# Japan - Post-earthquake: Aftershocks of the earthquake

New insurance  legislation in Japan is set to be extensively tested six months after the  devastating earthquake and tsunami that hit  the country.

It is more than six months since the March earthquake and tsunami devastated the Tohoku region in Japan. As the area gradually recovers and reconstruction begins, the extent of losses to the Japanese and international insurance markets is becoming more evident.

The compensation paid to date is estimated at approximately $22.8bn (£14.7bn), with the Japanese government predicting that this will reach$34.2bn in total. According to the latest figures, Japan’s non-life insurance industry has paid approximately 58% of compensation, an estimated $13.1bn, with much of the balance paid by the Kyosai mutual insurers. While the majority of insured losses have been incurred by the Japanese market, it is estimated that$12bn to \$15bn of the losses are reinsured internationally, roughly 30% to 40% of the insured losses, and 4% to 5% of the total economic loss.

In addition, contingent business interruption losses from the events have affected businesses worldwide. The scale appears to be substantial but is currently the largest unquantified element. Nevertheless, reports suggest that the earthquake has triggered large numbers of enquiries about business interruption cover for non-owned property damage.

The adjustment of losses will be impacted significantly by the Japanese Insurance Act, a  major new piece of legislation. The Act came into effect in 2010 so its provisions, and how they will apply in practice, have not yet been tested.

Japanese culture has led to a strong aversion to litigation and this also applies to the insurance environment. Corporations, including many insurers, subscribe to an alternative dispute resolution scheme for financial institutions, which reduces court litigation further. As a result, there are only a handful of reported insurance law cases in Japan.

Given the unprecedented scale of the devastation, it appears that local insurers are taking a pragmatic approach in dealing with the vast majority of claims, where the strict policy terms may not be applied. However, insurers must also take account of the new Act, which supersedes previous insurance law and practice.

Mandatory provisions
The new Act will apply to almost all policies governed by Japanese law — subject to exemptions for certain classes of business. This is especially significant as the vast majority of losses to international insurers and reinsurers are expected to arise under reinsurances of Japanese insurers, with the underlying policies subject to Japanese law. From a reinsurance perspective, certain mandatory provisions in the Act will overrule express policy terms. For consumer insurance, the Act also introduces unilateral mandatory provisions, which will only apply where they are in the insured’s favour.

As part of the Act, an insured has a duty of disclosure, although this is to be defined largely by the questions an insurer asks during the proposal process. Non-disclosures that are grossly negligent or in bad faith are actionable and entitle an insurer to cancel; however, a mere negligent non-disclosure would not be. There is a one-month time limit for an insurer to exercise an actionable right of cancellation from the time it becomes aware of relevant facts.

With the new legislation, an obligation is imposed on the policyholder to mitigate losses and a parallel obligation on insurers to indemnify any related mitigation costs. There is no guidance to specify that such costs should be necessary or reasonable.

In addition, policyholders have an obligation to notify claims without delay, although there are no specific consequences of a failure to this outlined in the Act. This could be significant where there are ongoing business interruption exposures, and it remains to be seen whether the courts will allow insurers to claim damages for delay in notification in such a situation.

The new Act also includes a provision that could make insurers liable for an excluded loss if it follows on from a covered loss. An example could be contamination or radiation exposure, following a covered cause of loss, such as an earthquake or tsunami. However, it remains to be seen whether such a loss will be apportioned between covered and excluded perils. This makes it particularly important for the losses suffered recently.

Practical interpretation
A potentially controversial provision excludes losses caused by the insured’s deliberate or grossly negligent acts. In principle this term would clearly favour insurers, so it will be interesting to see how it is interpreted and applied in practice. The concept of partial insurance is also recognised by the Act and is commonly used in Japan; for example, many household insurance policies will provide 50% cover in respect of earthquake losses. It appears to operate in a similar way to adjustments by average, although in the case of partial insurance the underinsurance is intentional.

The principle of contribution in the event of multiple insurances is enacted in the new legislation. Under the clause, when two or more insurances exist, each insurer would be liable for the full amount under their respective contract if the other insurer has not paid the claim. Subrogation principles and formulas are also enacted in the new law and insurers may be surprised by the limitations imposed on the extent of their possible recovery, in particular where the insured amount is less than the amount  of loss.

Most of the provisions of the Act are open to interpretation, so any guidance provided by the Japanese courts in disputes arising from earthquake-related claims will be valuable. In order to ensure a common understanding of claim-handling procedures and how the Act will apply, international reinsurers must be proactive in requesting information and initiating discussions with local cedants.

Reinsurers should also keep their retrocessionaires updated of the adjustment process so that any potential differences in approach can be resolved at any early stage.

Japan earthquake timeline

11 March

A massive earthquake measuring 8.9 on the Richter scale causes a huge tsunami to crash in the eastern coastline of Japan. The quake is followed by 50 aftershocks, with at least seven measuring 6.3. A large fire, with flames reaching almost 100ft, breaks out at the Cosmo oil refinery in Ichihara city near Tokyo. A state of emergency is declared after the Fukushima reactor's cooling system fails.

12 March

Japan's government launches a widespread rescue mission mobilising troops, planes and ships. An explosion rocks the Fukushima Daiichi nuclear plant, with operators at the plant detecting above normal levels of radiation.

13 March

The Japanese government doubles the number of rescue and recovery troops to around 100 000. The earthquake is upgraded from 8.9 to 9.0 on the Richter scale by seismologists.

14 March

The Japanese stock market falls as the cost of the disaster rises. The Bank of Japan injects £114.4bn to stabilise money markets.

Daniel Saville is legal director of reinsurance and corporate insurance at Reynolds Porter Chamberlain.