The Financial Conduct Authority (FCA), which regulates insurers in the United Kingdom, has indicated that it doesn’t believe COVID-19-related losses trigger most business insurance policies because such policies typically require a direct connection between financial loss and physical damage to the insured property.
Think fire, flood, wind, or earthquake damage.
The FCA is now litigating a test case involving policies of eight insurers that don’t require property damage to trigger coverage (Hear a three-minute explainer from the Centers for Better Insurance).
Is this case relevant to U.S. property/casualty insurers? It depends on whom you ask.
The FCA is looking at 17 policy wordings from the eight insurers and asking whether COVID-19 triggers a payout. Based on other policies the regulator has studied, the Financial Times reports, the court’s ruling are “expected to apply to nearly 50 insurers, who sold coverage to 370,000 customers.”
Senior executives from specialist insurance and reinsurance underwriter Hiscox Group warned that the FCA’s eventual findings could drive additional COVID-19 losses to its reinsurance book, Artemis reports.
Tom Baker – an expert in insurance law and policy at the University of Pennsylvania – called the U.K. case a “one-way ratchet” for U.S. insurers.
“If the carriers lose or end up having a lot of coverage, that’s going to be bad for them here” in the United States, Baker said. “I think if the carriers win, the insurance policies [in the U.K.] are really different. They tend to be named-peril, rather than all-risks policies. I think it will be easy to distinguish them.”
Jason Schupp, founder and managing member of Centers for Better Insurance, disagrees that an adverse ruling for U.K. insurers will have much of an effect on their U.S. counterparts.
“In Europe, [FCA] authorization to provide miscellaneous financial loss insurance allows an insurance company to write business interruption insurance that does not require evidence of property damage” to pay a claim, Schupp says. Even though the United Kingdom is no longer part of the European Union, Schupp says, “U.K. law itself recognizes the miscellaneous financial loss class of insurance.”
What does this mean for pandemic business interruption coverage in the United States? Not much, according to Schupp.
“The outcome of the U.K. litigation is unlikely to be relevant to the dozens – or perhaps hundreds – of business interruption lawsuits making their way through U.S. courts, where the property damage question is front and center,” Schupp says.
He goes on to say that proposals coming out of Europe or the U.K. for pandemic insurance going forward – such as a Lloyd’s framework – contemplate non-property-damage business interruption insurance solutions…. These proposals do not appear compatible with the current U.S. insurance regulatory system.”
A ruling by the FCA is expected in mid-September. Last week, the regulatory body said that, while the case doesn’t address how any resulting claims payments would be calculated, “We may intervene and take further actions where firms do not appear to be meeting our expectations and treating their customers fairly.”
As I’ve written previously, the question of whether business interruption provisions in commercial property insurance apply to COVID-19-related losses has become a major topic of debate during this pandemic. Suits have been filed seeking to establish that policyholders are entitled to coverage for such losses – even when losses associated with infectious disease are specifically excluded in the policy language.
This debate has been muddied in some circles by people confusing business interruption coverage with event cancellation insurance.
Citing the fact that the National Collegiate Athletic Association (NCAA) had its claim paid when it cancelled its annual men’s basketball tournament, as did the All England Lawn Tennis Association when it canceled its Wimbledon event, some wonder why many other businesses’ claims are being rejected.
While superficially similar, these claims couldn’t be more different from the business interruption cases currently being litigated.
Business Interruption: Physical Damage Required
Property insurance covers physical loss or damage to an insured’s property. The business interruption provisions of commercial property policies typically require a direct relationship between a physical loss or damage and the resulting lost income. The Insurance Services Office (ISO) form for commercial property coverage – the basis of many policies – specifies that any covered loss due to “necessary suspension” of operations must be caused by “direct physical loss of or damage to property at premises which are described in the Declarations.”
This is a critical point, as most business losses related to COVID-19 are due to employees and customers remaining absent, supply chain disruptions, and other factors – not to physical damage.
