LMA5400 and LMA5401: Cyber and Data endorsements

August 8, 2020 by Stephen Tomlinson

Analysis of LMA5400 and LMA5401

Background

Published on 13 November 2019 by Lloyd’s Market Association (LMA), LMA5400 and LMA5401 are intended for use on property insurance policies arranged either on a direct or facultative reinsurance basis.

It is difficult to concisely summarise the effects of LMA5400 and LMA5401 because they contain six far-reaching exclusions which utilise broad definitions (a ‘Computer System’, for example is ‘any… electronic device’). LMA5400 has a very limited exception to some of its exclusions, though this may not be effective because of the operation of LMA5400’s other exclusions. Rather than excluding cyber risks such as computer viruses, denial-of-service (DOS) attacks or hacking, LMA5400 and LMA5401 are based on the possible results of such risks rather than the causes, and only require ‘connections’ rather than causation for the exclusions to operate. As a result, LMA5400 and LMA5401 may exclude damage and losses that are not caused by cyber risks, and it is unclear whether insurers understand the uncertainty that this creates for themselves and insureds.

Exclusions	LMA5400	LMA5401
Cyber Act: loss or damage in connection with unauthorised, malicious or criminal act involving access to or use of an electronic device	Excluded	Excluded
Cyber Incident #1: loss or damage in connection with error or omission involving access to or use of an electronic device	Excluded	Excluded
Cyber Incident #2: loss or damage in connection with the unavailability or failure to access or use an electronic device	Excluded	Excluded
Loss or damage in connection with loss of use or reduction in functionality of Data	Excluded	Excluded
Replacement or restoration of Data	Excluded	Excluded
Value of Data	Excluded	Excluded
Exceptions and scenarios
Exception for property damage caused by fire or explosion which results from Cyber Incident	Yes, but Cyber Act or Data exclusions may prevail	Excluded
Exception for business interruption caused by fire or explosion which results from Cyber Incident	Excluded	Excluded
Exception for property damage or business interruption if insured peril causes unavailability or failure to use an electronic device	Excluded	Excluded
Basis of Valuation
Basis of Valuation for Data Processing Media	Cost to repair or replace the media, plus costs of copying Data from back-ups or originals	None

The Exclusions: LMA5400 and LMA5401

LMA5400 and LMA5401 contain four separate exclusions on damage and loss in connection with:

any unauthorised, criminal or malicious act involving a Computer System (a ‘Cyber Act’), whether the Computer System is the Insured’s or a third party’s;
an error or omission involving access to, processing of, use of or operation of any Computer System (a ‘Cyber Incident’);
partial or total unavailability or failure to access or use any Computer System (also a ‘Cyber Incident’); and,
the loss of use or reduction in functionality of Data.

Beyond this, LMA5400 and LM5401 also exclude:

the replacement or restoration of Data; and,
the value of Data.

Initial observations: LMA5400 and LMA5401 are far broader than ‘cyber’ endorsements

Although considered further below, LMA5400 and LMA5401 define ‘Computer System’ as ‘any… electronic device… owned or operated by the Insured or any other party’ (see ‘Definition: Computer System’). From this, it is apparent that:

a) Exclusion 1), above, excludes damage and loss in connection with criminal acts – such as criminal damage, theft or vandalism – involving an electronic device;

b) Exclusion 1), above, may exclude damage and loss in connection with a person using an electronic device in an unauthorised manner (i.e. in breach of instructions). Exclusion 2), above, is also relevant in this scenario since it excludes property damage or loss in connection with an error or omission in using an electronic device;

c) Exclusion 1), above, may exclude damage and loss in connection with a person that has not been authorised to use an electronic device doing so, notwithstanding that they may have used the device in an authorised manner;

d) Exclusion 3), above, excludes damage and loss in connection the unavailability of an electronic device. Clause 2 of LMA5400 provides a partial exception to this exclusion (see ‘Perils exception’, below), but this only applies where the unavailability results in a fire or explosion. If there is an insured peril which causes damage to an electronic device, that damage may be excluded by LMA5400 and LMA5401, as may subsequent damage and business interruption;

e) Because the unavailability of a computer system will often involve a loss of use of Data, there is overlap between Exclusions 3) and 4), above. Even if the partial exception for Exclusion 3) and Cyber Incidents applies, effect would be given to the exclusion (see ‘A Cyber Incident and another exclusion applies? Exclusion prevails’); and,

f) Similar to Exclusion 3), Exclusion 4) excludes damage and loss from the loss of use of Data. If there is an insured peril which causes damage to a device containing Data, that damage will be excluded by LMA5400 and LMA5401, as will subsequent damage and business interruption.

