A new study by the Federal Emergency Management Agency (FEMA) could be instrumental to its effort to persuade states and localities to adopt up-to-date building codes.
The study, titled Building Codes Save: A Nationwide Study of Loss Prevention, quantifies the physical and economic losses associated with flooding, hurricanes, and earthquakes that have been avoided due to buildings being constructed according to modern, hazard-resistant building codes and standards.
In California and Florida – two of the most catastrophe-prone U.S. states – the study found that “adopting and enforcing modern hazard-resistant building codes over the past 20 years indicate a long-term average future savings of $1 billion per year for those two states combined.”
“The combined savings from these two states demonstrate the high value of adopting I-Codes for hazard mitigation as a return on investment,” FEMA wrote, referring to model construction codes published by the International Code Council.
“This gives us the foundation to back up the recommendations that we’re making,” FEMA building engineer Jonathan Westcott said at a recent conference on flood prevention.
The study is part of FEMA’s broader effort to reduce the growing cost of natural disasters by convincing states and municipalities to adopt post-2000 building codes. Two-thirds of the nation’s localities haven’t adopted recent model codes, Westcott said.
Communities often don’t understand the long-term benefits of adopting stronger codes.
“Instead of just hearing about how expensive it is to add a foot of freeboard,” Wescott said, “they’re going to understand the financial benefits of doing that so they can make a balanced decision on what’s best for their community.”
The Senate Judiciary Committee last week held a hearing titled “COVID-19 Fraud: Law Enforcement’s Response to Those Exploiting the Pandemic.”
The hearing included testimony by William Hughes, associate deputy attorney general, U.S. Department of Justice; Craig Carpenito, U.S. attorney, District of New Jersey; Calvin Shivers, assistant director, Criminal Investigative Division, Federal Bureau of Investigation; and Michael D’Ambrosio, assistant director, U.S. Secret Service, Department of Homeland Security.
Testimony focused on the response to fraud that has resulted from the COVID-19 pandemic. Examples included sale of fraudulent personal protective equipment (PPE) and cyber-enabled fraud; price gouging and hoarding; and fraud relating to the CARES Act’s Paycheck Protection Program (PPP).
As demand for PPE has been greater than the supply, the environment created has been “ripe for exploitation,” Shivers said.
In addition to sales of counterfeit PPE, he cited “advance fee” schemes – in which a victim prepays for goods like ventilators, masks, or sanitizer that are never received – and business email compromise (BEC) schemes, which involve spoofing an email address or using one that’s nearly identical to one trusted by the victim to instruct them to direct funds to bank accounts controlled by the fraudsters.
Shivers said the FBI is working to educate “the health care industry, financial institutions, other private sector partners, and the American public of an increased potential for fraudulent activity dealing with the purchase of COVID-19-related medical equipment.”
He added that millions of units of PPE have been recovered from price-gouging and hoarding operations and the FBI is working to determine next steps for how to redistribute or sell the PPE.
D’Ambrosio said that although “criminals throughout history have exploited emergencies for illicit gain, the fraud associated with the current COVID-19 pandemic presents a scale and scope of risks we have not seen before.”
He described four categories of threat:
COVID-19-related scams, including the sale of fraudulent medical equipment and nondelivery scams;
Cybercrime like BECs, exploiting increased telework;
Ransomware and other activities that could disrupt pandemic response; and
Defrauding government and financial institutions associated with response and recovery efforts.
Thus far, the Secret Service has initiated over 100 criminal investigations, prevented approximately $1 billion in fraud losses, and disrupted hundreds of online COVID-19-related scams, D’Ambrosio said.
With the 2020 Atlantic hurricane season activity expected to be “well above average” in intensity; three named storms having formed already; and Tropical Depression Cristobal bringing flooding rains and powerful winds from the South to the Midwest as it made landfall in Louisiana, preparedness should be on the minds of everyone who could be affected – and that means more than just people in coastal states.
Cristobal’s low pressure area is forecast to move from the lower Mississippi Valley to the Midwest – just ahead of a cold front that will eventually absorb Cristobal’s remnants as it moves into southeastern Canada, according to Weather.com: “The combination of deep, tropical moisture from Cristobal and the cold front will wring out heavy rain along a swath from the lower Mississippi Valley into the Midwest. Strong winds will also develop in the Midwest and Great Lakes from this setup.”
If Cristobal remains a tropical depression when it crosses into Wisconsin, it would be the first tropical depression on record in the state, according to the National Weather Service in Milwaukee.
