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2010 Unrest and 2011 Floods – re/insurance lessons learned from Thailand?

In 2010 and 2011 Thailand experienced unrest and major floods, which tested the resources and capacity of the local insurance market and its offshore reinsurers to respond to and deal with complex, high value, high profile claims and litigation. What lessons have been learned from these 2 events?

Key issues in many of the disputed claims were divergent interpretations of policy terms and the relevance of cover to the risks intended to be covered. Policy wordings should be regularly and objectively reviewed to ensure that risk and cover correspond, particularly where the insured operates in a dynamic and changing industry and to ensure that the cover remains appropriate in an expanding and modernising economy, particularly in relation to the amount of cover.

A further critical interpretation issue arose from the application of Thai law to the insurance policy and a different law to the reinsurance policy. In many cases, reinsurance risk was assessed on the basis of common law and/or industry-accepted definitions, terms and concepts on the assumption that these definitions, terms and concepts were either recognised by Thai law or that Thai courts would apply foreign law, particularly case-based common law judgments, consistently with courts in other jurisdictions. This was not the position in a large number of claims, including for fundamental terms such as uprising, commotion and civil unrest and the interpretation of wide area damage.

Thailand's civil code legal system does not rely on judge-made case law and persuading a Thai court to apply foreign law or foreign law definitions, terms and concepts is challenging and uncertain. The challenge is more acute when the foreign law concept is not recognised under Thai law or the foreign law interpretation diverges from the interpretation under Thai law. The limited, recent and relevant insurance jurisprudence also affected the ability to accurately assess how a Thai court or an arbitral tribunal, applying Thai law, would interpret insurance terms and concepts.

Divergences between the law of the underlying insurance policy and the law of the reinsurance policy should be clearly identified and addressed, particularly in circumstances where the reinsurance policy incorporates the terms of the underlying insurance policy.

It is also important to ensure that the method of dispute resolution provides a fair and neutral process for the resolution of disputes. Where arbitration is the preferred method, the choice of forum, rules and the language of the arbitration play a critical role. This is particularly where a dispute over the applicable law requires resolution as a preliminary step.

The criteria for arbitrators also play a critical role. Although it can be beneficial to appoint industry experts as arbitrators, care should be taken to ensure that the criteria are broad enough to avoid a situation where potential industry expert arbitrators are ineligible because of their involvement in the claims or loss in dispute. This was the position in a number of arbitrations arising out of the 2011 Floods in which all Thai insurers had exposure to flood claims and limited the potential arbitrators from the insurance industry; where the arbitration clauses required arbitrators with a defined period of experience in the Thai insurance industry.

In the arbitrations filed in relation to reinsurance claims arising from the 2011 Floods, an issue which was not tested was the enforceability of an arbitral award where the notice of arbitration contained procedural and other defects.

The limitation period for claims created considerable concern and uncertainty and possibly diverted attention from settlement negotiations to defensive moves to suspend the limitation period. Thai law allows an insured 2 years from the date of loss to commence proceedings against their insurer. The few cases which have addressed this issue have not sufficiently defined the 'date of loss'. Where a reinsurer has made quarterly or other payments in respect of a number of claims in a policy year to its cedent, it is not clear if this constitutes an admission of liability sufficient to suspend the limitation period. Reinsurers making payments under a Bordereau or other claims agglomeration systems should ensure that disputed claims are identified and payments are either withheld or paid with a reservation of rights. Where a payment is made, a clear and express reservation of rights should be made although the enforceability of such reservations is by no means certain or consistent.

The law is silent on the limitation period for claims by an insurer against its reinsurers, other than a 1990s decision of the Supreme Court to the effect that the limitation period for such claims is the same 2 year period as for claims between the insurer and its insured. The flurry of claims filed against insurers immediately prior to the second anniversary of the flooding created considerable concern for Thai insurers, who had a handful of days in which to commence proceedings against their reinsurers before the expiry of the limitation period. It is important to note that although the decision is persuasive it is not binding on the Supreme Court or on inferior courts.

In the absence of a change in the law or some form of clarification from the regulator, the uncertainty over the limitation period is likely to continue.

Underinsurance is not unique to Thailand. The claims arising from the 2011 Floods highlighted the extent of underinsurance and the consequences, particularly where the levels of cover and sub-limits had not been adjusted to reflect growing, expanding or changing operations or the increasing value of the risks. Commercial and competitive pressures are unlikely to moderate underinsurance trends and this is likely to continue to be a source of friction between insured, insurer and reinsurer.

Over the past 30 years, Thailand has developed a sophisticated, global manufacturing sector with foreign investment playing a critical factor. Thailand's manufacturing sector is highly integrated into global and regional logistics and manufacturing networks. In certain sectors, such as the automotive sector, there is widespread use of sub-contractors and a cascade of suppliers and customers. The extent of this became apparent in the aftermath of the 2011 Floods and the resulting business interruption claims.

In many business interruption claims, adjustment was premised on the application of the Orient Express Hotels judgment by a Thai court or an arbitration tribunal applying Thai law without due regard for the position under Thai law. It is by no means certain that a Thai court would consider this decision relevant to a claim governed by Thai law, particularly where the court is being asked to apply a foreign common law judgment in a civil code jurisdiction. Other factors to consider are the contemporaneous and contrary decisions arising out of other Hurricane Katrina losses and that the decision in Orient Express Hotels focuses on whether the arbitrator made an error of law rather than the court directly interpreting the business interruption clause.

A more complex issue was substantiation of business interruption claims, particularly in circumstances where this was dependent on evidence from customers and suppliers. Customers and suppliers were often reluctant to disclose sensitive commercial information. This was often also the case where the insured was part of a global multinational company. This resulted in a number of claims which were only partially substantiated, at best.

Partial payment of such claims, even on a without prejudice basis, may only encourage such claims in the future and insurers and reinsurers may come under pressure to settle future claims on the same basis and with similar levels of substantiation. This is particularly relevant in the context of the ever increasing value of such claims.

With a globally integrated economy, the impact of the Thai floods was felt across the world and this was reflected in business interruption claims. Business interruption cover should address the global impact on risk exposure, including through premiums, sub-limits, delineation of national, regional and global losses and clearer and policy-specific definitions of customer and supplier.

The nature and extent of the flooding, which affected a large part of the country and resulted in major disruption to the Thai economy raises the issue of whether business interruption cover is appropriate for a national, natural catastrophe.