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Global Risk predictions
#1 AVIATION

UK spaceflight: a new dawn brings new risks

In our 2021 prediction, we foreshadowed a new era in British spaceflight. Dial forward one year and the scene is set: the UK Space Industry Regulations 2021 entered into force, putting meat on the bones of the Space Industry Act 2018 (SIA); the UK Civil Aviation Authority was appointed as the UK’s space regulator; and the UK Air Accidents Investigations Branch was nominated to act as the Space Accident Investigation Authority for the UK. For 2022, we predict the first launch licence will be granted and we will witness the first orbital rocket launch for satellites from UK soil. Recreational spaceflights, to the edge of space, are also on the horizon (although not perhaps in 2022), initially just for the intrepid few having sufficient financial resources. From a space insurance perspective, the prospect of launches from UK soil brings the potential for claims, including against operator licensees. The SIA and its associated regulations include express provisions that both permit civil claims and seek to provide checks and balances.

‘Tis the season: a flurry of mistakes with a dash of mechanical mishaps

A return to the skies will continue to present a challenge to the General Aviation (GA) community and carries an associated risk of increased GA insurance claims. In the UK, GA flying emerged from remaining COVID-19 restrictions on 19 July 2021. It is time for GA pilots and their insurers to take stock of the potential for an increased risk of accidents and incidents, of operational mistakes, mechanical mishaps and inadvertent regulatory breaches. Idle aircraft can give rise to a worrying list of maintenance issues. In terms of human factors, a prolonged break from flying raises a red flag in terms of skills fade. Mindful of the same, the UK Civil Aviation Authority (CAA) has encouraged GA pilot refresher training or club check flights before a resumption of flying. Finally, licences and currency requirements must be checked.

Coronal mass ejection must remain on the radar

Coronal mass ejections (CME) have historical precedent, occurring in 1770 and 1859 (the Carrington event), and hold the potential for significant losses. CME is a phenomenon that sees a significant release of plasma and accompanying magnetic field from the solar corona. It can make its impact felt on the Earth by reason of associated geomagnetic storms. The impact of such a storm has the potential to disable power grids causing voltage loss and/or irregularities, lead to intermittent satellite navigation (GPS) problems and interfere with high-frequency radio signals at altitude, with an associated risk for commercial flight operations. In 2012 a large CME missed the earth by just 6 days. Analysis suggests that it was of sufficient magnitude to cause damage and loss in the US alone of between US$0.5tr and US$2.6tr. November 2021 saw another “cannibal” CME tracked. The potential impact cannot be underestimated and CME must remain on our radar.

Contributed by our Belfast office.

#2 CONSTRUCTION AND ENGINEERING

COVID-19 liability waivers likely to be tested in Australia

Many infection clusters in Australia have involved construction sites. This may lead to a rise in liability waivers in contractor arrangements regarding the risk of transmission to protect project parties from liability claims by a third party. The robustness of such waivers is likely to be challenged in the courts.

Contributed by our Australian Legalign partner, Wotton + Kearney

#3 CYBER AND DATA RISK

Ransomware and extortion attacks will continue to cripple global businesses

Ransomware attacks are crippling businesses globally. The attacks use malicious software to encrypt systems and data in order to deny their availability, and are increasingly accompanied by the theft of data. Attackers seek to extort a ransom for decryption as well as the non-publication of stolen data. Cryptocurrencies, allowing untraceable money transfers, have exacerbated the problem, making it often impossible for law enforcers to identify cybercriminals. Governments are taking action, including issuing sanctions over criminal groups and cryptocurrency exchanges, but so far these measures are only a small drop in the ocean in the fight against the cyber criminals. The impact of these attacks can be catastrophic with losses arising from business interruption, the cost of restoring data and IT systems, and reputational damage. Businesses have no guarantee that data will be deleted if the ransom is paid. Strong cyber security measures, reliable and rehearsed ransomware recovery plans and appropriate insurance will help mitigate against the risk of ransomware.

Extended EU rules on cyberattacks leave insurers uncertain over ransom payments

On 17 May 2021, the European Council extended the decision on restrictive measures against cyberattacks that threaten the European Union or its Member States for one further year. The aim of the decision is to establish a common framework for measures by the Member States against persons, entities and organisations responsible for or supporting cyberattacks or attempted cyberattacks against critical infrastructures within the EU. The subject of the resolution is not only the freezing of assets, but also payment bids to certain persons, entities or bodies and organisations mentioned in the resolution. The resolution does not contain a general prohibition on the payment of ransoms or on the insurability of ransoms. This question remains open and is currently the subject of controversial discussions in many Member States, including Germany. At the same time, many insurers are considering whether they want to offer insurance for ransoms at all.