“Inland flooding has resulted in more deaths in the past 30 years from hurricanes and tropical storms in the U.S. than any other threat,” said CNN meteorologist Brandon Miller. “Though wind speeds and storm surge are important, and get a lot of the headlines, flash flooding from intense rainfall associated with the storm’s rainbands impact far more people and stretch over a much larger area.”
About 90 percent of all natural disasters in the U.S involve flooding. This is why experts like Dan Kaniewski – managing director for public sector innovation at Marsh & McLennan and former deputy administrator for resilience at the Federal Emergency Management Agency (FEMA) – strenuously urge everyone to buy flood insurance.
If it can rain, it can flood
“Any home can flood,” Kaniewski said in a recent Triple-I webinar. “Even if you’re well outside a floodplain…. Get flood insurance. Whether you’re a homeowner or a renter or a business – get flood insurance. It’s not included in your homeowners policy, and most people don’t understand that.”
Dr. Rick Knabb – on-air hurricane expert for the Weather Channel, speaking at Triple-I’s 2019 Joint Industry Forum – was similarly emphatic:
“If it can rain where you live,” he said, “it can flood where you live.”
He recounted buying a new home, asking his agent about flood insurance, and being told, “You don’t need it.”
“I told him, ‘Get it for me anyway,’” Knabb said.
Flood insurance purchase rates too low
As the Triple-I blog previously reported, 2019 was the second-wettest year on record across the continental U.S., yet flood insurance purchase rates remain low. To illustrate the difference between having and not having flood insurance, Kaniewski described two scenarios related to 2017’s devastating Hurricane Harvey.
“The average [FEMA] payout for the uninsured homeowner in the Houston area was about $3,000,” Kaniewski said. “But if you were proactive and took out a relatively low-cost flood insurance policy…you would have received not $3,000 but $110,000. You’re not going to recover on $3,000, but with $110,000, you’d be well on the path to recovery.”
Unfortunately, he said, even inside designated floodplains, “two-thirds of homeowners do not have flood insurance.”
“Social inflation” is the name used to describe growth in liability risks and costs related to litigation trends. A new white paper by the Insurance Research Council (IRC) examines this phenomenon and shows that insurers’ losses across several business lines have accelerated rapidly in recent years – much more rapidly than economic inflation alone can explain.
Some have tried to downplay the importance of social inflation and even cast doubt on its existence. The IRC study draws from a range of industry and scholarly resources to show that it does exist and hurts individuals and businesses who rely on insurance.
Among the drivers the IRC examines are:
Shifts in public sentiment about litigation
Increasing numbers of very large jury verdicts
Tort reform rollbacks
Legislative actions to retroactively extend or repeal statutes of limitation
Increased attorney advertising and involvement in liability claims
Proliferation of class actions
Emergence and growth of third-party litigation financing
Using loss data published by the National Association of Insurance Commissioners (NAIC), the IRC documents loss trends in several key insurance lines, including commercial and personal auto insurance and product liability coverage. The report notes that loss trends reflected in the data “are consistent with anecdotal observations and concerns about the impact of social inflation on insurance claims costs.”
The IRC links these trends to rising claims and losses that in turn lead to more expensive insurance for businesses and consumers. While the analysis is based on data and trends that predate the COVID-19 pandemic, the IRC notes that state efforts to impose business interruption coverage for economic losses under insurance policies that specifically exclude bacteria and virus-related losses are a current example of the forces that drive social inflation.
Social Inflation: Evidence and Impact on Property-Casualty Insurance is a valuable resource that explains the causes and impacts of social inflation. It can be downloaded from the IRC website.
The National Oceanic and
Atmospheric Administration (NOAA) has predicted an
above-normal hurricane season in terms of the total number of storms. Its
2020 Atlantic
Hurricane Season Outlook calls for
13-19 named storms, 6-10 hurricanes, and 3-6 major hurricanes.
This year, the COVID-19 pandemic
adds a layer of difficulty to hurricane preparedness, particularly when it
comes to evacuation plans. Florida state officials
anticipate the challenge of preparing shelters with social distancing measures
in place and have asked FEMA for guidance. New Orleans is advising residents to plan to include hand sanitizer and face
coverings in their emergency home kits and go-bags.
Likewise, the impending hurricane season subjects managing
pandemic response and reopening the economy in its wake to additional uncertainty.
The European Commission should create a European Union-based
resilience framework to provide insurance cover for catastrophes, such as
pandemics and huge cyberattacks, the Federation of European Risk Management
(FERMA) said Tuesday.
Reuters
reports that the proposed framework would involve public-private
partnerships and could respond to events that create hefty business losses
without physical damage.