These initial observations are not intended to be an exhaustive analysis, but demonstrate how LMA5400 and LMA5401 are far broader than the ‘Cyber’ endorsements which they purport to be.

Attribution language: causation not required for exclusions to apply

Sub-clause 1.2 includes the following attribution language: directly or indirectly caused by, contributed to by, resulting from, arising out of or in connection with. Of these, ‘in connection with’ (as used in the list of exclusions above) is the broadest and most significant because it may not require the excluded circumstance to be a proximate or remote cause of the damage/loss for the exclusion to apply. As per the anti-concurrent causation language (‘regardless of any other cause or event contributing concurrently or in any other sequence thereto’), the exclusions in LMA5400 and LMA5401 can apply even if there are other proximate or remote causes of damage/loss.

LMA5400 Perils exception

Despite the exclusions of clause 1, clause 2 of LMA5400 contains an exception where:

1) a Cyber Incident

results in

2) a fire or explosion

that causes

3) physical loss or damage to property insured.

However, this exception will not apply where the Cyber Incident has a connection with a Cyber Act. Furthermore, while the exclusions exclude ‘loss’ generally, the exception in clause 2 is only for ‘physical loss or physical damage to property insured’ such that business interruption losses remain excluded by clause 1. This appears to be an unfair result for insureds – where the intention of the underlying policy is to pay business interruption loss that results from covered damage to property – since this intention is overridden by the endorsement.

LMA5401 does not contain an equivalent exception to clause 2 in LMA5400.

What if the peril comes first? Exclusion prevails

While clause 2 of LMA5400 provides cover where a Cyber Incident results in a fire or explosion that causes physical loss or damage to property insured, what happens if:

1) a fire or explosion

results in

2) a Cyber Incident, i.e.

a) an error or omission involving access or use of a Computer System, or

b) unavailability (partial or total) or failure to access or use a Computer System,

which causes

c) damage to property and business interruption?

In this case, the property damage and business interruption will be excluded. Again, this outcome may justifiably be considered unfair for the insured where the proximate cause of damage and business interruption is an insured peril. Nonetheless, the words ‘regardless of any other cause or event contributing concurrently or in any other sequence to the thereto’ in clauses are clearly intended to have this effect.

This unfairness may be exacerbated by the realisation that Computer System is defined to include ‘any… electronic device’ (see ‘Definition: Computer System’).

A Cyber Incident and another exclusion applies? Exclusion prevails

Consider a scenario in which:

1) a computer virus infects the insured’s computer systems

causing

2) those Computer Systems to be unavailable (a ‘Cyber Incident’ for which the exception would apply); and

3) Data on those Computer Systems to be deleted or corrupted (as per the exclusion in sub-clause 1.2),

resulting in

4) a fire or explosion

that causes

5) physical loss or damage to property insured.

In this scenario, it can be appreciated that there are two circumstances connected with the loss:

1) the Cyber Incident for which there is cover under clause 2; and,

2) the deletion or corruption of Data, which is excluded under clause 1.2.

As such, the common law principle as articulated in Wayne Tank and Pump Co Ltd v Employers’ Liability Assurance Corpn Ltd [1974] QB 57 (CA) may apply such that effect would be given to the exclusion. Per Cairns LJ in Wayne Tank:

if one cause is within the words of the policy and the other comes with an exception [i.e. exclusion] in the policy, it must be taken that the loss cannot be recovered under the policy. The effect of an exception is to save the insurer from liability for a loss which but for the exception would be covered.

While an outcome that is consistent with a common law principle may be hard to argue against, it should be noted that some policies – such as the Mk.V Modified Industrial Special Risks (ISR) policy – do provide cover where there is a non-excluded proximate cause of damage, notwithstanding that an excluded cause of damage may have preceded or followed it. From the Mark V Modified ISR:

Provided that the Insurer will indemnify the Insured for any Damage to Property Insured caused directly by any circumstances not excluded under Section 1 of this Policy, notwithstanding that these circumstances may in turn have been caused by any of the circumstances referred to in Exclusions 6.2.1 to 6.2.17.

Ultimately, this example of a computer virus should serve to demonstrate just how limited the perils exception in clause 2 of LMA5400 is.

Separately, it may be recalled that NMA2914 and NMA2915 have exceptions for property damage if:

1) loss of or damage to Electronic Data

causes

2) a Fire or Explosion.

LMA5400, however, has no such exception.

Basis of Valuation

LMA5400 provides a basis of valuation (or basis of settlement) for Data Processing Media, which is defined as property on which Data can be stored. Specifically, the basis of settlement for Data Processing Media is:

1) the cost to repair or replace the Data Processing Media; and

2) costs of copying Data from back-ups or from originals.