Contributed by our German Legalign partner, BLD.

#4 DIRECTORS & OFFICERS AND FINANCIAL INSTITUTIONS

Increasing transparency around ESG turns up the heat on D&Os

Investor demand and social inflation is moving the UK towards mandatory ESG reporting. From April 2022, the largest UK-registered companies and financial institutions will be required to disclose their climate change related risks. The FCA’s July 2021 consultation, focusing on transparency around board diversity, tends to suggest that S and G are following hot on E’s heels. D&Os need to be careful to ensure that all ESG information presented on behalf of the company is accurate. Although ESG disclosures are not yet mandatory in the UK, the risk of claims for greenwashing (or the S and G equivalent) remains an ever-present, and increasing, threat.

Parent company liability for subsidiaries’ human rights abuses and environmental damage is a fertile area for claims

UK parent companies cannot hide behind their corporate form and turn a blind eye to the activities and omissions of their foreign-based subsidiaries or corporate affiliates. The Supreme Court has signalled that the English Courts are willing to assume jurisdiction over claims of abuse or environmental damage by an overseas subsidiary where there are concerns that affected claimants may not obtain justice in the foreign court and the corporate structure suggests the UK-headquartered parent managed or supervised the activities of its subsidiary (i.e. a duty of care to the claimants can be established). While cases are highly fact sensitive, companies which operate in high-risk countries where abuse is prevalent should review their group-wide approach to risk management and governance of subsidiaries and affiliates. Ignorance will not assist those at the top of the corporate chain.

Corporate ESG pledges come with liability risks for D&O insurers

ESG has infiltrated legal areas that go beyond the strict arena of climate change. Business priorities are shifting in response to environmental awareness campaigns and the high profile given to COP26. This has led to increased recognition of the importance of corporate responsibility, sustainable finance and social values. Companies are promoting their ESG credentials in their marketing materials and corporate contracts. Pledges are made not only with the aim of reducing energy overheads, but because companies know ESG creates brand recognition and loyalty, and their customers, investors and employees are demanding commitment. Transparency and evidence of implementation will be scrutinised. ESG policy documents encapsulating clearly defined objectives, together with regular tracking of improvements against performance indicators should help companies and their directors navigate the risk of setting unachievable targets or overstating results. Given the risk of abusive marketing practices and the inevitability of legal claims, ESG exposure will need to be carefully considered by insurers during the D&O underwriting process.

Contributed by our Chilean office.

#5 INSURANCE ADVISORY

Inflation casts its shadow

With global inflation rates rising fast and the UK’s rate expected to peak above 5% in 2022, insurers will face a range of cost pressures. The cost of building materials and labour is outstripping the general inflation rate and will have a significant impact on claims settlements. Car parts and replacement vehicles are also experiencing supply issues and related cost increases. As these come in hard market conditions, they will potentially push premiums higher in 2022/23. Insurers will need to manage their messaging around any increases carefully as they will be adding to the wider negative impact inflation will have on living standards.

#6 INSURANCE WORDINGS

Systemic risks continue to move to centre stage

Insurers have been paying attention to systemic risks. We have worked with insurers to help identify systemic risks and in some cases wholesale wordings reviews have been commissioned to exclude or limit exposures. This was put into sharp focus by Lloyd’s bulletins on silent cyber starting in 2019, followed by the COVID pandemic, followed again in 2021 by greater focus on climate change. Inflationary pressures, supply chain disruptions, market shocks and labour shortages are further risks which have been in the news and have the potential to impact insurers. Systemic risks should remain on the board agenda and it should not be left to regulators to raise awareness or compel adoption of effective strategies.

#7 INTERNATIONAL CASUALTY

The future for group litigation in the UK

Foreign litigants and claimant law firms will increasingly target UK incorporated companies in relation to the impact of their operations worldwide. The Dutch courts are taking a similar approach and we expect other countries to follow suit. After the significant Supreme Court decisions in Lungowe v Vedanta Resources plc and Okpabi and others v Royal Dutch Shell Plc and another, the door to the English courts is now open to foreign litigants. In July, the Court of Appeal overturned previous rulings to allow a claim by 200,000 Brazilians to pursue BHP for compensation relating to the Samarco dam tragedy, in spite of a compensation scheme being agreed in Brazil. It seems the motive of the English courts is to give foreign litigants a voice and promote access to justice. The practical implications for global corporates and their insurers are increased litigation risk and the need for a new strategy in defence of similar cases in the future.

