Most insurance experts believe legislative proposals that would require insurers to cover business-interruption (BI) claims stemming from COVID-19 related shutdowns, even if the insurance policies exclude pandemic-related losses, threaten the solvency of the insurance industry. This is the finding of a survey conducted by the Wisconsin School of Business and the Center for Insurance Policy and Research of the National Association of Insurance Commissioners (NAIC).
The survey also found most experts believe the private
market will have a difficult time efficiently supplying BI coverage for
pandemics, given the systemic, correlated, and non-diversifiable nature of the
peril.
Many survey respondents felt only the federal government can
provide coverage for correlated risks because it can spread the cost through
taxation, long-run borrowing, and deficit financing. But whether provided by
only the federal government or the private market, the pricing and
affordability of coverage were indicated to be issues for both.
Most said they believe the private market can supply BI
coverage for pandemics with an effective federal partnership. Some questioned
whether the Terrorism Risk Insurance Program (TRIP) is a good model for
pandemic insurance, given the similarities between the pandemic and terrorism
perils.
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.”
Business interruption insurance and liability issues remain
on the front burners as governments begin gradually “reopening the economy” amid scary new
projections about the pandemic.
A measure that would make it
easier for small businesses in Washington, D.C. to claim coronavirus-related damages
under business interruption insurance policies is on hold after six of the 12
D.C. Council members raised concerns about its legality and the costs it could
impose on insurers.
Council Chairman Phil Mendelson
struck the language from a broader pandemic emergency bill to allow for more
debate. Councilman Charles
Allen had spearheaded the measure after many small
businesses have seen their insurers deny such claims.
The American Property
Casualty Insurance Association estimates local businesses
could claim losses of hundreds of millions of dollars each month.
“These numbers dwarf the
premiums for all relevant commercial property risks in the key insurance lines
for D.C., which are estimated at $16 million a month,” David Sampson, the
association’s president and CEO, wrote in a statement. “We oppose
constitutionally flawed legislation that retroactively rewrites insurance
contracts and threatens the stability of the sector, to the detriment of all
policyholders.”
Faced with 20,000 coronavirus
deaths and counting, the nation’s nursing homes are pushing back against a
potential flood of lawsuits with a sweeping lobbying effort to get states to
grant them emergency protection from claims of inadequate care.
The Associated Press reports that
at least 15 states have enacted laws or governors’ orders that explicitly or
apparently provide nursing homes and long-term care facilities some protection
from lawsuits arising from the crisis. And in the case of New York, which leads
the nation in deaths in such facilities, a lobbying group wrote the first draft
of a measure that apparently makes it the only state with specific protection
from both civil lawsuits and criminal prosecution.
When
you think of winemaking, you picture grapes on the vine and a hearty glass of
red on your table. But you probably don’t think of all the steps involved in
the production of wine and the fact that those grapes – and later, the finished
product – travel long distances to reach our palates.
That’s
where marine insurance comes in: to protect businesses along the supply chain
from the unexpected.
The
American Institute of Marine Underwriters (AIMU) drew a robust
crowd to its recent webinar, “From Vine to Wine and the Fire In Between,” where
participants learned of the risks associated with wine production and the
coverages that are designed to mitigate losses. The two-hour session is part of
AIMU’s extensive and popular educational series, and drew a crowd of
underwriters, claims experts and brokers from the ranks of marine insurers and
beyond.
“One
of the biggest roles we perform is education, and it’s not limited to our
members,” says John Miklus, President of AIMU. “Marine touches so many aspects
of business that there’s a real thirst for knowledge in the broader insurance
community and we try to quench that thirst.”
Pamela Schultz, Jonathan Thames and Erik Kowalewsky of Hinshaw & Culbertson opened by discussing the effects of the
2017 wildfires on the Napa and Sonoma wine growers and wineries, where 10
percent of the harvest was still on the vine when the fires started.
There
are nearly 20 steps involved in wine production, including include growing,
harvesting, fermenting, storage, barreling, aging, blending, bottling, labeling
and distributing. Each presents opportunities for things to go wrong.
Thames
explained that Stock Throughput is a form of marine coverage that insures goods
in all their physical states along the supply chain with the exception of damage
caused by the processes of turning the raw materials into the finished
products. He said policies are generally very broadly worded and cover all
risks.
Schultz
pointed out how marine insurance comes into play during shipment. Stock
Throughput policies are designed to cover supply chains and anything that moves
inventory against loss due to:
Extreme weather and
natural disasters can cause supply chain interruptions and even loss of product.
Transportation:
Obviously, wine has to get from the vineyard to the table and that table may be
anywhere in the world.
Trade
problems/disruption: This affects imports and exports, especially delays due to
current COVID-19 crisis.
Lack of Control: Products
are sometimes shipped long distances, and it’s difficult to know everything
about every link of the supply or travel chain.