“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 when, say, a fire destroys the interior of a building or wind damages windows. The virus leaves no visible imprint. Even if remediation is needed – like cleaning mold from metal surfaces – insurers cite cases in which judges have ruled there’s no physical damage from mold if the mold can be cleaned off.
Add to this the fact that most policies exclude coverage for losses related to infectious diseases and it’s hard to imagine U.S. courts finding in favor of the plaintiffs – particularly when pandemic insurance existed well before COVID-19 and was largely ignored by business owners and risk managers.
Event Cancellation Insurance
COVID-19 has led to the cancellation of events from weddings to business conferences to the Tokyo Summer Olympics. Individuals and businesses buy event cancellation insurance against losses resulting from a cancellation due to circumstances beyond their control, including:
Weather or other natural events like hurricanes, tornadoes, and earthquakes, and
Human-caused events such as labor strikes and acts of terrorism.
If a policy is an “all-cause” or otherwise unlimited policy, it could cover cancellations due to COVID-19, particularly if purchased before 2020.
Wimbledon’s organizers were among the few who bought event cancellation insurance that specifically included coverage for losses related to “communicable disease” after the 2003 SARS outbreak. They paid about £25.5 million (US$33 million) in premiums since then and are set to receive around £114 million (US$142 million) for this year’s cancelled tournament, according to GlobalData.
GlobalData said the event still faces a net loss. The total Wimbledon revenue loss is estimated at around £250 million (US$328 million).
The NCAA had a policy for its “March Madness” tournament that had to be cancelled. Its event cancellation policy covered just $270 million, even though the tournament generates more than $800 million a year. The organization reportedly was better prepared for a cancellation several years ago, when it built up savings of nearly $500 million to help mitigate the financial impact of a lost tournament.
“Then, in 2015, new leadership decided to spend more than $400 million of those savings without increasing the NCAA’s insurance coverage by following a questionable theory about the risk of saving that much money,” the Washington Post reports, citing former NCAA employees.
The availability of such coverage without exclusions for infectious disease may be limited or even more expensive in the wake of the current pandemic.
Underwriters routinely receive requests to add additional insureds to policies. But failure to add insureds correctly can open up insurers to potentially huge losses.
Companies typically need to add additional insureds to allow them to fulfill their obligations with their contractual partners. The requests are commonly associated with coverage for the marine and energy business, but construction and other industries often need to add insureds as well. Those requests can involve commercial general liability, excess and umbrella and other liability policies.
Maritime legal expert Harold “Hal” K. Watson recently conducted an interactive educational webinar on the proper addition of insureds for the American Institute of Marine Underwriters (AIMU). Watson, a partner at Chaffe McCall LLP in Houston, is a former president of the Maritime Law Association of the U.S. and an internationally renowned authority in marine and energy insurance.
Using detailed examples from actual cases — including the Deepwater Horizon disaster — Watson illustrated how policy language surrounding additional insureds can cause claims to go wrong. He offered the audience of underwriters, brokers and claims adjusters practical suggestions for writing policy language in specific ways to prevent problems.
Watson explained how arguably ambiguous policy language became a significant factor in Deepwater Horizon, the offshore drilling rig that in April 2010 blew out, resulting in an explosion that killed 11 crew members and caused billions of dollars in pollution and environmental damage in the Gulf of Mexico. Transocean owned the drilling rig, but it was under contract to BP. Watson noted that the contract between the two companies required Transocean to name BP as an additional insured for some purposes. But there was uncertainty whether or not the insurance policy incorporated the limitations of the drilling contract.
The U.S. Court of Appeals for the Fifth Circuit initially held that the insurance policy did not incorporate the limitations in the contract, but then certified the case to the Texas Supreme Court since Texas law applied. The Texas Supreme Court finally ruled that the insurance policy did incorporate the limitations, but if the Fifth Circuit’s original ruling had stood, BP would have been entitled to all of Transocean’s insurance coverage limits.
