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Thoroughly bred?

Bloodstock insurance can be a complicated business, covering not only injury and stress-related ailments but fertility problems too. Jeremy Golden explains why a new policy wording of 'sub-fertility' gives greater coverage in this area

For Julian Lloyd, bloodstock underwriter at Lloyd's syndicate Hiscox, the bloodstock insurance market - the insuring of thoroughbred horses - is an exhilarating and unpredictable ride demanding sensible caution, as well as experience and constant vigilance, to stay on top. He summarises: "A million-pound horse one minute can be worthless the next. Bloodstock is known to defy some of the cleverest minds in the business."

This form of insurance underpins an enormously lucrative and glamorous multinational industry. In the UK alone, thoroughbreds have been bred for more than 300 years. Around 7500 thoroughbreds of all ages are sold at sales each year in this country for an annual turnover of at least £250m - these horses attract buyers worldwide.

The UK is the home of two of the world's most internationally renowned thoroughbred sales companies: Tattersalls (established in 1766) and Doncaster Bloodstock Sales. Competition in UK racing is intense, with the influence of the leading Arab families and the likes of John Magnier and the Niarchos family. Because of this, UK racing is generally regarded as the best in the world, which leads to strong demand for UK horses in training to be sold overseas to race.

Much of the bloodstock insurance for more expensive horses - not only participants in horse racing, but also eventing, show jumping and dressage - is now concentrated at Lloyd's, representing around 60% of total thoroughbred premiums. At Lloyd's there are six companies - Brit, Catlin, XL, Hiscox, Wellington and Amlin - with full-time bloodstock teams, and others add their names to some placings.

Worldwide reach

Hiscox specialises in insuring thoroughbreds representing a value of between $15m-100m (£8.2m-£54.6m) each. According to corporate literature, the syndicate covers bloodstock for Hiscox clients worldwide, from Newmarket to Kentucky, the Cape to Hunter Valley.

Mr Lloyd has been working with bloodstock for more than 12 years and describes the market as a "high-risk, high-rated business that cannot depend on the availability of reinsurance". He states: "The balance of the account is on the underwriting side using good old-fashioned underwriting skills."

During the past year or two, London has experienced a significant increase in demand as the bulk of US insurers, including Chubb, have pulled out of bloodstock, driven by the view of actuaries that it does not make sufficient money. On the companies side, QBE and AIG remain leading participants in London. This trend towards market concentration has, therefore, allowed for significantly higher rates compared to those being paid three years ago. Rates are still rising, and likely to do so throughout 2005.

Most bloodstock placed in Lloyd's adheres to the various classes covered by the equine insurance forms of which death cover, including destruction on humane grounds, is by far the most common. Mr Lloyd states that the wording has stood up well to the test of time, thanks in no small part to rigorous testing by lawyers.

Lloyd's has made it a matter of principle to "attack issues of subjectivity" with respect to death cover, by placing the onus on the insured to timely report problems to the insurer once the horse becomes ill or injured.

The insured must also show that the best and most appropriate treatment of the horse was made available at the time.

This caution by underwriters is understandable. Even outside the racecourse, horses are notoriously accident-prone or, as one experienced vet says: "A typical horse gets up in the morning, eats oats, and contemplates suicide.

These are 'flight animals' that tend to react suddenly and not always rationally to what they hear, rather than what they see. A horse's vision is, in fact, quite restricted, and that is why a horse will often bolt out of a field, irrespective of the danger."

Highly prized

However, stress-related ailments, rather than accidents, are by far the biggest killer of horses. This vulnerability, therefore, makes it imperative that experts are always available and at hand to treat horses, but this is apparently not always the case, even for highly prized animals. "A vast number of people like to own horses but, regrettably, very few know much about them. Cheaper horses are being transported around all over the place in totally unsuitable vehicles," claims Mr Lloyd.

One recent case involving a stress-induced ailment for which a Lloyd's underwriter was not prepared to pay out because it did not deem the treatment administered the best available, concerned a serious bout of colic. It was administered with steroids, rather than the standard intravenous fluid treatment used for rehydration, and the horse subsequently developed secondary problems and died.

Humane destruction is a core issue in bloodstock insurance. According to the British Equine Veterinary Association: "The insured horse must have sustained an injury or manifest an illness or disease that is so severe as to warrant immediate destruction to relieve incurable and excessive pain, and that no other options for treatment are available to that horse at that time."

Veterinary opinion

If immediate destruction cannot be justified, the attending veterinary surgeon should provide effective first-aid treatment before requesting that the insurance company be contacted. Failing that, a second opinion must be arranged from another veterinary surgeon.

Ian Wright is an eminent veterinary expert from Reynolds House Referrals, based in Australia. He points to problems in fracture repair faced by vets who are asked to make judgements in the field about immediate destruction for humane reasons. He argues that there are very few cases in which these criteria are genuinely met, but that there are many in which economic criteria suggest treatment is not viable.

Mr Wright also points to the widening gulf in attitudes that allow for claims for loss of use in non-thoroughbred animals but not in racehorses.