Social inflation: US phenomenon to global trend

Social inflation will become an important consideration for insurers writing business globally. Starting as a US phenomenon in the 1970s, it has become a broad term to describe factors that drive an increase in the cost of claims but are not truly understood. By its nature, social inflation refers to the emotive human element behind an increased frequency of litigation and higher judgments. While the jury system is a key part of this phenomenon in the US, there is a will in other jurisdictions, including the UK, the Netherlands, Australia and Israel, to promote access to justice. Combined with continued public distrust of private corporations and an increase in litigation funding, traditional protection for big business is being eroded. Insurers will need to track developments closely to adjust pricing and reserving accordingly.

A continued rise in social unrest will see political violence insurance go from a niche product to a must-have

The trigger points for mass protest are only going to grow. Whether it is the call for change to bring about a fairer society, the fight against climate change or opposition to government policy, people across the world have found their voice. In 2021, the COVID-19 protests in the Netherlands and Australia follow the riots in South Africa after the jailing of former President Zuma, a resurgence of Colombian protests against proposed tax reform and the storming of the US Capitol Building. As protests spread, so too do the chances of major social unrest in the future. Businesses will need assistance with risk assessment and with putting in place political violence and terrorism products to complement their property insurance programme.

Backlogs in the Australian court system are expected to fuel social inflation

It is expected that the effects of the pandemic will exacerbate social inflation. In Australia through 2020 and 2021, staff have generally had to work from home and most of the court systems were significantly curtailed because of the lockdowns and social distancing measures. Court closures have slowed the resolution of cases and resulted in a backlog. It is expected that the backlog and delays will influence the value of the cases resulting in larger settlements and judgments. Two class actions have recently been filed in Australia against insurers for failing to cover business interruption losses during extended lockdowns and we expect an increase in claims in the coming years.

Contributed by our Australian Legalign partner, Wotton + Kearney.

#8 MARINE, ENERGY AND TRANSPORT

Reusing out of desperation: cutting corners and lack of maintenance is a recipe for disaster

Ports are choked, the new container order book is at a seven year high and the waiting time for new container vessels has doubled since 2019. Frustratingly, empty containers are stacked inland without a way of being transported to manufacturers. The frenzy caused by the global supply chain crisis will cook up an increase in claims arising from losses connected to substandard container use. Smaller shippers are more likely to revert to reusing containers that would otherwise be taken out of service due to age or quality. The inadequacy of the correct container for the purpose, alongside a US NCB inspection study which showed 43% of dangerous goods were not secured correctly, builds an uneasiness that there will be an increased risk of container vessel fires.

Climate activist litigation will fuel social inflation

This year will see a new trend in social inflation emerging, with climate activist groups using the courts to compel companies to comply more definitively with existing law and regulation around reducing emissions. The first example of this was seen in the collective action initiated against Royal Dutch Shell by climate groups and 17,000 civilians in the Dutch courts. In the 2021 judgment, the court agreed that Shell was not doing enough to mitigate its impact on the climate and ordered Shell to reduce global CO2 emissions by 45% by 2030. More recently, German climate activists have issued a claim against BMW, Daimler and VW on almost identical grounds. While this type of litigation does not seek the immediate financial impact of a penal monetary award, the longer term consequences of achieving more stringent emissions targets will be significant, both in terms of increased transition risk and managing ESG disclosure obligations. This climate activist litigation will have wider implications for all large carbon producing entities, who may choose to adjust their own emissions targets for fear of being targeted directly by activists.

#9 MOTOR

Expect more cross-jurisdiction litigation in the English courts

The Supreme Court decision in Brownlie will see the return of proceedings being issued in the English courts for claims arising from accidents overseas – something which, for the most part, ceased temporarily post-Brexit, as automatic jurisdictional rights were lost. It was held that ‘damage’ sustained within the jurisdiction ought to be interpreted in its broadest sense so that, where consequential effects of an accident are felt here, it is sufficient for jurisdiction to be established. There remains, however, uncertainty as to the extent to which the more trivial consequences of minor injury can legitimately be said to be harm within the jurisdiction and it remains open to overseas defendants to challenge whether England is the most appropriate forum. We anticipate a high volume of satellite litigation on such points as the parameters of Brownlie are tested.

#10 PRODUCT SAFETY, LIABILITY AND RECALL

As new liability risks emerge, is unintended “coverage creep” inevitable?