Watson explained how wording can be used to avoid situations that essentially give away an insured’s coverage. He also discussed other areas involving risks and exposures including:
The distinction and nuances between indemnity clauses and insurance policies.
The need for caution when providing broad coverage for additional insureds.
How additional insureds come into play in umbrella and excess liability policies, including specialized maritime policies.
The effect of anti-indemnity statutes pertaining to oil and gas wells in Texas and Louisiana
AIMU has seen growing interest in its educational offerings as it pivots from live to virtual events. According to AIMU President John Miklus, there were nearly 100 attendees at the “Additional Insureds” webinar and a similar number at another recent webinar on yacht insurance fundamentals.
AIMU’s primary focus is on education of its members and the insurance community at large and continues to deliver its programs using innovative methods. Click here for more information on upcoming classes.
As states struggle to identify the best ways to reopen their economies, agencies, and schools from the coronavirus-related lockdown, legislatures have been moving forward legislation to protect them and the people they employ.
Virginia Approves Worker Health & Safety Standard
The Virginia Occupational Safety and Health (VOSH) – the state’s version of the federal Occupational Safety and Health Administration (OSHA) – will enforce a standard that mandates and, in some instances, exceeds guidance issued by the U.S. Centers for Disease Control and Prevention (CDC) and OSHA, PropertyCasualty360.com reports.
The standard protects employees who raise reasonable concerns about infection control to print, online, social, or other media. It covers most private employers in Virginia, as well as all state and local employees.
The standard also requires building and facility owners to report positive COVID-19 tests to employer tenants. It exempts private and public institutions of higher education with reopening plans certified by the State Council of Higher Education in Virginia (SCHEV) and public-school divisions that submit reopening plans to the Virginia Department of Education. No such exemptions are provided to private elementary and secondary schools.
In addition to CDC and OSHA guidelines, the standard requires employers to:
Provide flexible sick-leave policies, telework, and staggered shifts when feasible;
Provide handwashing stations and hand sanitizer when feasible;
Assess risk levels of employers and suppliers before entry;
Notify the Virginia Department of Health of positive COVID-19 tests;
Notify VOSH of three or more positive COVID-19 tests within a two-week period;
Assess hazard levels of all job tasks;
Provide COVID-19 training of all employees within 30 days (except for low-hazard places of employment);
Prepare infectious disease preparedness and response plans within 60 days;
Post or present agency-prepared COVID-19 information to all employees; and
Maintain air handling systems in accordance with manufacturers’ instructions and the American National Standards Institute (ANSI) and American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) standards.
Special Legislative Session for Tennessee Liability Bill
Weeks after Tennessee’s two legislative chambers failed to come to an agreement on legislation surrounding civil liability for coronavirus, Gov. Bill Lee called the state’s General Assembly to return next week for a special session, The Tennessean reports.
Lee issued an order asking members of the legislature to return to Nashville at 4 p.m. on Aug. 10 to take up the matter, which would extend broad immunity to businesses, schools, and other entities against COVID-19-related lawsuits.
The General Assembly also is expected to take up two other bills it failed to pass before adjourning in June. One would expand medical professionals’ ability to offer telehealth services and encourage insurers to cover those costs. The other would increase penalties for protesters camping and engaging in vandalism at the Capitol. A group of protesters has remained across the street from the Capitol for more than 50 days, resulting in the arrest of some for trespassing and writing messages in chalk.
Nevada Senators Advance Liability Shield Measure
State senators in Nevada, by an overwhelming majority, advanced legislation that would extend COVID-19 liability protections to businesses, nonprofits, schools, and governmental agencies and outlining several measures intended to protect hospitality workers, The Las Vegas Sun reports.
The legislation would extend COVID-19 liability protections to many entities that have “substantially complied with controlling health standards.” Provisions of the bill would sunset either upon the termination of the current state of emergency or in July 2023.
The measure wouldn’t extend to most private health care providers.
