Thailand: Insurance Issues Following the Thailand Flooding

Last Updated: 29 February 2012
Article by Peter Shelford and Louise Joyce

The floods in Thailand in 2011 were the worst for more than 50 years, with the Thai Finance Ministry estimating that the total economic cost of flood damage could exceed US$6 billion. Some in the industry regard this as a severe underestimate.

To date, it is estimated that the flooding in Thailand has cost around US$3.3 billion in insurance claims. Both residential and industrial areas in and around Bangkok have been affected by the flooding, as several large industrial estates have been left without facilities and resources. It is likely that large global businesses will suffer as a result of this disruption.

This article highlights issues that are likely to arise when insurance claims are brought in the wake of the flooding and practices to be considered when deciding whether an insurance policy responds to a claim.

LIKELY ISSUES ARISING FROM THE FLOODING

As industrial all risk insurance policies in Thailand generally provide coverage for flood damage (unless specifically excluded), policy interpretation issues are likely to arise.

Who is the insured?

Around 15,000 industrial and manufacturing plants have been damaged following the flooding in Thailand. Many factories operated by global businesses have been forced to close and many have found their supply chains disrupted. Insurers will need to clarify who is in fact bringing the claim. Can a manufacturer outside of Thailand bring a claim for reduced production due to disruption to its suppliers in Thailand?

Reinstatement value clause

Most insurance policies contain a clause that enables the insured to claim for the replacement of destroyed property with new property. The policy usually provides that damaged property will be repaired to a condition as it was when new. One issue that may cause difficulties for insurers is where the insured intends to relocate its operations overseas. In this case, the insurer will need to consider whether the insured can claim the full reinstatement cost and whether in any event the reinstatement clause allows the insured to relocate to a new location and specifically whether this must be in Thailand.

Business interruption issues

Business interruption coverage is designed to compensate the insured for the financial effect of the interruption or interference to that business due to physical damage. The intention is to restore the business to the same financial position as if the loss had not occurred (subject to the terms and conditions of the policy). Business interruption claims are normally linked to material damage and can often lead to the largest, most complex and contentious claims following natural disasters. In part, this is due to the many factors that affect the calculation of loss.

Deductibles and occurrences

Deductibles are an effective way of reducing insured losses and the large amount of work involved in settling minor claims. The policy itself is likely to define whether the flooding constitutes one occurrence, which means that one deductible is payable by the insured. The occurrence is likely to be referenced to a time limit (such as a 72-hour clause). The number of occurrences therefore affects the number of deductibles and the amount paid by the insured, insurer or reinsurer. Calculating the number of occurrences and their respective impact can therefore have enormous financial consequences.

Wider area impact

Issues may also arise in respect of business interruption claims where damage is sustained both to the insured's property and the surrounding area. The essential characteristic of a natural disaster is that it causes damage to a wide area. Is an insurer entitled to disregard and exclude the impact of wide-area damage when considering losses arising from the same insured peril? Again, insurers need to look at the specific wording within each policy and consider them on their individual merits.

LEARNING FROM RECENT NATURAL DISASTERS

When dealing with flooding insurance claims in Thailand, insurers may want to look to the recent severe natural disasters that have happened across the Asia Pacific region: earthquakes in New Zealand, flooding in Australia and the earthquake and tsunami in Japan. Such events may provide insurers with useful guidance when considering policy interpretation.

New Zealand

The Canterbury earthquake of February 2011 was the largest single insurance event in the history of New Zealand, with the Insurance Council of New Zealand estimating that the cost of the earthquake was to reach US$10 billion. As New Zealand suffered from three separate earthquakes, the insurance market was faced with the difficult task of quantifying the damage and loss sustained following these three events. As described above, one difficulty faced was the issue of deductibles.

Japan

Following the Tohoku earthquake in Japan and the subsequent tsunami in March, the General Insurance Association of Japan ensured that all insurers used adjusted standard guidelines to enable quick and prompt assessments.

Australia

One issue that insurers faced in Australia following the flooding in Queensland was the policy definition of defined events. Policies may have excluded "flood" while retaining cover for storm damage or other similar concepts. Naturally this resulted in considerable debate in respect of the interpretation and ambiguity in policy wording. Following an independent review of natural disaster insurance, the Australian Federal Government has announced it will introduce regulations standardising flood cover for homes.

THE YEAR AHEAD

Global insurers faced with flooding claims in Thailand may be able to look to the issues and solutions that have arisen in respect of other natural disaster insurance claims during the past few years. Different perspectives and strategies have been used, which can be referred to when deciding on a specific course of action in Thailand. There is no doubt that there are some important insurance lessons that can be learnt from the flooding in Thailand, which has certainly highlighted the need for clarity in insurance policies. Policies may be very different and legal and factual disputes may consequently arise. In any event, as the flooding continues to cause unprecedented damage, it remains to be seen what the full scale and extent of the damage will amount to.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

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