The information age has allowed rapid global communications and networking to re-shape modern society. Loss of control over global supply matrices, the interaction between tangible products and digital services, and the environmental impact of global manufacturing give rise to new liability exposures for insurers. At the same time, the inability of regulation to keep abreast of such developments, coupled with heightened social expectation, is leading to more litigation and claims inflation. It is increasingly the case that companies are incurring liabilities they had not envisaged and liability insurers are being called upon to respond to losses which were not anticipated by underwriters or reflected in the premium. Learning lessons from silent cyber and the COVID-19 pandemic, general liability underwriters need to move towards more explicit affirmative coverage for catastrophic risks, or to tighten up contract wordings so that they clearly articulate underwriting intent. This should focus on clarifying insuring agreement clauses and definitions as much as policy exclusions. At the same time as achieving contract certainty, liability insurers need to develop new ways of assessing and managing risk if they are to deliver the claims certainty that global corporate policyholders are seeking in these unpredictable times.

Supply chain due diligence poses major challenge for liability insurers

With the imminent arrival of the EU Directive on Mandatory Human Rights, Environmental and Good Governance Due Diligence, larger companies operating in the EU will be expected to ensure that their business partners throughout the value chain put in place governance policies in line with the company’s due diligence strategy. As ESG-related issues continue to gather momentum globally, this trend is already in motion in many industries, such as the fashion industry where sustainable fashion and the environmental impact of sourcing materials is under the spotlight. While such legislation is to be welcomed in seeking to manage such emerging areas of risk, it could equally give rise to new criminal or civil liabilities on companies and their directors which may be inadvertently covered under general liability or D&O policy wordings. A major challenge that liability insurers face is assessing whether their corporate policyholders have the necessary control and visibility over their suppliers. Underwriters would be well-advised to prioritise supply chain due diligence as part of their risk assessment strategy.

COVID-19 vaccination programme remains key defence in fight against pandemic

On 8 December 2020, the UK became the first country to roll out a COVID-19 vaccination programme. Vaccines give high levels of protection. Deaths and hospital admissions due to severe illness have greatly reduced. The question now is how immunity lessens over time, particularly for older adults and at-risk groups, with the booster programme designed to bolster waning immunity. All of this has been thanks to the work undertaken by vaccine scientists and the availability of funding, with nearly 1.5 billion doses now being manufactured each month. The World Health Organisation’s target is to vaccinate 70% of the world’s population by mid-2022. While regulators have sought to ensure safety, efficacy and quality in challenging circumstances, we can nevertheless expect liability claims to arise against producers and healthcare providers arising from issues such as availability, side effects, dosage and timing of immunisation.

Glyphosates – group litigation on the European stage?

In 2015, the International Agency for Research on Cancer, an arm of the World Health Organisation, found that glyphosate was “probably carcinogenic in humans.” Bayer, the manufacturer of RoundUp (the most well-known glyphosate-based herbicide), has since been hit with 3 US judgments by claimants alleging that it caused them to develop non-Hodgkin’s lymphoma and has paid $10bn to settle a class action involving more than 100,000 claimants. Class actions are also afoot in Canada and Australia. Bayer nevertheless continues to assert that RoundUp is safe, having been approved by regulators and relied upon for agricultural and domestic use worldwide. Glyphosate is currently approved in the EU until 15 December 2022, when further analysis on the causative link and minimum dose requirement is expected, although Austria, Luxembourg, Germany and France have already banned or restricted its use. Whilst group litigation in Europe is less likely, particularly in civil jurisdictions where disclosure obligations, access to litigation funding and punitive damages are more restricted, the new Directive on Representative Actions for the Protection of the Collective Interests of Consumers and social inflation factors may prove us wrong.

Storage risks loom large as global demands rise

A key issue in global supply chains is the suitable storage of goods, including cold storage solutions and storage options for delicate or dangerous components. The expected increase in demand for cold chain solutions, fuelled by a rise in demand for quality groceries from around the world and multiple delivery channels, may put pressure on these options and lead to product spoilage, injury claims and product recalls. This could be exacerbated by the post-pandemic supply chain strains with significant delays in shipping time-sensitive products.

Contributed by our Australian Legalign partner, Wotton + Kearney.

Product liability fallout from the pandemic in Australia

There has been a concerning number of businesses taking advantage of the COVID-19 outbreak. In Australia, the regulator has received many complaints about a wide range of fake, unauthorised and unlicensed products. In December 2020, it took high profile action against Lorna Jane Pty Ltd (Lorna Jane) regarding its LJ Shield Activewear, which was promoted to protect wearers from COVID-19. In July 2021, the Federal Court ordered Lorna Jane to pay Au$5 million in penalties and the ACCC’s costs for making false and misleading representations to consumers and engaging in conduct liable to mislead the public. It is likely the regulator will actively pursue any similar transgressions.