Like NMA2915 and NMA2914A, LMA5400 excludes costs of research and engineering, and costs to recreate, gather or assemble such Data. As per NMA2914, NMA 2915 and NMA2914A, LMA5400 states that if the media is not repaired, replaced or restored, then the basis of valuation is the cost of blank Data Processing media.

Similar to NMA2914, NMA 2915 and NMA2914A with respect to Electronic Data, LMA5400 states that the policy does not insure the value of Data. While this proposition is readily understandable for Electronic Data, on the basis that intangible assets and intellectual property are not typically covered by property policies, it is problematic for LMA5400 because its definition of ‘Data’ could include physical documents (see ‘Definition: Data’, below).

LMA5401 does not contain a basis of valuation.

Definitions

Definition: Computer System

In LMA5400 and LMA5401, the definition of ‘Computer System’ includes ‘any… electronic device’. It is noted that the ‘electronic device’ does not have to be associated with an actual computer. While the term ‘electronic device’ may lack a precise definition, the term could be applied to electrically powered devices and electronically-controlled devices.

To be clear, the broad definition of ‘Computer System’ in LMA5400 and LMA5401 makes the exclusion far broader than may have been intended. Specifically, Exclusion 3, above, has the effect that LMA5400 and LMA5401 will exclude loss or damage in connection with the unavailability or failure to access/use an electronic device.

It is noted that the definition of ‘Data’ (considered below) includes ‘code’, while the definition of ‘Computer System’ includes ‘software’ which consists of code. Under LMA5400 and LMA5401, the definition of ‘Computer System’ could also include ‘Data’. Consideration of the incongruities of these overlapping definitions, however, is beyond the scope of this analysis.

Definition: Data

The definition of ‘Data’ in LMA5400 and LMA5401 is unusual in that it is defined as ‘information of any kind that is recorded… in a form to be used, accessed, processed, transmitted or stored by a Computer System’. Given the ability of computers to scan and interpret physical documents, the definition of ‘Data’ in LMA5400 and LMA5401 could include physical documents. This may appear to be a perverse outcome, but the definition is not explicitly limited to ‘Electronic Data’ as that term is commonly defined in property policies (and was used in NMA2914, NMA2915 and NMA2914A).

As such, LMA5400 and LMA5401 could exclude damage to physical documents, manuscripts, deeds, specifications, plans, drawings, designs, books and other records.

Definition: Cyber Act

For LMA5400 and LMA5401, Cyber Act means “an unauthorised, 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.”

The term ‘unauthorised act’ could be applied to:

1) an otherwise authorised person carrying out an act:

a) for which they have not been authorised (perhaps the act is outside the scope of their duties); or

b) that is contrary to instructions or guidelines (perhaps issued by an employer or manufacturer of a device);

2) an unauthorised person carrying out an act.

There may be emergency scenarios which compel persons to perform acts – involving electronic devices – for which they are not authorised in order to avoid or minimise the risk of injury or property damage. LMA5400 and LMA5401 do not appear to have considered such scenarios.

As noted above, the term ‘malicious or criminal act’ is also problematic because it could be applied to criminal damage, theft or vandalism involving an electronic device. Such acts should not be the subject of a cyber exclusion.

Definition: Cyber Incident

For LMA5400 and LMA5401, ‘Cyber Incident’ means

any error or omission or series of related errors or omissions involving access to, processing of, use of or operation of any Computer System; or
any partial or total unavailability or failure or series of related partial or total unavailability or failures to access, process, use or operate any Computer System.

The definition of ‘Cyber Incident’ demonstrates why LMA5400 and LMA5401 can have such broad application: they contemplate the results of cyber risks rather than cyber risks themselves. In its second limb, a ‘Cyber Incident’ is the unavailability or failure to use an electronic device. It should be apparent that there are many insured, non-cyber perils that could cause this, yet LMA5400 and LMA5401 make no such distinctions.

NMA2914, NMA2914A, NMA2915 and NMA2915A

August 8, 2020 by Stephen Tomlinson

Analysis of NMA2914, NMA2915, NMA2914A and NMA2915A

About

NMA2914, NMA2915, NMA2914A and NMA2915A are Electronic Data Endorsements that have been widely applied to Property policies. Since these endorsements can significantly reduce cover, it is important that their effects are understood. While NMA2914 and NMA2915 were published by the Non-Marine Association (NMA) on 25/01/01, NMA2914A and NMA2915A were released on 11/3/2015.

