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How Insurance Handles New Exposures

Insurance, even in the 21st Century, is typically considered similar to an ocean liner: it is huge and, while it can adjust its course, it doesn't do so quickly or particularly with grace. In other words, it is often a long, painful process for insurance to work out how it deals with new or evolving exposures.

The insurance sector plays a critical role in helping its personal and business customers survive losses. Customer expectations have been molded to assume that threats to economic stability caused by losses will be covered, even when they are newer dangers.

Newer exposures are difficult to manage. Traditionally, insurance goes through a cycle.

If It's New, It's Litigated

A slow reaction from insurers is justified. It is a heavily scrutinized and regulated financial sector. Once it commits to providing coverage, making adjustments are difficult. New sources of loss undergo an awkward, complicated and expensive phase that is often inevitable. It is necessary to, first, clarify coverage intent under existing policies. Policyholders, agents, and insurance companies have to work through various losses in order to determine how policies respond. Insureds and insurers have much at stake. Their initial strategies are to press arguments that are at odds, seeking protection or limiting/denying coverage, respectively. Disputes can be creative as well as wide-ranging. Parties will parse as well as stretch policy language so that it works in their favor. Eventually they litigate how policies are interpreted. It can take years and can create substantial frustration, even enmity.

Often, the process is quite imperfect as the insurance market either decides among the options of excluding coverage or develops either a limited or a full market. Remember, insurers have to create policy language to handle unpredictable sources of loss that are sustainable on a long-term basis. In recent years, cyber liability, pandemic, new technologies, and many other areas are presenting serious challenges. Insurance has been around for a very long time, providing a valuable service that helps our economy. One reason for its longevity and success is that it sticks to being careful and conservative.

 

 

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