Contributed by our Australian Legalign partner, Wotton + Kearney.

Hand sanitiser could drive injury claims and product recalls in Australia

The COVID-19 pandemic led to a global shortage in alcohol-based hand rubs so Australia relaxed legislation to make it easier for local businesses to rapidly produce it. This led to increased imports of methylated spirits containing methanol. There is now growing concern around the health effects of methanol, which has led to a proposed amendment to the Poisons Standard to include hand sanitisers containing more than 2% methanol. This may lead to a rise in sanitiser-related injury claims and product recalls.

Contributed by our Australian Legalign partner, Wotton + Kearney.

#11 PROFESSIONAL LIABILITY

Construction Professionals: Challenging times will be faced by construction professionals

Insurers should be alive to the increased risk exposure of design professionals certifying construction works due to the effects of the COVID-19 pandemic. Design professionals are often contractually required to certify that construction works are being carried out in accordance with design documents. This is ordinarily undertaken in parallel with an inspection regime. The current environment brings increased risks in the provision of such certificates; in part due to restrictions imposed on site and the increase in remote inspections. Furthermore, with profit margins being squeezed due to factors such as the rise in the cost of raw materials and increase in labour costs due to a diminished labour pool, the standard of workmanship may well suffer as corners are cut. This can lead to consultants with inspection obligations coming under closer scrutiny from employers and ultimately seeking to claim damages from the consultant for a failure to identify defective works. As a result, the market may well see an increase in claims against design professionals for an apparent failure to carry out their inspection obligations to the requisite standard.

Insurance Brokers: COVID-19 claims against insurance brokers – where are we now?

A trickle, but not a flood, of claims is expected against insurance brokers arising out of COVID-19 business interruption (BI) losses, both under the Professional Negligence Protocol and before the FOS. Where a policyholder has moved from an insurance policy which, in light of the FCA test case, has a responsive BI clause (such as a general notifiable disease wording), to one which does not respond to COVID-19 (such as a policy with a defined, or closed, list of infectious diseases) allegations are made that the broker should not have procured more restrictive cover. In other cases, the claim is simply that the broker failed to obtain BI cover for a pandemic or advise of the need for such cover. Some of these claims are, wrongly in our view, being framed as mis-selling claims. There is no one size fits all defence; the policyholder’s type of business and the timing of placement being relevant factors. However, the overriding and common feature is that, in large part, these claims are advanced with the benefit of hindsight.

#12 PROPERTY

Beware of social unrest

In July 2021 the imprisonment of former South Africa president Jacob Zuma for contempt of court served as a catalyst for widespread rioting in parts of the country. Thousands of businesses were destroyed and lives lost. While the rioting may have been initiated by the former president’s supporters for political reasons, the unrests were fuelled by other complex social issues, including high unemployment, the economic effects of the pandemic and frustration borne from political mismanagement. Unfortunately, this trend of social unrest is not limited to South Africa, as the underlying issues are common in a number of countries across the continent. We therefore expect further incidents of social unrest across the continent, fuelled by a growing unemployed and politically aware youth population who are disillusioned with a detached political elite and are able to mobilise using social media.

The Northern Ireland Protocol will cause a rise in the costs of property damage claims

As a consequence of Brexit and the implementation of the Northern Ireland Protocol, the costs of property damage claims in Northern Ireland will rise due to increased import tariffs and failure/delay of supply of essential repair materials. Anecdotal evidence from the trades suggests that the cost of materials, including timber and steel, is already increasing by up to 40%. We could also see a rise in alternative accommodation costs following delays in repair completion timeframes. The net effect of these increased costs will lead to larger pay-outs on property damage claims brought by home and business owners which may lead to some insurers opting to pull out of the Northern Irish market, leading, in turn, to a sharp rise in premiums for policyholders.

Contributed by our Belfast office.

Restarting operations after COVID-19

Many businesses, including mines, power and chemical plants and oil refineries, were forced to significantly curtail or pause operations during the pandemic due to access and supply issues and financial pressures. Maintenance activities were also significantly affected due to budget, access and resourcing issues. Highlighting this issue, Swiss Re reported oilfield maintenance budgets were cut by US$20bn. Companies now ramping up operations after COVID may experience higher rates of major losses because of the heightened risks associated with starting-up operations after shutdowns or extended idle periods. These start-up risks, including heightened pressures on workers and equipment, combined with recent cutbacks in maintenance and inspection activities, have the potential to lead to machinery breakdown, fire, spills and explosions. Similar maintenance and human error risks will also be seen in other reactivated industries, such as aviation.

Contributed by our Australian Legalign partner, Wotton + Kearney.

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