While NMA2914, NMA2915, NMA2914A and NMA2915A have been used by insurers (and reinsurers) to avoid exposure to cyber risks, these endorsements only address cyber risk indirectly by including ‘Computer Virus’ as a possible cause of loss of, or damage to, Electronic Data. Instead, these endorsements exclude damage and loss that results from damage to or loss of Electronic Data.

Summary: reductions in cover

1) NMA2914, NMA2915, NMA2914A and NMA2915A exclude loss of or damage to Electronic Data. However, NMA 2914 and NMA 2915, do provide cover for property damage if loss of, or damage to, Electronic Data causes a Fire or Explosion; NMA2914A and NMA2915A do not.

2) NMA2914, NMA2915, NMA2914A and NMA2915A all exclude business interruption loss that results from loss of or Damage to Electronic Data.

3) If a) an insured peril causes loss of or damage to Electronic Data, and b) that loss of or damage to Electronic Data results in subsequent property damage and business interruption, then such subsequent losses are excluded. This outcome demonstrates why insureds should resist the application of NMA2914, NMA2915, NMA2914A and NMA2915A.

For further analysis, please continue reading.

	NMA2914	NMA2915	NMA2914A	NMA2915A
Loss of, or damage to, Electronic Data	Excluded	Excluded	Excluded	Excluded
Cover for property damage caused by fire or explosion if such perils result from loss of, or damage to, Electronic Data	Yes	Yes	No	No
Cover for business interruption if loss of or damage to, Electronic Data causes fire or explosion	No	No	No	No
Cover if an insured peril causes loss of or damage to Electronic Data and subsequent property damage and business interruption	No	No	No	No
Basis of valuation: media	Cost to repair, replace or restore such media	Cost to repair, replace or restore such media. If no sub-limit: Cost of blank media	Cost of blank media	Cost of blank media
Basis of valuation: Electronic Data	Cost to reproduce any electronic data	Cost to reproduce any electronic data. If no sub-limit: cost of copying electronic data from back-ups or originals	Cost of copying electronic data from back-ups or originals	Cost of copying electronic data from back-ups or originals
Sub-limit	In the risk details	In sub-clause 2.1.1	No reference	No reference
Value of Electronic Data	None	None	None	None

The Exclusions: NMA2914, NMA2915, NMA2914A and NMA2915A

Sub-paragraphs a) of NMA2914 and NMA2915, and Clauses 1.1.1 of NMA2914A and NMA2915A, effectively contain two exclusions:

1) An exclusion on loss of or damage to Electronic Data; and,

2) An exclusion on loss resulting from 1), above (i.e. an exclusion on loss resulting from loss of or damage to Electronic Data).

To the extent that Electronic Data may be considered property, the first exclusion may be regarded as a property exclusion; the second exclusion may then be considered a business interruption exclusion.

Definition of Electronic Data

The definitions of Electronic Data in NMA2914, NMA2915, NMA2914A and NMA2915A are identical and similar to those in many Property policies. If the underlying policy already has such a definition, however, then the definition of Electronic Data in NMA2914, NMA2915, NMA2914A and NMA2915A could be deleted.

Definition of Computer Virus

Since ‘computer virus’ is included as a cause of loss of or damage to Electronic Data, its definition is not material. Nonetheless, the definition of ‘Computer Virus’ in NMA2914, NMA2915, NMA2914A and NMA2915A poses interpretive difficulties –

1) if a computer virus is an unauthorised instruction or code, how is ‘authorisation’ determined? Practically, the vast majority of computer instructions and code will not have been ‘authorised’ by users or system administrators;

2) ‘propagate’ is typically used in the context of organisms being reproduced from parent stock. Here, the term is applied to instructions/code that ‘propagates’ through a computer system or network. But what of instructions/code on a single computer system that carries out a malicious operation but does not ‘propagate’? And what of malicious instructions/code that is transmitted by e-mail between computers that are not networked? Potentially, such instructions/code may not fit the definition of ‘computer virus’ in 1.1.3.

The above items are not exhaustive, though further analysis is beyond the scope of this analysis.

Listed Perils writeback: NMA2914 and NMA2915 only

Unlike NMA2914A and NMA2915A, NMA2914 and NMA2915 do provide cover in sub-clause 1(b) for property damage if:

1) loss of or damage to Electronic Data

causes

2) a Fire or Explosion.

On this basis, NMA2914A and NMA2915A may be regarded as inferior to NMA2914 and NMA2915. However, this sub-clause 1(b) in NMA2914 and NMA2915 only writes back cover for property damage such that business interruption losses remain excluded by sub-clause 1(a). This appears to be an unfair result for insureds – where the intention of the underlying policy is to pay business interruption loss that results from covered damage to property – since this intention is overridden by the endorsement.

