Businesses throughout the country are asking their agents, brokers and insurers if their policies will step in and provide coverage. The challenge, according to most insurance industry experts, is that loss of business associated with COVID-19 shutdowns and slowdowns is not covered by Business Interruption insurance. The coverage is triggered by direct physical loss or damage as the result of a covered cause of loss (e.g., fire, explosion, wind, etc.). “The actual or possible presence of a virus does not fit that definition,” says Robert Hartwig, PhD, CPCU, former president and economist for the Insurance Information Institute in New York.
States Are Getting into the Act
Several states have begun to look into measures that would compel the insurance industry to cover business-income losses related to the coronavirus outbreak, which has forced closures or significant slowdowns throughout every sector. New Jersey was the first state to propose a bill that would create Business Interruption insurance coverage for COVID-19-related claims despite virus exclusions in many policies. The proposal looked for retroactive coverage for any insured with a Business Interruption policy in place from March 9, 2020, when New Jersey Governor Phil Murphy first declared a public health emergency and a state of emergency due to the virus. The bill would apply to New Jersey businesses with fewer than 100 eligible employees, meaning full-time employees working a normal week of 25 hours or more. The proposed bill is currently on hold.
Ohio and Massachusetts took a page from New Jersey. Two Democratic senators from the Buckeye State introduced a bill that mirrors the New Jersey-proposed legislature. Massachusetts’s legislation would apply to policies sold to businesses in the commonwealth with 150 or fewer full-time employees, as long as the policies were in place by the time Governor Charlie Baker issued his March 10 emergency declaration.
In California, the state insurance commissioner has asked insurers to submit data with regard to COVID-19-related Business Interruption insurance in the hopes that the data will help state policymakers understand the scope of insured and uninsured losses to businesses. “The coronavirus crisis is devastating small businesses across our state, throwing people out of work and quickly unraveling our economy,” Commissioner Ricardo Lara said. “Although many small businesses maintain Commercial Multi-Peril insurance policies with Business Interruption coverage, they will have large uninsured losses. We are currently working with the insurance industry and business groups to find creative solutions during this unprecedented crisis to make sure our businesses survive, and we need this data to define the size of the problem.”
Meanwhile in New York, lawmakers from both sides of the aisle in a letter to insurance trade groups stated that their members should recognize financial losses triggered by the coronavirus outbreak as part of their customers’ Business Interruption coverage.
Impact of Proposed Legislation on Insurers
The proposed legislature to basically undo the exclusions that exist in Business Interruption policies has drawn concern over the constitutionality of enforcing such changes with many voicing the dangerous precedent it would set. According to the American Property Casualty Insurance Association (APCIA), most Property policies – including those with Business Interruption coverage – do not cover viruses such as COVID-19 and that to "retroactively rewrite existing insurance policies" could put the insurance industry at risk. One estimate by the APCIA found that the potential continuity losses small businesses will incur could total $220 billion to $383 billion per month, which would quickly consume the estimated $800 billion surplus U.S. insurers have for payouts.
"If policymakers force insurers to pay for losses that are not covered under existing insurance policies, the stability of the sector could be impacted and that could affect the ability of consumers to address everyday risks that are covered by the property casualty industry," APCIA President and CEO David A. Sampson said in a statement.
“Any action to fundamentally alter Business Interruption provisions specifically, or Property insurance generally, to retroactively mandate insurance coverage for viruses by voiding those exclusions, would immediately subject insurers to claim payment liability that threatens solvency and the ability to make good on the actual promises made in existing insurance policies,” said Sampson.
Hartwig doesn’t think the type of legislation sought by New Jersey, Massachusetts and Ohio will be upheld in the courts. In an article published in the ITA, Hartwig said, “The N.J. proposal was tabled and there is zero chance that elimination of exclusionary language would be upheld in courts. This would amount to retroactively rewriting longstanding contract provisions and would be illegal and unconstitutional by any standard… Politicians have an unfortunate affinity for using insurers as whipping boys. Beyond this, it is highly doubtful that state insurance regulators would support such efforts. The reason is that putting insurers on the hook for billions of dollars of business interruption claims that were clearly excluded from policies and for which they never collected a penny in premium fundamentally threatens their solvency and would likely impair their ability to pay business interruption claims that they are legitimately called upon to pay (e.g., following a major hurricane).”
Silent Coverage?
Analysis by RiskGenius, however, estimates that about 80% of commercial insurance policies will not have a communicable disease coverage or exclusion clause, which could mean that such policies are “silent” on whether losses arising out of communicable disease would be covered. The RiskGenius team believes this issue may arise in claims and litigation.
The Possibility of a Federal Program
The National Restaurant Association (NAR) asked the Trump Administration to create a $145 billion Restaurant and Foodservice Industry Recovery Fund of which $100 billion would be federally backed Business Interruption insurance that would not exclude coverage for coronavirus-related claims. The NAR in a letter to Congress wrote, “Rather than engaging in a protracted dispute and arbitration process, Congress must approve a timely insurance program through the U.S. Treasury Department that allows businesses to receive their insured benefit under an expedited time frame… As we enter a 12-to-18 month period of tremendous uncertainty in the hospitality industry, these insurance claims must be approved quickly and utilize a federal backstop similar to the program created for airlines after 9/11/2001."
Insurance Trade Groups Discussing Federal Program
Insurance trade groups, including the APCIA, IIAA, NAMIC, and the CIAB, are also discussing the possibility of designing a federal program that could direct money to affected businesses via the insurance industry. One early proposal, according to Politico, envisions a “’Federal Business Interruption and Workers' Protection Recovery Fund’ — patterned after the September 11th Victim Compensation Fund — that would make assistance available to all businesses.”
The fight over whether Business Interruption insurance can be made to step in to cover coronavirus-related shutdowns has just begun. We’ll be keeping you abreast of how this all plays out, including the impact on insurers as businesses seek to cover their business income losses.
Sources: CNN, Restaurant Hospitality, Wall Street Journal, ITA, Politico, NAR