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Event Cancellation Debacles Will Have Insurers Reframing Coverage Terms for Years to Come
The future of event cancellation insurance will be determined by the far-reaching impacts of COVID-19.
Topics: COVID-19 | Crisis Management | Global Risk | Loss Control | Risk Insider
“May you live in interesting times.”
This well-known expression surely applies to most of 2020 and 2021 — and will likely ring true when 2022 ends in just a few short months.
On March 11, 2020, the National Basketball Association announced it was postponing its season because of concerns over COVID-19. Soon after, the National Collegiate Athletic Association Division I conference basketball tournaments and March Madness were canceled for the same reason.
Many people believed these cancellations were a tipping point.
Later, other events, including the 2020 Tokyo Olympics and the Wimbledon Tennis Tournament, were canceled or postponed, again because of COVID. Events that had almost always happened as scheduled were suddenly canceled, leaving people with a new feeling of uncertainty.
The unemployment rate reached 14.8% in April 2020 — the highest the United States had experienced in 70 years .
Like most industries, insurance was not impervious to this uncertainty.
The Pandemic’s Effects
One of the few benefits of the COVID pandemic has been the data it generated.
Taylor Graciano, doctoral student in risk management and insurance, University of Georgia
The last global pandemic, the 1918 influenza pandemic, occurred long before computers and mass data collection existed. Pandemic risk modeling previously focused on excess mortality rates for life insurance. But global pandemics affect far more than just life insurance.
The COVID pandemic has also caused changes in property/casualty, business interruption, event and auto lines. In the future, pandemic modeling will be driven by real-time data and performed by actuaries, mathematicians and data scientists. It will also be considered by many types of insurers.
Some of the largest consumers of special event insurance are trade shows and conferences. However, from 2019 to 2020, revenue generated from trade show and conference planning decreased by 43.2%.
The industry was expected to rebound in 2021 to pre-pandemic levels, and it did to some extent, but new variants of COVID slowed recovery. Revenue is projected to increase slightly by this year’s end but then decrease and stabilize until 2025.
Many insurers have implemented changes in response to the pandemic. These have included price increases, new exclusions and other risk reduction measures.
Further, insurers classified the COVID pandemic as a “ known event ” in January 2020. This classification is assigned after an unexpected or unforeseen event occurs, and it removes future coverage in many instances.
For example, if a future bride and groom purchased wedding insurance in 2019 for their June 2020 wedding, cancellation of their wedding because of COVID would have been covered, assuming there was no applicable exclusion in the policy.
However, if they purchased the same policy in March 2020, cancellation of their wedding would not have been covered, because COVID was then considered a known event.
As individuals and businesses tried to adjust to a new normal, the event insurance industry faced its own challenges. During 2020, the event insurance market tightened dramatically. Prices rose by 50 to 100%, and capacity diminished, largely because many insurers exited the market .
On December 8, 2020, Munich Re, the largest reinsurer in the world, announced it would no longer insure events that were canceled because of the COVID pandemic, setting the tone in the reinsurance market.
New Exclusions and Litigation
Communicable disease endorsements existed before COVID, but they were expensive, and insureds rarely purchased them.
J. Tim Query, PhD, professor, Department of Finance, New Mexico State University
Even if the endorsement was added to a policy before COVID became a known event, it may not have provided coverage if invited guests — not the client — canceled their plans to attend the given activity because of COVID.
All-cause event-cancellation policies also previously covered communicable diseases. However, as claims poured in from insureds that had these, insurers in turn created communicable disease exclusions.
The Wimbledon Championship — the oldest and arguably most prestigious tennis tournament in the world — has purchased event-cancellation insurance for the past 17 years, at a cost of $2 million per year. Cancellation of the 2020 tournament triggered a $141 million payout from its insurer .
While this may seem significant, it is just a small fraction of what insurers are anticipating in future payouts.
The insurance industry’s future regarding pandemic-related event cancellation is still unknown. At the time of writing, new variants of COVID continue to disrupt the economy. As with many types of risks, we are living in the midst of a dynamic and shifting environment.
Some plaintiffs in business interruption cases have alleged breach of contract because of their insurer’s refusal to cover commercial losses that resulted from government COVID-related shutdown orders.
The insurance companies have argued that closure as a result of a government shutdown order is not a covered physical loss or physical damage. Federal appeals courts and at least one jury have recently sided with insurers.
A growing body of case law also supports the proposition that virus exclusions are not ambiguous and thus preclude recovery for losses generated by the existence of COVID on a business’s location.
However, according to the University of Pennsylvania Carey Law School’s COVID Coverage Litigation Tracker, there are currently 222 pending appeals in federal circuit courts and another 65 pending in state appellate courts. These disputes will likely continue into the foreseeable future.
The insurance industry is estimating over $200 billion in pandemic-related losses. Lloyd’s estimated that its own payouts for such losses are now on par with payouts for the terrorist attacks of September 11, 2001, or for the combined impact of hurricanes Harvey, Maria and Irma in 2017.