Commercial prices climb
Prices for commercial insurance are rising at rates not seen
for almost two decades, compounding pressure on businesses that are already
struggling to deal with the coronavirus crisis, The
Financial Times reports. Industry experts say that prices for some
types of cover are doubling as insurers attempt to repair some of the damage
the crisis has inflicted on their balance sheets.
Insurers are facing a double hit from coronavirus, the FT
says. Claims from customers could pass $100 billion in total, while there has
also been a hit to reserves from volatile financial markets.
French ruling puts coronavirus claims on global menu
Reuters
reports that AXA will meet the bulk of business interruption claims from
some restaurant owners in France after losing a court case seen as a potential
precedent for coronavirus-related disputes across the world.
A Paris court ruled last week that AXA should pay a
restaurant owner two months of revenue losses caused by the virus pandemic. AXA
had argued its policy did not cover business disruption caused by the health
crisis.
Will life insurers be able
to pay all the death claims attributable
to COVID-19 that come on top of claims for deaths not directly related to the
pandemic?
How many additional death claims will COVID-19 cause?
As of this writing, officially about 90,000 Americans have died
from COVID-19. In addition, there have been other deaths that seem excessive
relative to “normal” statistics in prior years, suggesting the COVID-19 numbers
are an undercount. It’s also
possible that the “lockdown” imposed nearly nationally in late March,
April, and in part of May, added to the total through suicide, drug overdoses,
untreated conditions that would have been treated and managed in the absence of
the pandemic, and violence.
So,
let’s assume that, for the full year 2020, COVID-19 and related stresses cause
300,000 additional deaths. For simplicity, we’ll ignore any lockdown-related reductions
in deaths – from, for example, fewer traffic accidents, air pollution, and
other causes – that might be attributed to the pandemic.
Dr. Steven Weisbart
Triple-I Chief Economist
“It’s
unlikely that all the people who’ve died from COVID-19 had individual life
insurance, since many were age 60 or over,” Weisbart says. “Even if we assume a
third of these were insured – and, further, that two-thirds of younger people
who died also had life insurance – and that all these claims were in addition
to other causes of death, that would be 150,000 claims.”
In 2018, the latest year for which we have data, beneficiaries
under 2.7 million individual life insurance policies received death benefits.
So, although 150,000 additional death claims represent a large human toll, they
would be only a 5.6 percent increase over the 2.7 million baseline.
“That would result in total death benefits being paid to 2.85
million beneficiaries,” Weisbart says. “This is roughly the same as occurred in
2015 and well below the peak of 3.5 million in 2012.”
In other words, even with our conservative assumptions, paying the
additional deaths claims due to the pandemic is well within the industry’s financial
and operational ability.
From new litigation to proposed legislation, debate over whether insurers should be required to pay for business losses related to the coronavirus pandemic remain in the news.
Restaurants Sue Insurers Over Business Interruption Claims
Proprietors of more than 10 restaurants, bars, and bakeries in Washington, D.C., joined a growing list of restaurateurs seeking coverage for pandemic-related damages, The Washington Post reports.
The Post interviewed Triple-I CEO Sean Kevelighan and Triple-I non-resident scholar Michael Menapace, who explained why the suits are unreasonable and threaten the insurance industry’s solvency.
“The insurance business works by spreading risk around so the industry isn’t hit all at once with claims,” Kevelighan says. “A pandemic disrupts business far and wide, with no end date in sight.”
About 40 percent of all companies have business interruption insurance, and most policies do not cover COVID-19. If lawmakers retroactively require carriers to pay these unplanned-for claims, it could cost the insurance industry $150 billion a month, which would quickly deplete its $800 billion surplus.
Louisiana lawmakers scrapped a bill that would have forced insurers to cover retroactive business interruption claims due to COVID-19, Business Insurance reports.
However, state senators agreed to rewrite and amend Senate Bill 477 to allow a proposal requiring insurers to clarify exclusions on business interruption policies to move ahead.
The scrapping of the Louisiana proposal follows last week’s decision by the Council of the District of Columbia not to go ahead with a proposal to force insurers to provide retroactive business interruption coverage on small-business COVID-19 claims.
The Pennsylvania Senate is weighing a bill that would include losses spurred by the COVID-19 global pandemic under property and business interruption insurance coverage, Property/Casualty 360 reports.
Senate Bill 1127 doesn’t explicitly state that insurers must cover COVID-19 business interruption claims. The bill states that if a covered property is located within a municipality where “the presence of the COVID-19 coronavirus has otherwise been detected,” that property is “deemed to have experienced property damage.”