“Unease with the bill’s focus on the tourism and gaming industry crossed party lines,” the Sun writes. “Sen. Marcia Washington, D-North Las Vegas, said she was concerned why the bill singled out hospitality workers: ‘I’m here to represent, as far as I’m concerned, everybody, all the workers in the state of Nevada,’ Washington said.”
Marie Neisess, president of the Clark County Education Association, said the bill did nothing to help teachers going back into the classroom this year.
“Even with the best safety measures in place, educators and students will still be at risk,” Neisses said. Putting a bill in place that protects the employer rather than the employee is unacceptable.”
The bill now advances to the Senate floor for final action as lawmakers continue to meet in special session.
“Rebuttable Presumption” for Essential Workers Goes to N.J. Governor
New Jersey may become the next state to enact a law presuming that essential workers who acquire COVID-19 did so on the job, Business Insurance reports.
Lawmakers in the New Jersey Assembly and Senate on Thursday passed S.B. 2380 with a 42-27 vote in the Assembly and a 27-12 vote in the Senate. The bill, introduced in early May, would create a rebuttable presumption for essential workers seeking workers compensation for acquiring COVID-19 on the job during a declared state of emergency.
The bill identifies essential employees as those whose duties are considered essential during an emergency response and recovery operation; public or private sector employees whose duties are essential to the public’s health, safety, and welfare; emergency responders and workers at health-care facilities and those performing jobs that support a health-care facility, such as laundry, research, and hospital food service.
The bill moves to Gov. Phil Murphy’s desk. If signed into law, the legislation would take effect immediately and be retroactive to March 9. According to Business Insurance, a spokeswoman for Gov. Murphy declined to comment on whether he intended to sign the legislation.
In a July 29 earnings call Evan Greenberg, the CEO of Chubb, addressed the lawsuits filed by many businesses over business income (interruption) coverage during the COVID-19 pandemic. He stressed that even though business interruption (BI) policies do not cover a pandemic, they are a good value and work as intended.
“Standard BI policies, which are an addendum to a fire policy, require direct physical loss or damage to the property, for example, a fire or flood damages the property and prevents the business from operating while repairs are being made. COVID-19 does not cause physical loss or damage to a property, despite the trial bar’s efforts to influence some government officials in the wording of their civil public shutdown orders,” he said.
Greenberg reiterated the uninsurable nature of pandemics and the necessity for the federal government to take the lead in mitigating pandemic risks. To properly service all policyholders, Greenberg said, the insurance industry must not be distracted by attacks from the legal community.
The comments appear in their entirety below.
Remarks from Evan Greenberg, Chubb Second Quarter Earnings Call, July 29, 2020
I am going to say a few words about the business interruption issue that I know is on the minds of many. As you know, the insurance industry is under attack by the trial bar over business interruption claims. They represent many businesses which purchased BI coverage that does not provide cover for pandemic, and these customers are understandably disappointed and upset. Plaintiff attorneys are attempting to torture or reverse engineer insurance contract language to conjure up business interruption coverage that for the most part simply doesn’t exist.
Coverage for a pandemic was never contemplated in standard business interruption policies, and therefore no premiums were ever charged for that risk. In fact, state insurance regulators, who approve the policies, have been clear that this risk is not covered and that the industry could not cover the massive open-ended tail risk of a global pandemic because it threatens the industry’s solvency. Without the federal government playing a major role to cover the tail risk, pandemics are simply uninsurable on a broad basis.
Standard BI policies, which are an addendum to a fire policy, require direct physical loss or damage to the property, for example, a fire or flood damages the property and prevents the business from operating while repairs are being made. COVID-19 does not cause physical loss or damage to a property, despite the trial bar’s efforts to influence some government officials in the wording of their civil public shutdown orders.
