LMA 5391 & LMA 5395

What are these LMA 5391 & LMA 5395?

These are the latest exclusion wordings introduced by the Lloyds Market                   Association recently.

What do these clauses exclude?

These clauses seek to exclude loss, damage, expense, etc. arising out of COVID-19, SARS -CoV- 2 or variations or mutations of the same.

This seemingly super-fast action on part of the LMA leads us to a very interesting conclusion. As of date, without either of the above exclusions, one can safely assume that under an ‘All-Risks’ marine cargo policy, any loss, damage or expense caused by COVID-19/SARS is payable. As understood widely, under an All-risks policy with named exclusions, the onus is on the insurer to establish that the loss/damage falls under one of the exclusions and hence not payable. As none of the exclusions under ICC fit the bill as regards any pandemic, leave alone COVID-19 specifically, insurers would have nothing to fall back upon. Why do insurers fear these pandemics so much? No doubt, COVID-19 with all its attendant variations and mutations poses an enormous danger to human life and health but …….. can COVID-19 cause a physical loss or damage to cargo in transit? At this point in time, NO. Complete facts about the virus are not known except that like any other virus, it is not a living being, cannot survive or reproduce on its own except when it enters a living cells of any organism, where it can multiply and cause tremendous damage to the host.

So what are insurers worried about? If COVID-19 continues unabated, there could arise situations where huge expenses may have to be incurred by cargo owners. These expenses may be in the form of sanitizing expenses, clean-up expenses, meeting regulatory orders for destruction of cargo feared to have been contaminated/had the presence of COVID-19 (may be very relevant in case of edible items or pharmaceuticals in transit) and possible liabilities arising out of General average declared by vessels in which the vessel itself, cargo or crew show presence of the virus. This may sound outlandish at the moment but legal minds are sure to work in this direction.

So the Lloyds’ Market Association has come out with two COVID-19 exclusion clauses LMA-5391 & LMA-5395. These are recommendatory in nature & the markets are given the freedom on whether to use either of the clauses or not. It will be a matter of time before insurers, on their own or at the behest of reinsurers start using either of the clauses. Let us look at the wordings of both these clauses and the essential differences.

LMA 5391

‘CORONAVIRUS EXCLUSION

This Insurance does not cover any claim in any way caused by or resulting from:
a) Coronavirus disease (COVID-19);
b) Severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2);
c) any mutation or variation of SARS-CoV-2;
d) any fear or threat of a), b) or c) above.’

A very simple wording,on the face of it, but its intent and effect are far-reaching. First, the words ‘in any way caused by or resulting from’ is truly draconian. Any direct effect of the virus, one can understand, especially since direct effects are limited but ‘ any way’ meaning any indirect or remote relation to the virus would also result in ‘No claim’. E.g. If it is established that COVID-19 was for sometime present on an insured cargo that was later sanitized/neutralized but still the regulatory body insists on destruction of the cargo, claim will not be admissible. Secondly, even if a lock-down is enforced because of COVID-19 and during the lock-down period, let’s say the insured goods catch fire —- With LMA 5391, arguably still the claim can be declined because it is ‘ resulting from’ or  a consequence of the virus. The basic principle of Proximate clause may be turned on its head. Last but not the least, if there is a  ‘fear or threat’ of the virus and the insured incurs additional expenses in protecting the cargo by diverting it elsewhere, testing the cargo and containers, taking steps to sanitize the cargo/containers, etc. such expenses will not be allowed as claims. Forget Sue and Labor charges or Loss Minimisation expenses or the duty of the Assured to act ‘ as if uninsured’.

LMA 5395

CORONAVIRUS EXCLUSION (for use on marine and energy liability policies)

This clause shall be paramount and shall override anything contained in this insurance inconsistent therewith.

This insurance excludes coverage for:
1) any loss, damage, liability, cost, or expense directly arising from the transmission or alleged transmission of:
a) Coronavirus disease (COVID-19);
b) Severe Acute Respiratory Syndrome Coronavirus 2 (SARS-CoV-2); or
c) any mutation or variation of SARS-CoV-2;
or from any fear or threat of a), b) or c) above;
2) any liability, cost or expense to identify, clean up, detoxify, remove, monitor, or test for a), b) or c) above;
3) any liability for or loss, cost or expense arising out of any loss of revenue, loss of hire, business interruption, loss of market, delay or any indirect financial loss, howsoever described, as a result of any of a), b) or c) above or the fear or the threat thereof.

All other terms, conditions and limitations of the insurance remain the same.

This clause although more elaborate can be stated to be a narrower version of the COVID-19 exclusion. Why? Because even though it excludes loss, damage, liability, cost or expense, the same should be ‘ DIRECTLY arising from the transmission or alleged transmission of ‘ the viruses. Yes, it of course excludes ‘fear or threat’ of the virus too as also consequential losses but the small comfort to any assured will be that if an insured peril and COVID-19 operate concurrently, the test will be what directly caused the loss. Hail the principle of Proximate Cause! Insurers cannot use the exclusion citing any remote connection with the virus.

Early days………how insurers use these clauses, whether a policy with an absolute COVID-19 exclusion will be cheaper than the one with a LMA-5395 exclusion, how frequently this exclusion when used would be invoked, how many legal disputes would arise and how Courts would look at these exclusions, only Time will tell. Hopefully, the same Time will be constructively used to find a vaccine and cure for COVID-19 so that we eliminate this peril altogether rather than cocoon ourselves in legal language to avoid monetary losses.

Stay home, stay safe!