clause 1:
This policy, subject to all applicable terms, conditions and exclusions, covers losses attributable to direct physical loss or physical damage occurring during the period of insurance. Consequently and notwithstanding any other provision of this policy to the contrary, this policy does not insure any loss, damage, claim, cost, expense or other sum, directly or indirectly caused by, contributed to by, resulting from, arising out of, or in connection with a Communicable Disease or the fear or threat (whether actual or perceived) of a Communicable Disease regardless of any other cause or event contributing concurrently or in any other sequence thereto.
What is LMA5393 excluding?
The answer to this question may depend on whether the ‘read down’ version or ‘re-drafted’ version of LMA5393 is applied. Specifically,
- the ‘read down’ version of LMA5393 excludes damage or loss that ‘arises out of’ or is ‘attributable to’ a Communicable Disease or the fear or threat of a Communicable Disease. This would require the Communicable Disease to be a remote cause of the loss; whereas
- at its broadest, the ‘re-drafted’ version of LMA5393 excludes damage or loss that has a ‘connection with’ a Communicable Disease or the fear or threat of a Communicable Disease. This would not require the Communicable Disease to be a cause – proximate or remote – of the damage or loss for the exclusion to apply.
Returning to the question: what is LMA5393 excluding? I do not think that anyone can be certain. LMA5393 appears to be a ‘market failure’ by the insurance industry because people who should have known better could not find the right words. Given this failure, a court may be reluctant to give insurers the benefit of the broader, re-drafted version of LMA5393 above, though this is speculation and not professional/legal advice.
Clause 2: clarification of exclusion
Clause 2 of LMA5393 of clarifies that the exclusion in clause 1 excludes costs to clean-up, detoxify, remove, monitor or test for a Communicable Disease or property insured that is affected by such Communicable Disease. While this may seem straightforward, there is a distinction between:
- a pathogen which causes a disease; and,
- a disease, which is a condition that affects an organism.
Strictly speaking, it would not be possible to ‘clean-up’ or ‘detoxify’ a disease. Furthermore, to ‘remove’ a disease would require the organism to be physically removed from a location. However, ‘monitoring’ or ‘testing’ for a disease is feasible, since this would simply require testing persons (or other organisms) to determine if they have the disease.
For consistency with clause 1, it would be preferable if clause 2 also referred to the ‘fear or threat (whether actual or perceived) of a Communicable Disease’. Given the breadth of clause 1, however, such an amendment does not appear strictly necessary.
Clause 3: definition of ‘Communicable Disease’
In clause 3 of LMA5393, ‘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: primacy clause
Clause 4 of LMA5393 is a ‘primacy clause’ which states that the endorsement shall apply to all extensions, additional coverages, exceptions and other coverage grants.