Though it doesn’t cover pandemic, standard BI coverage provides good value for the money. We estimate the industry pays out about 70 cents in insurance claims for every business interruption protection dollar collected, with most of the remaining amount paid in commissions, premium taxes and other expenses. For Chubb, in addition to our normal losses this year, we will pay BI claims for policies that specifically covered certain pandemic-related shutdowns such as those for the entertainment industry.
We care deeply about properly supporting and servicing all of our policyholders, and I have particular sympathy for the millions of businesses that have suffered terribly during the pandemic-forced economic shutdowns. But it would be wrong – in fact, catastrophic and irresponsible – to pay the claims of those who didn’t have coverage, and in fact didn’t pay premiums for the coverage, by using funds that have been properly reserved for the legitimate claims of the vast majority of our P&C policyholders who number over 100 million globally.
To provide some context, in 2019, Chubb paid $24 billion on approximately four million property and casualty claims. Again, to pay billions of dollars in uncovered claims by raiding the reserves or capital needed to pay claims on other kinds of policies, such as auto and home, commercial insurance exposures, or respond to natural catastrophes such as hurricanes and wildfires, would be irresponsible to the vast majority of our policyholders and to our shareholders.
Beyond the business interruption challenges of the current COVID-19 crisis, the insurance industry has an important role to play in society and in the economy, and that includes fully participating in the development of a prospective future pandemic business interruption solution should crises arise. Earlier this month, Chubb released its Pandemic Business Interruption Program designed to mitigate the economic disruption and losses in the event of a future pandemic.
Our framework is not the first plan to be introduced. But the public-private partnership framework we developed has important differences from the other leading proposals. By sharing our ideas and approach, we hope to spark and influence a productive debate on a solution that will work for businesses of all sizes, taxpayers, our industry and the economy more broadly.
First and foremost, I believe the industry can and should take pandemic risk along with the government. This is a peril that can be covered to a greater degree than we do today as long as the tail exposure is covered by the government. It’s our job to figure out how to do that. We can do more than simply play an administrative role or we belittle ourselves and we’re less relevant than we can or should be.
The framework we announced has attributes that we believe will make for a successful program. It accounts for the different needs of small, medium and, to a modest degree, large businesses. Premiums for small business will be affordable and they will be paid quickly. Larger companies would pay a fair and risk-adjusted price to both the government and insurers for pandemic cover in a program built on free-market principles. The government gets paid for the use of its balance sheet – it’s not a handout to larger companies.
Our framework has incentives for broad participation by the industry. And by committing insurance industry capital and providing opportunity for increased risk-sharing over time as direct and secondary markets develop, the pandemic burden shouldered by the government will ultimately be lessened to a degree.
This is an important issue for our nation. We look forward to contributing to the dialogue as policymakers work to refine the most effective solution.
The shipping industry has largely proved resilient to the coronavirus outbreak, and insurance claims related to risks of the sea could be reduced as fewer vessels venture out, insurer Allianz reports in its Safety and Shipping Review 2020.
However, new challenges have emerged that could lead to more claims.
“One of the biggest issues,” Allianz reports, “has been the inability to change crews easily because of pandemic restrictions.”
Crew relief is essential to ensuring the safety and health of seafarers. Fatigued crew members make errors that Allianz says contribute to 75 percent to 96 percent of marine incidents. Damaged goods and containers account for more than one in five shipping claims.
“The pandemic has heightened the risk environment around high-value and temperature-sensitive goods in particular as supply chains have come under pressure, cargo-handling companies have shut down abruptly, and ports operated under restrictions,” Allianz says.
COVID-19 also has made it hard to obtain parts and materials like lubricants that are essential to maintenance and repair. This could make ships and the equipment on board them less safe, potentially leading to groundings or collisions.
Such an outcome could impede or reverse the industry’s steadily improving safety record.
The number of total losses of large ships fell in 2019 to 41, Allianz reported – “the lowest total this century and a close to 70% fall over 10 years.”
The insurer credits improved ship design, technology, regulation, and risk management as contributing to the long-term reduction in losses.