Amanda Mochrie, a barrister at US law firm Bryan Cave, which specialises in equine insurance disputes, comments: "The circumstances in which destruction is justifiable on humane grounds have always been a highly subjective and contentious area and will continue to be so. Whether analysing the definition of 'humane destruction' contained in policy wordings, or weighing up the views of respective vets instructed by owners and underwriters, the courts will rely on expert evidence from veterinary surgeons, who will follow the guidelines laid down by their professional bodies."

She adds: "While each case will turn on its own facts, if professional guidelines do not assist practitioners but instead lead to inconsistencies in interpretation of policy terms this will not be in the interests of either owners or underwriters."

David Ashby, director of Amlin Plus, says bloodstock insurance has a role far wider than underwriting competitive sports. He refers, in particular, to stallion permanent disability and congenital infertility cover. Growth in demand has accelerated in tandem with the substantial increase in the number of stallions shuttling between the northern and southern hemisphere every July. Some 60 to 70 are transported by plane every season from the UK, Ireland, Continental Europe, Japan, the US and Canada to Australia, New Zealand and South America.

Stallion permanent disability covers total permanent infertility or inability to breed mares incurred during the policy period as a result of accident illness or injury also happening in the policy period. This must be reported at the time of the accident or onset of the illness, which might lead to a claim.

Congenital infertility - that is, from birth - is the inability to breed mares, or a congenital abnormality of the semen, either of which results in less than 60% of the book of mares becoming pregnant. It excludes any cover (or contribution) due to accident or disease and requires mares to be available to the stallion for the duration of the breeding season.

Mr Ashby explains that CI is based upon at least 20 qualifying mares being covered in a minimum of two oestrus cycles and all booked mares being kept available for the whole breeding season. "The wording for congenital infertility has relied heavily on insurers acting in the spirit of the policy, as strict interpretation of the small print is liable to put the stallion owner or manager in an impossible position."

Old anomalies

Mr Ashby and Charles Hamilton of Hamilton & Partners have combined forces to produce a new 'sub-fertility' wording, which they believe solves the anomalies of the old and actually reflects the realities of stallion management.

Under the new policy wording, which was first introduced in October 2003 and has reportedly been well received by the world's leading stud masters, the policy is against first season sub-fertility, which is more broadly defined than congenital infertility and gives greater coverage.

The stallion is insured against failing to achieve a conception rate per oestrus cycle of 30% or more in the first season at stud, based upon a minimum of 50 coverings. Extensive research and consultation with the veterinary profession establishes that a conception rate per oestrus cycle of 30% is an acceptable minimum for commercial viability as a stallion.

"In short, the new wording enables a stallion to make a successful claim without requiring commitments from mare-owners that are contrary to their interests and, therefore, impossible to enforce," says Mr Ashby. "The wording is still being 'bedded in' but it has been used by stallion owners in the northern hemisphere for a while now and there have been no claims on it so far."

CASE STUDY: Hiscox bloodstock insurance judgement

Lloyd's plaintiff: Hiscox v Ralph C Wilson Jr defendant - US District Court, ED Kentucky, 28 Jan 2003

The equine property insurer sought declaratory judgement that it was required to provide coverage for loss of a colt, which had to be euthanised due to infection that developed following surgery on his hock. The insured filed counterclaims, alleging bad faith and unfair settlement practices.

Included among the summary judgement by Chief Judge Forester were the following points: (1) the insured was required to provide immediate notice of the colt's infection under the terms of the policy, as a condition precedent to coverage; and the insured's compliance with a separate notice provision requiring notice of surgery, did not satisfy notice of infection requirement; (2) the insurer, by consenting to humane destruction of colt without reservation, did not waive the notice requirement; (3) under Kentucky law, the insurer did not have to demonstrate probable prejudice, resulting from the insured's failure to comply with notice requirement to avoid coverage for loss of colt; (4) the insurer did not act in bad faith in denying coverage The plaintiff's motion was granted.

KEY TERMS - Lloyd's equine insurance, UK and overseas

Death or destruction on humane grounds. The main conditions are that the horse is fully sound and healthy at inception, and either dies or has to be destroyed on humane grounds during the policy period. The insured must do everything in his power to have the horse treated by a vet, and must inform insurers immediately at the onset of illness/injury.

Restricted perils. Covers death due to fire, lightening, windstorm and transportation risks. Transportation cover is for death following collision of the conveyance (US only).

Stallion permanent disability. Covers total permanent infertility or inability to breed mares incurred during the policy period as a result of accident, illness or injury also happening in the policy period. This must be reported at the time of the accident or the onset of illness, which might lead to a claim.

Congenital infertility. The congenital inability to breed mares, or a congenital abnormality of the semen, either of which results in less than 60% of the book of mares becoming pregnant. Excludes any cover (or contribution) due to accident or disease. Requires mares to be available to the stallion for the duration of the breeding season.

Prospective foal. Covers the foetus in the mare from (usually) 45 days post-last-mating until (usually) 30 days after birth. Usually includes loss due to death of mare.

Economic slaughter clause. Sold as add-on to mortality cover in respect of 'sport horses' only, such as showjumpers and event horses. This cover is not available for racehorses due to the very high number that end their career, unsound, and worth little.

The rest are clauses added to policies for various reasons. For example, the equine 12-month extension. This clause extends the timeframe from expiry of the policy in which a decision has to be made to destroy a horse, or not due to a problem that has arisen and been reported during the policy.

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