Global Level 4 Travel Advisory: Stealth Subsidy for Insurers?

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.

Last week. the State Department issued a global level 4 health advisory, recommending US  citizens not travel internationally, Global Level Four Health Advisory – Do Not Travel.

I am one of many US nationals who was outside the US when the advisory was issued. The department recommended that we return immediately to the US. Yet at the time the advisory was issued, many countries had either ceased allowing commercial departures, or in places where they were still available, the cost had skyrocketed.

And, given what is occurring in places such as NYC, California, or Washington, returning there does not necessarily seem prudent. Nor, for that matter, does boarding an airplane, to sit in close proximity to many others, and risk being stuck in crowds when passing through customs and immigration in the US. Far better to shelter in place, if one can find a safe place to do so, and hope that things return to more normal conditions eventually.

The State Department warning is a recommendation, not a requirement, and for those who couldn’t – or wouldn’t return immediately, the State Department said be prepared to stay outside of the United States for an indefinite period.

Well, duh. I would wager that anyone who was outside the US last week had previously considered the available options. There are precious few good ones available at the moment.

Which got me to thinking about the consequences of the State Department’s self-evident warning.

What effect does the warning have on travellers who hold  travel travel insurance? For those who don’t, I think it would be virtually impossible to puchase travel coverage at this time.

Thinking there may be more to this than meets the eye, I reached out to our Clive, asking him whether he thought any travel insurance considerations entered into the department’s decision to issue the warning.

First he summarized the effect the warning would have on the validity of travel cover:

Yes, while it depends on the policy, usually travelling against a Level 4 advisory (or whatever your national government terms it) will result in your travel cover policy being cancelled (e.g., travel insurance).

From the Association of British Insurers website, the travel insurance Q and A section:

`If I ignore any government advice against all but essential travel, will my travel insurance still cover me?

• If you travel against government advice then you are likely to invalidate your travel insurance. If you are unsure check with your travel insurer.

What would be classed as ‘essential’ travel?

• You should check with your travel insurer if the reasons for your trip would or would not invalidate your travel insurance. A holiday to the area would not be considered as essential.

Note that I am aware I am discussing UK-issued travel insurance and a State Department warning. I am assuming US insurers are working out of a similar playbook.

Was the State Department aware of the impact of its warning on travel insurance?. I have no evidence to offer one way or the other. But the consequences of the level 4 designation are clear. It voids travel insurance for those who undertake travel after the advisory was issued.

Although I cannot prove it, I suggest that the implications of the advisory for the validity of extant travel insurance contracts are not a bug, but a feature.

Clive concurs:  “so I agree with you, this is more likely a stop-loss for insurance carriers than as a concern for those traveling!

Trips in Progress, Existing Travel Policies

But my concern wasn’t primarily with those who’ve yet to travel, but those who are in the midst of a trip, and despite the State Department recommendation, cannot return home – because commercial flights are simply not available – or elect not to, because they think they’re better off sheltering wherever they may be rather than rushing back to the US at this time.

What happens to their existing travel policies?

In addition to chatting with Clive, I did a little poking of my own, and found a Los Angeles Times article with a promising headline, State Department’s stricter travel advisory likely won’t help an insurance claim. I won’t bother quoting from the article at length, since despite reading it three times, I can’t tell you I really understand it.  Here’s a teaser:

But will the new warning affect whether your trip insurance will cover your expenses if you are caught abroad?

“Generally speaking, the answer is no,” said Julie Loffredi of InsureMyTrip, an insurance aggregator that helps consumers compare policies. “It does not change anything.”

“Travel insurance companies have already identified this as a foreseen event back in January. However, with some ambiguities regarding specific coverage, policy holders should reach out to their companies directly for clarification.”

So I turned to Clive again for his take.

Here’s what he had to say about the issue raised in the LA Times piece:

Usual “basic” or standard travel insurance policies won’t cover what’s most-often referred to as “disruption”. This is a catch-all designation for events which are fairly frequently-occuring, such as strike action, airline technical issues, civil unrest – that kind of thing – and are, essentially, man-made or as a directly result of human activity of some sort. Pandemics are invariably classed as “disruption”. Note that this is different from what used to be, in less PC times, get called “Acts of God” – weather, volcanoes, earthquakes and the like. These naturally-occurring events are almost always covered.

You can almost always get “disruption” cover as an add-on to the basic travel insurance policy. It is often expensive, because the risks are numerous and almost limitless, unpredictable and can, as the term implies, be disruptive to such a degree that travel is difficult or impossible.

What the insurance industry is saying – and what the LA Times hopelessly mangled in its piece – is that if existing policyholders had the chance of buying additional levels of cover but decided not to, then they can’t, now, expect an insurer to be generous to them and pay out for consequential losses as a result of COVID-19 disruption. For new policy purchasers’, not that there’s likely to be many of these, the industry is, probably fairly, saying that it can’t do any sort of risk pricing, so it can’t offer “disruption” cover even if it wanted to. And the (in the case of the article) the Federal government is, again, probably rightly trying to make the point that foolhardy thrill seekers can’t try a spot of high-anxiety vacationing, play Russian roulette with their health and expect the government to bail them out if they get sick, need treatment but can’t obtain it locally then turn up on the media with fire-at-the-orphanage sob stories about how they can’t get treated and can’t get home either.

What isn’t really fair at all is if an existing policy holder did buy “disruption” cover, needs to travel for what might be a very valid reason, but finds that, because of the Level 4 advisory, their insurer has cancelled the “disruption” element of their policy (or even voided the entire policy). A convention in the insurance industry is, if a policy is sold offering stated benefits at a particular premium, the insurer should honour that policy as sold on the terms it was sold under. While a lot of former travellers may now be quite happy to not travel, there will inevitably be some who have, to them, important reasons why they may still want to make that trip. But if they do, they will quite possibly be running a huge financial risk as they’ll be travelling uninsured.

The Federal government should be telling the industry to look at each policy on a case-by-case basis and where there is genuine hardship involved, backed up by documentation or sworn statements, existing travel policies should be honoured. As things stand, the insurance industry has, seemingly, been given a free pass.

There’s also an additional category to consider here. What about the traveler who did purchase disruption cover, but is now stuck somewhere, and elects to ride out the situation, rather than attempt to rush home, despite the State Department’s warning?

The closest relevant ABI answer strikes me as just so much hemming and hawing and does not squarely address the issue of the traveler who chooses to shelter in place:

If I am in an area and the Government advice is to return home, will my travel insurer cover any additional costs I incur in getting back to the UK?

• Travel insurance policies may cover some out-of-pocket losses, and also help you to leave the area if a warning to return back to the UK comes into effect while you are there, if you are unable to get assistance from any other source. You should keep up to date with government advice on the [Foreign & Commonwealth Office]  website.

Clive again:

I think the outcome where you had disruption cover and were on a trip already would be driven by the factual matrix of any claim which arose. If you could show the insurer you’d made every effort to take a commercial flight, had sought other journey combinations such as road and rail to another country if necessary or even sea routes (and so on) they’d have to pay out. It would be a lot easier if you had some documentation, but of course in that situation getting documentation is hard to do. So much would depend on the claim handling by the insurer and the attitude of the loss adjuster there. If they are a crappy insurer out to nickle and dime on claims, they’d possibly play hardball. If it is a good company, they’d not be making your life difficult. But if you’d not taken any steps to get on a commercial flight, they’d likely tell you to go jump in a lake.