But improved technology can be a two-edged sword as vessels become more reliant on computers and software, making them vulnerable to cyber incursions. The coronavirus outbreak has affected this risk, too, Allianz says, reporting that companies have faced a 400% increase in attempted cyber-attacks since the pandemic began.
While COVID-19’s impact on the insurance industry will require time to fully understand, litigation, legislation, and concerns about pricing and policy language will be with us for some time to come.
“Significant” changes in policy language seen
The majority of respondents to an Artemis re/insurance market survey believe the COVID-19 pandemic will result in “significant changes” to business interruption (BI) policy wordings.
In fact, the U.K. Financial Conduct Authority (FCA) is conducting a review focused on obtaining legal clarity on policies connected to the pandemic and which claims are valid and which aren’t.
FCA’s Interim CEO Chris Woolard said recently that while some BI policies are paying out for virus-related issues, others remain “within dispute” due to ambiguities in their wordings.
Outside of the 67.6% who stated a belief that COVID-19 will drive “significant changes” in BI policy wordings, 21.6% expect a “moderate amount” of change, while the remaining 10.8% said the effect will be “limited.”
Loss estimates vary
The Artemis survey also shows 67% of respondents expect the industry to face between $80 billion and $100 billion of underwriting losses due to the pandemic. This is roughly in line with Lloyd’s of London’s earlier estimate of a $107 billion global industry impact.
But analysts from investment bank Berenberg said they believe global COVID-19 claims will be more manageable, estimating a range from $50 billion to $70 billion for the total bill. The analysts don’t specify whether this includes both life and non-life insurance claims from the pandemic, but they do point to the estimate from Lloyd’s of London as being too high.
“We estimate $50-70bn for global COVID-19 claims,” Berenberg’s analysts state. “Significantly less than the $107bn estimate reported by the Lloyd’s of London market estimate on 14 May.”
Las Vegas Hospitality Union Sues Employers
Las Vegas Culinary Workers Union Local 226 is suing several employers on the Las Vegas strip over unsafe working conditions during the coronavirus pandemic, Business Insurance reported.
The union, representing 60,000 workers, said in a statement it is asking for injunctive relief under the Labor-Management Relations Act based on the “hazardous working conditions” workers face.
The lawsuit alleges casino hotels have not protected workers, their families, and their community from the spread of COVID-19 and that current rules and procedures in place for responding to workers contracting COVID-19 have been “wholly and dangerously inadequate.”
The Culinary Union made a number of requests for policy changes, including daily cleaning of guest rooms, mandatory testing of all employees for COVID-19 before returning to work and regular testing thereafter, adequate personal protective equipment for workers, and a requirement that guests wear face masks in all public areas.
Best Warning on COVID-19 Workers’ Comp Laws
Insurance rating agency A.M. Best has warned that legal efforts in several U.S. states to expand workers’ compensation coverage to allow employees to claim for COVID-19 will have a negative impact on re/insurers, Reinsurance News reports.
The crisis has resulted in many employees now working from home, but a significant part of the workforce still needs to be present and public facing, and this is the group new state laws aim to support. For these workers, some states are looking to shift the burden to the insurer to prove that an employee contracting COVID-19 did not do so while on the job.
“This shift in the burden of proof could lead to significant additional losses to a segment already under pressure and result in increased reserve estimates and higher combined ratios,” A.M. Best said.
Given that assumptions used in pricing and actual loss emergence diverge significantly, these legislative changes will result in an increase in loss estimates and could affect earnings.
Businesses Ask Patrons to Waive Right to Sue
As businesses reopen across the U.S. after coronavirus shutdowns, many are requiring customers and workers to sign forms saying they won’t sue if they catch COVID-19, Associated Press reported.
Businesses fear they could be the target of litigation, even if they adhere to safety precautions from the Centers for Disease Control and Prevention and state health officials. But workers’ rights groups say the forms force employees to sign away their rights should they get sick.