It also states that Gov. Tom Wolf’s March 19 emergency order to close businesses is to be considered an order of civil authority under a first-party insurance policy which limits, prohibits, or restricts access to non-life-sustaining business locations “as a direct result of physical damage at or in the immediate vicinity of those locations.”
A magazine publisher is appealing a federal court ruling in favor of an insurer in a coronavirus-related business interruption dispute, Business Insurance reports.
In one of the first court rulings on the business interruption coverage issue, U.S. District Court Judge Valerie E. Caproni, in the Southern District of New York, said the policyholder’s attorney deserved “a gold star for creativity” but the loss was not covered under the policy issued by the unit of Hartford Financial Services Group Inc.
COVID-19 has changed many aspects of our lives, so it isn’t surprising
to see life insurance markets affected. But some stories create false impressions
that should be corrected.
The story that some life insurers are writing fewer policies “because of COVID-19” has gained traction in both traditional and social media. While not wrong, like other stories involving insurance and COVID-19, it requires context to keep it from wandering off into urban legend territory.
“Life insurers’ ability to keep their promises to policyholders
depends on numerous factors,” explains Triple-I chief economist Dr. Steven
Weisbart. “Among them are interest
rates and how responsibly insurers underwrite policies and manage their
investments.”
Dr. Steven Weisbart Triple-I Chief Economist
Interest rates exceptionally low
What do interest rates have to do with life insurance? Many
products (whole and
universal life and term life for 20 years
or more) calculate premiums in the expectation that, during the life of the
policy, the insurer will earn enough interest from its investments, net of
investment expenses and taxes, to help pay life insurance benefits. Many life
insurance and annuity policies – especially those issued 10 or more years ago –
guarantee to credit at least 3 percent per year.
“Efforts to stave off the recession spurred by attempts to ‘flatten
the curve’ of infections and deaths caused by the virus have led to
historically low interest rates,” Weisbart says.
Gross long-term rates on the investment-grade corporate bonds life
insurers primarily invest in had been 4 percent for most of the past decade and
plunged below 3 percent in August 2019. Since the onset of the pandemic, rates
have fallen even further (see chart).
“So, life insurers – who planned to profit from the ‘spread’
between the interest they earned on their investments and the interest they
credited on their policies – have lately struggled as this spread disappeared
and then reversed,” Weisbart says.
Options are limited
“So, that’s it!” I hear some of you say. “It’s all about rich
insurance companies protecting their profits!”
Businesses must make a profit to stay alive, and U.S. insurers – one
of the most heavily regulated and closely scrutinized businesses on the planet
– have the additional requirement to maintain substantial policyholder
surplus to ensure claims can be paid. Life insurers, in particular, are
required to maintain a special account – the interest maintenance reserve
(IMR).
“The IMR is drawn down when net interest earnings are too low to
support claims – as is the case now,” Weisbart says. “If it’s exhausted, insurers
can draw down surplus, but they can’t draw too much because they’re required to
keep at least a minimum surplus to protect against adverse outcomes in all
other lines of business.”
If their investments aren’t performing as well as expected,
insurers have two options: write less business or charge more for the business
they write.
Exercising a combination of these options is what life insurers
are doing now.
“When interest rates eventually rise, the profitable spread will
return,” Weisbart says, and competition among insurers will likely lead to more
liberal underwriting and lower premiums. “But we can’t predict with confidence
when that might happen.”
Until then, life insurers are tightening their criteria for issuing new policies and, in some cases, raising premiums so they can deliver what they’ve promised their existing policyholders.
Coronavirus-related insurance
litigation is likely to move beyond business interruption coverage and into
workers comp and general liability policy lines as states begin to lift
restrictions on economic activity.
“There’s just going to be a
bloodbath of litigation over the next 10 years,” former Mississippi Attorney
General and counsel at Weisbrod Matteis
& Copley Jim Hood told Bloomberg Law this week. “Even if the governor tells you to open up, that’s not
going to protect you from a lawsuit.”
The Trump administration and
Republican lawmakers are insisting that an employer liability shield be included in the next round of pandemic relief legislation, but
it’s unclear whether Democrats will go along with the idea.
California Facilitates Workers Comp for Virus Claims
California Gov. Gavin Newsom signed an executive order Wednesday that will make it easier for essential
workers who contract COVID-19 to obtain workers’ compensations benefits. The
governor said the order streamlines workers’ comp claims and establishes a
rebuttable presumption that any essential workers infected with COVID-19
contracted the virus on the job. In effect, the change shifts the burden of
proof that typically falls on workers and instead requires companies or
insurers to prove that the employees didn’t get sick at work.