Invaders: Yes, pests
have been known to get into wine and cause damage and so can fumigation.
CTL: Constructive Total
Loss becomes an issue if the wine is stolen. Most policies exclude consumption
of wine, but Schultz said that hasn’t stopped some insureds from trying to
claim it on that basis.
The
2017 California wildfires brought into focus the issue of smoke taint. The smoke
that lingers for weeks after the fires are extinguished can taint the grapes,
rendering a wine unpalatable, or worse, undrinkable.
Thames
noted that smoke taint claims don’t arise until after fermentation, after the
wine has been tasted, and the grower must prove damage with scientific evidence
and serve notice of potential loss within 60 days. However, he said there are
cost effective processes winemakers can put in place beforehand to mitigate the
effect.
The
presenters discussed the difference between crop insurance and whole farm
revenue protection, both of which offer only limited protection to the grower. Crop
insurance is not a 100 percent indemnity product; it only covers the grapes
pre-harvest, so there will always be a gap. Limits are based on past yields so it’s
difficult to expand limits in the first few years.
As a result of the 2017 fires in Oregon, one winemaker now requires
its growers to carry crop insurance and pays half the premium.
Whole
farm revenue protection insures against lost revenue, but doesn’t protect
particular crops as it is not a property policy. To make a claim on this policy
the insured must establish that farm revenue is down as a result of the winery
rejecting the grapes.
Participants
were invited to vote on their favorite wine, and the overwhelming choice was
Red, at 70 percent. White garnered 17 percent of the vote and Rose 12 percent.
Triple-I CEO Sean Kevelighan today joined legislators and legal experts to discuss proposed measures that could retroactively rewrite business interruption insurance policies.
“The insurance industry is
applying forward-thinking solutions to take care of its customers, communities,
and employees during the COVID-19 crisis,” Kevelighan said, citing more than $10
billion so far returned to customers through premium relief; $200 million in
charitable donations; and insurers pledging not to lay off employees during the
crisis and implementing innovative solutions to conduct daily operations while
respecting social distancing. “We’re deeply engaged in mitigating the economic
impact of this pandemic.”
But the industry can only do
these things – while keeping its promises to policyholders and preparing for impending
catastrophes – if policyholder surplus isn’t eliminated, as it could be if some
of the proposed legislative “solutions” were enacted.
Legislation has been discussed or
introduced in Louisiana, Massachusetts, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island, and South Carolina that would retroactively enact
business interruption coverage into existing policies despite an absence of the
physical damage required in property policies and/or express exclusions for
communicable diseases in those policies.
Kevelighan explained how policyholder
surplus provides a cushion that enables insurers to meet their obligations,
even when large, unexpected catastrophes occur. He showed how retroactively
rewriting insurance contracts could make it impossible for insurers to play
their critical role as “financial first responders.”
The scenarios he discussed could
cost the industry $150 billion and $380 billion per month – “quickly
eliminating the surplus it has taken the industry centuries to accumulate.”
And they would do this in the
midst of a tornado season that is shaping up to be the deadliest
in eight years and as a “more active than
normal” hurricane
season approaches.
Kevelighan made his remarks
during a webinar sponsored by the National Council of Insurance Legislators
(NCOIL) and the Rutgers Center for Risk and Responsibility at Rutgers Law
School. Other panelists included NCOIL
President and Indiana Rep. Matt Lehman; New Jersey Assemblyman Lou Greenwald; and Jay Feinman and Adam Scales, Professors
of Law at Rutgers Law School and Co-Directors of the Rutgers Center for Risk
and Responsibility.
The panelists all expressed support for the creation of a COVID-19 Business Interruption and Cancellation Claims Fund, similar to the 9/11 Victims Compensation Fund enacted by Congress in 2001, for businesses suffering from costs related to the interruption of their businesses, as well as the many associations that have had to cancel events. Funded by the federal government and operated by a special federal administrator, it would facilitate distribution of federal funds and liquidity to impacted businesses during this time of incalculable business interruption.
The coronavirus crisis continues to generate data that can be valuable for understanding and decision making. Below are just a few resources that may be of interest to insurers and the people and businesses they serve.
Graphs from the University of Texas COVID-19 Modeling Consortium show reported and projected deaths per day across the United States and for individual states.
The Verisk COVID-19 Projection Tool has been made available to enhanceunderstanding of the potential number of worldwide COVID-19 infections and deaths. It provides an interactive dashboard that leverages the AIR Pandemic Model.
Small and medium-size businesses account for roughly 44% of the U.S. economy and provide employment to about 59 million people. McKinsey is tracking their sentiment to gauge how their views on economic activity, employment, and financial behavior—as well as their expectations about financial institutions and public authorities—change as a result of ongoing public and private interventions.