So far, at least six states — Utah, North Carolina, Louisiana, Oklahoma, Arkansas and Alabama — have such limits through legislation or executive orders, and others are considering them. Business groups such as the U.S. Chamber of Commerce are lobbying for national liability protections.
On the surface, the article’s author recounts the sort of innovation and ingenuity that most of us familiar with insurance can easily recognize. But just beneath is a fascinating glimpse at how insurers, virologists and epidemiologists, and data scientists devised ways to understand and rationalize the economics of outbreaks—and at the amazing race to quantify and price pandemic risks to bring an insurance product to market.
“Reinsurance is sometimes called the business of a hundred professions … you don’t just have mathematicians and lawyers and businessmen. You have former mining engineers. You have former captains who steered ships across the ocean. You have art experts who are specialized in art insurance. It is, if you like, always close to life.”
Like many significant advances, pandemic insurance started from a conventional, even humble proposition. In 2011, with the 2008 Ebola outbreak still fresh in the collective memory, Gunther Kraut, then a young quantitative analyst at Munich Re, studied ways for his firm to hedge its life insurance portfolio against a “one-in-500-year return period.”
Kraut later partnered with Nathan Wolfe, a globetrotting rock-star virologist, and Nita Madhav, an epidemiologist who’d spent 10 years modeling catastrophes for the insurance industry, to create what was essentially a new consciousness about pandemic risk—and tools to help mitigate potentially immense losses.
Without trifling, this is a gripping saga involving global NGOs, multinational corporate giants, visionary business derring-do, and catastrophic failures of the imagination. But from its pages, we get a fuller understanding of insurance as a pervasive force that, in spite of its sophistication, ubiquity and capacity for good, nevertheless sometimes bows to the principles of behavioral economics.
By Max Dorfman, Research Writer, Insurance Information Institute
A new and risky legal precedent could be set as the coronavirus pandemic continues to roil the U.S. economy. A growing number of policyholders say that insurers are acting in bad faith when they deny claims for losses sustained during shutdowns.
While business income interruption coverage typically covers physical damage to a property, some businesses believe the potential presence of the virus on their property or in their community is equivalent to physical damage.
Business income interruption exclusions for pandemics date back to the 2002-2003 SARS epidemic, when insurers realized that the risk of such a massive health crisis would be impossible to credibly quantify, and thus impossible to absorb.
In several recent articles, some plaintiffs’ attorneys have accused insurers of acting in bad faith by issuing quick denials without properly investigating their claims. “Quite frankly, the prevailing law on the insurance policies is that coverage is supposed to be interpreted broadly and exclusions are supposed to be interpreted narrowly,” said William Shernoff, a founding partner of California-based Shernoff Bidart Echeverria LLP, which specializes in representing policyholders in claims against insurance company denials. Shernoff also stated that any inconsistency in a policy means it’s ambiguous and would result in a decision favoring the plaintiffs.
Michael Menapace, an insurance lawyer and a Triple-I non-resident scholar, disagrees. “They’re trying to recast what the damage is from the policy trigger of “direct physical loss of or damage to property” to a broader concept of “loss of use,” which term does not appear in most policies. They’re also going to claim that somehow the entire insurance industry tricked policyholders by sneaking in the virus exclusion. There is a tension between the plain meaning rule [what the exclusion literally states], and the doctrine of reasonable expectations [the way someone who is not trained in the law would interpret them].” He continued, “When an insurance company denies a claim, they may get the decision wrong – but it doesn’t mean they denied it in bad faith.” Menapace adds that the virus exclusion has not been tested in the courts on any large scale since its adoption in 2006. “There’s so little case law on virus exclusions during pandemics, I have a hard time believing insurers are acting in bad faith.”
There are many reasons for the insurance industry not to act in bad faith under these circumstances. An insurer that is deemed to have acted in bad faith can be liable for damages that are greater than the policy limits, including but not limited to interest, emotional distress, consequential economic losses, attorneys’ fees and punitive damages.