As changing weather patterns pose a significant concern for insurers, it seems fitting to compare pandemic-related losses to the insured losses of previous natural disasters in the U.S. Hurricane Laura, the most powerful hurricane to make landfall in the U.S., cost insurers $10 billion — just 5% of what COVID is projected to cost them.
Other Risk Reduction Measures
Some event planners pivoted to virtual events to staunch their industry’s rapid decimation.
Concerts became multimedia events as artists developed virtual experiences. Academic conferences also took on virtual formats to facilitate networking and research collaboration.
Similar to how mold affected homeowners insurance policies, and how the terrorist attacks of September 11, 2001, transformed future commercial insurance policies, the COVID pandemic has caused insurers to reevaluate how their event cancellation insurance policies are written.
It’s important for insurers to consider the lessons learned from the pandemic so that they can better prepare for inevitable future pandemics and create more comprehensive insurance frameworks.
Future data on events from 2021 to 2023 will help insurers determine the severity of COVID’s impact on the events insurance industry.
Data on the types of special event insurance claims filed during the pandemic could also provide an avenue for research into how to improve policy wording and coverage options for future pandemics. &
Taylor Graciano is a doctoral student in risk management and insurance at the University of Georgia. Her research interests include health insurance, insurance demand and consumer behavior. Graciano graduated with the highest honors as the Mountain States Outstanding Student and Outstanding Graduate of the Economics Department from New Mexico State University with a BBA in finance, economics and general business. J. Tim Query, PhD, is a professor at New Mexico State University (NMSU) in the Department of Finance. His research interests include uninsured motorists, risk management in a university setting and actuarial issues and solutions. He has published 48 papers in academic journals and is a two-time winner of the Faculty Award for Outstanding Senior Research from the NMSU College of Business. Query is a past president of the Asia-Pacific Risk Management and Insurance Association and holds the Mountain States Insurance Group Endowed Chair at NMSU.
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September 28, 2022
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Construction’s Skilled Labor Shortage Is Building. What Contractors and Their Risk Professionals Need to Know to Get Ahead
A storm is brewing for the construction industry as a skilled-labor shortage lengthens job times and contributes to higher rates of injury. But there are risk tools that can help contractors get ahead.
By: The Hartford | October 1, 2022
A lack of labor in any industry has many implications, from decreases in productivity to increases in workers’ compensation claims. For the construction industry, a labor shortage can contribute to delays in project completion, issues with quality control, increased builder’s risk costs and more.
“Labor is a significant issue in today’s industry,” said David DeSilva, Head of Construction for The Hartford’s Middle & Large Commercial. “Skilled labor shortages hinder the ability of construction companies to uphold the timeliness or contractual requirements with the owner or higher-tiered contractors.”
An Associated Builders and Contractors analysis revealed the construction industry will need more than half a million workers above its current pace of hiring in order to meet demand. That would mean, the report estimated, an additional 650,000 workers.
“When you think about shortages and some of the issues they can cause, there are job delays, reengineering of construction sequences, a shift in the business model. They may be going from self-performed to more subcontracted work,” DeSilva said.
“As an example, if a trade doesn’t have enough workers and laborers to complete the job, they may subcontract part of that or all of that work out to someone else.” And even this practice has its own risk implications to contend with.
It’s no doubt, either, that the pandemic has increased the need for laborers. According to DeSilva, however, this was a growing concern pre-pandemic as well: “More workers were leaving the field than entering it, and firms were beginning to address the issues pre-pandemic.”
Now with the Great Resignation in the mix, an aging workforce and low interest from younger professionals, the construction industry needs to act in order to attract and retain skilled talent and mitigate against risk.
Here’s a deeper dive into what’s going on in construction, the insurance implications of a labor shortage and how construction professionals can start to course-correct and bring on the skilled talent they need to thrive.
Understanding Your Labor Shortage Exposures
David DeSilva, Head of Construction for The Hartford’s Middle & Large Commercial
As noted, a lack of labor can lead to several risk exposures. For the industry, specifically, there are a few key things that construction risk professionals should know in order to get a grip on mitigating risk.
A key component of construction is job bidding. Contractors meet with potential clients to give them a proposal for completing their project. Subcontractors use this bidding process to showcase their skills to the contractors to be considered for the job.
But with less labor, contractors aren’t able to take on as many jobs at the same time.
“You’re seeing firms be more selective in their bids and more selective in the work they’re taking on,” DeSilva noted. This means bidding has become more competitive in nature, thus driving up project costs for higher-tiered contractors or the owner, placing a strain financially on the project.
Less workers can also lead to workmanship issues.
“When you think about less experienced workers coming onto site and completing these jobs, there is a potential for downstream implications on the quality of work,” said DeSilva. Added to that, he said, newer workers could lead to timeliness issues as they take their time to become more familiar with the requirements of the job.