What if the peril comes first? Exclusion prevails

While the listed perils writeback in NMA2914 and NMA2915 is beneficial, consider:

1) a peril insured by the policy (including but not limited to Fire or Explosion)

which causes

2) loss of or damage to Electronic Data

which, in turn, causes

3) further damage and business interruption.

The effect of NMA2914, NMA2915, NMA2914A and NMA2915A is that the loss of or damage to Electronic Data, the resultant property damage and the resultant business interruption are all excluded (i.e. 2) and 3), above). This outcome may justifiably be considered unfair for the Insured where the proximate cause of damage and business interruption is an insured peril. Nonetheless, the words ‘regardless of any other cause or event contributing concurrently or in any other sequence to the loss’ in sub-clauses 1(a) of NMA2914 and NMA2915, and sub-clauses 1.1.1 in NMA2914A and NMA2915A, are clearly intended to have this effect.

Basis of Valuation/Settlement: Electronic Data Processing Media Valuation

While NMA2914, NMA2915, NMA2914A and NMA2915A exclude loss of or damage to Electronic Data, the ‘Electronic Data Processing Media Valuation’ clause does provide for the reinstatement of Electronic Data, but this is conditional on covered damage to ‘electronic data processing media’.

For NMA2914, the basis of valuation (or basis of settlement) for ‘electronic data processing media’ is the cost to:

1) repair, replace or restore such media to its prior condition; and,

2) ‘reproduce’ any electronic data contained thereon.

NMA2914A provides the same basis of valuation if a sub-limit is specified in sub-clause 2.1.1.

However, for

1) NMA2914A where a sub-limit is not specified in sub-clause 2.1.1,

2) NMA2915, and

3) NMA2915A,

the basis of valuation for electronic data processing media is:

1) the cost of blank media; and

2) the costs of copying the electronic data from back-ups or originals.

These bases of valuation are inferior to that in NMA2914 because it does not include costs to ‘reproduce’ electronic data. In practice, there may not be any practical difference if the insured has back-ups of the electronic data. But if the insured does not have back-ups, then the term ‘reproduce’ may include activities to re-create, gather or assemble electronic data, because such activities are explicitly excluded in NMA2914A, NMA2915 and NMA2915A.

Sub-Limits

To summarise,

1) NMA2914 requires the sub-limit to be specified in the Risk Details;

2) NMA2915 and NMA2915A do not have sub-limits; and,

NMA2914A provides for a sub-limit to be entered in sub-clause 2.1.1, but sub-clause 2.1.2 addresses cases where no sub-limit is entered.

For NMA2914A, the absence of a sub-limit from sub-clause 2.1.1 is beneficial from an insured’s perspective for the reinstatement of the electronic data processing media, but this benefit may be outweighed by the detriment of the inferior basis of valuation.

Value of Electronic Data: none

Finally, NMA2914, NMA2915, NMA2914A and NMA2915A clarify that the policy does not insure the value of Electronic Data. While Electronic Data may be property for the purposes of the underlying policy, the value of such Electronic Data is an intangible asset and represents intellectual property. Intangible assets and intellectual property are not typically covered by property policies.

LMA5393: Communicable Disease Endorsement for Property policies

August 8, 2020 by Stephen Tomlinson

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.

LMA5394: Communicable Disease Exclusion for property treaty reinsurance

August 2, 2020 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’:

a Communicable Disease; or
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.

LMA5398: Infectious or Contagious Disease Exclusion

August 2, 2020 by Stephen Tomlinson

Analysis of LMA5398

About LMA5398

Drafted by the Lloyd’s Market Association (LMA) and released in May 2020, LMA5398 is a communicable disease exclusion for UK consumer and commercial property risks.

LMA5398 exclusion

LMA5398 excludes loss or damage that is ‘in any way caused by or resulting from’:

infectious or contagious disease;
any feat or threat of infectious or contagious disease; or
any action taken to minimise or prevent the impact of an infectious or contagious disease.

Significantly, the words ‘in any way caused by or result from’ have the effect that the exclusion only applies where the listed items are an actual cause of loss, whether the proximate or remote cause.

Definition of ‘infectious or contagious disease’

The second sentence of LMA5398 defines ‘infectious or contagious disease’ as any disease capable of being transmitted from an organism to another organism. Strictly speaking, however, it is pathogens which are transmitted between organisms and pathogens which cause diseases (since the disease is the condition that affects the organism).

LMA5502 and LMA5503: Communicable Disease (Property Treaty Reinsurance)

August 2, 2020 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.