The California Federation of
Labor, which asked for the change in a March 27 letter to the governor and
legislative leaders, applauded the order. Dozens of business groups, led by the
California Chamber of Commerce, pushed back last month on the labor
federation’s request, saying the changes would force businesses to be the
“safety net to mitigate the unprecedented outcomes of this natural disaster and
the government’s response.”
If only 10 percent of health care workers contract COVID-19 and all of their claims are deemed compensable, workers’ compensation loss costs for that sector could double or even triple in some states, according to an analysis by the National Council on Compensation Insurance (NCCI).
Claims Journalreports
that, in NCCI’s worst-case scenario, 50 percent of workers are infected and 60
percent of their claims are deemed compensable. That would result in $81.5
billion in increased costs —or two and half times current workers’ compensation
loss costs — for the 38 states and District of Columbia, where NCCI tracks
claims data. If
eligibility is limited to first responders and healthcare workers and only 5
percent of those workers are infected, Claims Journal says, the increase
in costs would be just $2 billion, assuming 60 percent of claims are paid.
Whether
business interruption coverage in property policies applies to COVID-19-related
losses has become one of the dominant insurance debates during this pandemic.
Lawsuits have been filed – some even before insurers have denied a claim –
seeking to establish that policyholders are entitled to coverage for losses
sustained during the current shutdowns.
The debate often focuses on a simple phrase in the insurance policy: “direct physical loss or damage.” Business interruption coverage can apply to losses stemming from direct physical loss or damage. Losses that didn’t come from direct physical damages aren’t covered.
Michael Menapace, Esq. Wiggin and Dana LLP
“A property policy may, for
example, pay to repair the damage caused by a fire and may cover the loss of
business during the reconstruction period,” writes Michael Menapace, a professor of insurance law at
Quinnipiac University School of Law and a Triple-I
Non-Resident Scholar. “But here’s the rub. Are the business interruptions related to
COVID-19 caused by physical damage to property?”
Insurers say no, arguing that “damage to property” requires
structural alteration like one would find in a typical claim, where, say, a
fire destroyed the interior of a building or wind damaged windows and
furniture.
The virus, on the other hand, leaves no visible imprint. Left alone, it can’t survive long and, after it has perished, whatever it was attached to is as good as before. Even if some remediation is needed – like cleaning metal surfaces – insurers might argue that this is no different from cleaning dirt off a surface. They cite cases in which judges have ruled there’s no physical damage from mold if the mold can be cleaned off.
Departing from common sense
Others depart from this common-sense, legally recognized
definition. Some plaintiffs’
attorneys argue that if coronavirus
is not direct physical damage then insurers would not have created an exclusion
for viruses in the first place. Many insurers added exclusions for losses from
viruses and communicable diseases after the SARS outbreak in 2003.
Policy
language, Menapace says, controls whether COVID-19 interruptions are covered. Some policies
have standard terms and exclusions, some provide “all-risk” coverage –
covering loss arising from any fortuitous cause except those specifically
excluded – and others are variations on these types.
“The threshold issue will be whether the insureds can prove their
business losses are caused by ‘physical damage to property’,” he writes.
In
past cases, where there is direct physical loss to property – such as
contaminated food that couldn’t be sold or a building rendered useless by asbestos
contamination – courts have found business interruption coverage was
triggered. But when an earthquake caused a power loss in two factories, courts
found the only injury was a shutdown of manufacturing operations that didn’t
constitute “direct physical loss or damage.”
What About Current Claims?
Are
business interruptions related to COVID-19 the result of the government
restrictions, or are they due to the physical loss to their property?
Menapace writes that many of the current claims would seem not to trigger the standard
coverage in a commercial business interruption policy, but he cautions that this
might not always be the case.
A
true “all-risk policy,” he writes, “generally would not distinguish between
business interruption losses due to government action or direct physical loss
because all-risk policies cover all losses except those specifically excluded.”
But
most commercial property policies aren’t true “all-risk policies”; instead,
they typically cover business interruption losses “caused by direct physical damage
to property” at or near the insured premises.
“That
will be difficult burden for policyholders to meet,” Menapace says.
Some
policies exclude coverage for losses resulting from mold, fungi, or
bacteria. Because COVID-19 is a virus, that exclusion might not
apply. Other policies exclude viruses, diseases, or pandemics.
“If
a policyholder believes it may have a claim,” Menapace advises, “it should
provide prompt notice to its insurer(s) so it does not risk a denial based on
late notice. Likewise, once the claim has been made, it is essential that
the insured cooperate with the insurer, including providing timely proof of
loss.”