Also, less labor impacts timeliness in that contractors must adhere to safe shifts for workers, and fewer employees means less shifts, which could lead to longer project completion times. Some construction jobs last months — and even years — depending on the type of program and project it is.
Insurance Strains to Note
A skilled-labor shortage has the potential to impact all lines of insurance, no matter the size or scale of the project. DeSilva called attention to a handful that should be at the top of the consideration list for construction risk professionals to review.
Number one is workers’ compensation.
“It’s no secret that older workers take longer to recover from injury, which clearly impacts claim dollars and claim payouts,” he said. “Data has shown that less experienced workers, at the opposite end of the spectrum, tend to get injured more often, and with less workers in the field, there are higher demands on the workers that are left.”
It’s the perfect storm for potential mistakes or oversights, which can lead to more injuries.
It also has workmanship implications, as fewer workers under more pressure could possibly miss key performance and quality checks. That can lead to builder’s risk, yet another insurance line that feels the strain of the lack of labor in construction.
“Then there’s the overall economic inflation, driving loss dollars, medical costs, material costs, safety equipment — everything is increasing at record highs,” DeSilva added.
He said depending on the insurance program structure, these loss dollars could be directly paid by the contractor and indirectly through the insurer.
Safety as a Way to Bring in Skilled Labor
Safety and training have to be at the forefront of recruitment and retention of workers.
Not only will a strong safety training program bring down the number of injuries and help prevent risk, but it will also create a culture of safety among laborers. That in turn shows these workers their employer cares about their wellbeing and gives them a sense of security in their job.
“Risk managers and safety directors are really beefing up their training and safety programs in an effort to mitigate loss and retain the talent that they already have,” said DeSilva. A key way they’re doing this is by looking to technology for safety solutions.
“When you think about the implementation of onsite imagery, or water sensors, wearables on workers, or telematics in vehicles,” said DeSilva, “these technological devices are going to help drive down loss costs and ultimately benefit both the firms and the workers.”
Partnering with a Team Skilled in Construction’s Demands
Once construction firms understand the labor shortage and its impacts, it can be hard to determine what to do next. Implementing a quality safety program is a good start, but knowing exactly what that entails will require an insurance partner that can guide contractors and construction risk professionals towards the best solutions for them.
At The Hartford, the risk engineering consultants are trained to know what to do to help.
“Our risk engineering team consultants have a wealth of knowledge and experience in the industry, as many of them have come from the contractor side,” said DeSilva.
“They have the training from the contractor seat and have the ability to review safety programs and identify hazards and offer recommendations for improvement. When you’re working through a labor shortage every day, it’s easy to overlook things. A new perspective from people who understand your industry goes a long way.”
The Hartford also has an Accredited Industrial Hygiene Lab dedicated to giving firms the opportunity to monitor and improve occupational health, further reducing workers’ comp claims and bolstering safety efforts to keep workers safe.
When a claim does roll in, claims professionals at The Hartford are ready to act: “We have medical clinicians who help manage claims, and data experts that are solely dedicated to claims. Our claims team is able to identify trends, highlight exposures and save on medical costs,” DeSilva said.
“The labor shortage is likely going to continue to be a challenge for the foreseeable future. How contractors handle the shortage will be a major factor in their performance and the reputation of their firm,” he added.
“The industry is continually evolving, and organizations that frequently update their safety and training programs are going to minimize and mitigate their exposure to loss.”
To learn more, visit: https://www.thehartford.com/business-insurance/construction .
The information provided in these materials is intended to be general and advisory in nature. It shall not be considered legal advice. The Hartford does not warrant that the implementation of any view or recommendation contained herein will: (i) result in the elimination of any unsafe conditions at your business locations or with respect to your business operations; or (ii) be an appropriate legal or business practice. The Hartford assumes no responsibility for the control or correction of hazards or legal compliance with respect to your business practices, and the views and recommendations contained herein shall not constitute our undertaking, on your behalf or for the benefit of others, to determine or warrant that your business premises, locations or operations are safe or healthful, or are in compliance with any law, rule or regulation. Readers seeking to resolve specific safety, legal or business issues or concerns related to the information provided in these materials should consult their safety consultant, attorney or business advisors. All information and representations contained herein are as of August 2022.
The Hartford Financial Services Group, Inc., (NYSE: HIG) operates through its subsidiaries, including the underwriting company Hartford Fire insurance Company, under the brand name, The Hartford®, and is headquartered in Hartford, CT. For additional details, please read The Hartford’s legal notice at www.thehartford.com .
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with The Hartford. The editorial staff of Risk & Insurance had no role in its preparation.
The Hartford is a leader in property and casualty insurance, group benefits and mutual funds. With more than 200 years of expertise, The Hartford is widely recognized for its service excellence, sustainability practices, trust and integrity.
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