Menapace also makes the point that business income interruption claims from a pandemic would rapidly deplete insurers’ reserves and surplus that are needed for covered losses such as those from hurricanes and other perils. “We can insure certain events because there is a spreading of risk,” saidMenapace. “If everyone has the same loss at the same time, like from a pandemic, we lose the fundamental aspect of insurance, which is risk spreading.”
Much depends on how the courts interpret the exclusions. “Insurers said they were not going to cover damage due to pandemics. There is going to be new law created. It depends whether the courts will read the plain meaning of the exclusion, or if they’ll interpret some of the creative arguments of the plaintiffs.” If these contracts will retroactively favor the insured, Menapace added, it could force insurers to stop covering business income interruption in any scenario, as the costs would simply be too great. And that would be truly bad for policyholders and insurers alike.
Riots across the U.S. and the subsequent damage to thousands of businesses have many business owners asking what their business insurance policies will cover. In this interview, Triple-I Vice President of Media Relations Loretta Worters answers some frequently asked questions about business insurance and what it covers.
Are businesses covered for
property damage from riots?
Yes, they are. Business property that has been damaged by
riot, civil commotion. vandalism and fire are covered under virtually all
businessowners and commercial insurance property policies. This typically includes
damage
to windows, doors, light fixtures, store windows and plate glass on office
fronts. There is also coverage for the contents of the building such as
furniture, office
supplies, computers or machinery that may be either damaged or stolen.
Should a
business insure its building and contents at replacement value or actual cash
value?
A business may
have the option to insure its business property at replacement value or actual cash value. The difference is that replacement
value coverage can help a business replace its property at market prices,
whereas actual cash value coverage takes depreciation into account. Replacement
value coverage costs more, but it also pays out more in the event of a claim.
What
about loss of income?
Businesses that are forced to suspend operations or limit
hours due to rioting, vandalism or civil commotion and have coverage for the
loss of income under business income insurance (also known as business
interruption, or BI) do have coverage. Coverage
is typically triggered if there is direct physical damage to the premises.
What
if a business is unable to access its property due to a
government order? If there
is a curfew in place, how will that impact a business?
While insurance policies vary, typically there is business interruption coverage for civil authority orders, such as curfews (when a business has reduced hours) or when a business is unable to access its property due to a government order requiring the business to close. Such coverage nearly always requires the existence of property damage within some limited geographic radius surrounding the policyholder’s location. This often ranges from 1 to 10 miles. Typically civil authority coverage has a waiting period of 24 to 72 hours, depending on the policy, before a policyholder can begin claiming the benefits of coverage. Coverage typically lasts up to four weeks, but the time period can be extended by paying an additional premium. However, once a curfew is lifted and business can resume, coverage ceases.
Is business income
coverage subject to a deductible?
Under most
policies, business income coverage is subject to either a waiting period, which
acts like a form of deductible or a monetary deductible.
How will
the amount of the business income loss be determined for a business?
Under most
policies, business income coverage includes both net income (the profit a business earns after expenses and
allowable deductions) and the cost of continuing
normal operations.
What
information does a business need to support its business income claim?
Most insurers require the following:
Profit and Loss statements
Sales records
Income tax returns
Rent or mortgage statements
Payroll records
What
if a business vehicle has been damaged in a riot?
Damage to vehicles is covered under the
optional comprehensive portion of an auto policy. This provides reimbursement
for damage to the vehicle and its contents caused by fire, falling objects,
vandalism or riot. Comprehensive coverage also reimburses a business if the
vehicle’s windshield is cracked or shattered. Some companies offer glass
coverage without a deductible.
Any advice for business owners?
Know your risks! Every smart business owner recognizes that business insurance is an essential element of an overall business plan. It should be factored in with fixed operational expenses like utilities. Without adequate coverage, business owners may have to pay out-of-pocket for costly damages from a riot, hurricane or other disaster, which could spell financial ruin.
