FM Global is lowering communicable disease business interruption (BI) sub-limits provided in its standard property policies from $1mn to just $10,000 in the Covid-19 fallout ahead of an expected tightening of terms from reinsurers at its upcoming treaty renewal, The Insurer can reveal.

FM Global

  • FM standard communicable disease coverage cut from $1mn to $10,000
  • Affiliated standard sub-limit cut to just $1,000
  • FM offered higher limits on an individual account basis
  • Covid-19 related BI claims already coming in on the policies
  • Reinsurers expected to tighten terms and conditions at upcoming renewal

The mutual giant’s Affiliated FM unit, which targets middle market insureds, is also understood to be dramatically cutting sub-limits for the coverage in its policies from $100,000 to $1,000.

The standard sub-limits for communicable disease BI are offered on an annual aggregate basis with a 12 month period of liability.

Insureds have an option to purchase higher limits for communicable disease than those offered as standard in FM Global policies, and the carrier is understood to write significantly higher limits for the exposure on a portion of its book of business.

Sources have suggested the carrier has already started to see Covid-19 BI claims come in on its portfolio, with in excess of 300 already filed. More than 15 percent of the claims by volume are thought to relate to policies that had higher than standard sub-limits for communicable disease.

The changes to the standard sub-limits are understood to have been communicated to the market ahead of the 1 April renewals in the US.

However, because FM writes on an admitted basis it has to comply with a 60-day notice period to inform insureds of the change.

Although the requirement differs state-by-state and the insurer is likely to look to negotiate an earlier change with some insureds, it is expected that the lower sub-limits will be broadly in place at the mid-year June and July renewals.

Market sources have suggested that this will coincide with tighter terms and conditions around communicable disease from reinsurers when FM’s reinsurance treaties renew at 1 July.

It is thought that the same reinsurance treaties cover FM Global and Affiliated FM.

As previously reported, reinsurers began pushing at 1 April to apply stricter wordings around communicable disease to their treaties, causing a degree of consternation among some buyers and brokers.

The move has been driven by a desire to control or eliminate silent pandemic coverage at a time when the commercial insurance industry – particularly in the US – has been put under pressure by regulators to pay out for Covid-19 BI losses even when they are ostensibly excluded in policies.

How the FM standard coverage works

While many property insurers excluded communicable disease in some form from business interruption in their property offerings, FM Global and Affiliated FM were widely seen as having some of the broadest coverage as standard in their property and BI policies ahead of Covid-19.

In a video on the carrier’s website it states that its FM Global Advantage policy includes communicable disease coverage for all clients “that is among the broadest in the market”.

FM Global added communicable disease to its Advantage all-risk policy in 2016.

The coverage includes the cost of cleaning up the disease, business interruption or time element losses sustained associated with a shutdown, and lost sales. It also covers the cost of a PR campaign associated with a communicable disease shutdown.

To trigger the coverage, communicable disease must be present at a location that is owned, leased or rented by the insured. It also requires that a government agency or officer of the insured must restrict or limit access to the site for more than 48 hours as a result of the presence of the disease.

The ability to claim if an officer of the insured chooses to restrict or limit access to the site is thought to be relatively unique, with coverages for communicable disease typically requiring a government agency to order a shutdown.

Communicable diseases are defined as those that can be transmitted from human to human by direct or indirect contact – even if the disease originates from an animal.

FM Global did not respond to a request for comment on this article.

FM continues to tune out broader coverage

The move by FM Global to slash sub-limits for communicable disease comes a year after it took similar steps to significantly reduce exposures on its portfolio to cyber risk.

As this publication revealed last March, the carrier lowered standard policy limits from $10mn to $1mn in its computer systems non-physical damage (CSNPD) and data, programs or software (DPS) coverages.

It also cut standard limits from $5mn to $1mn in its off-premises data services (OPDS) coverage.

Although FM would still offer higher limits than the standard on an individual account basis, that additional coverage would likely come at a significantly higher price.

The insured would also have to undertake FM Global’s risk assessment for cyber and buy into its engineering-based risk mitigation approach to secure additional limit.

The changes came against a backdrop of a broader push in the property arena to significantly sub-limit or exclude non-physical damage coverage in policies in the wake of several high-profile losses.

More generally, actions by FM Global and AIG to tighten underwriting and push for rate over the last 16 months have been a big driver of the hardening US commercial property marketplace.

In its annual report, FM Global reported strong premium growth in 2019 driven by improved pricing, terms and conditions. Gross in-force premium climbed 8.6 percent to $6.44bn.

It also revealed a major turnaround in its underwriting performance, with a loss ratio of 52.5 percent that was little more than half the 100.8 percent and 100.1 percent reported in 2017 and 2018 respectively.