The world’s 10 largest insurance markets are cumulatively expected to see gross domestic product (GDP) decrease by 4.9 percent in 2020 compared to 2019 because of COVID-19, according to a new Insurance Information Institute (Triple-I) report.
“Given the scope of the downturn so far in China, North America, and Western Europe, the virus’s continuing expansion in the Southern Hemisphere, and the possibility of further rebounds in the former this fall and winter, the likelihood of a V-Shaped recovery is extremely low,” writes Dr. Michel Léonard, Vice President & Senior Economist, Triple-I, in the Global Macro and Insurance Outlook: Q2 2020. “The most likely outcome for the rest of 2020 is a slow recovery, with multiple false starts and step backs, that does not stabilize until well into 2021.”
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.
On May 21, Triple-I
CEO Sean Kevelighan testified before the U.S. House of Representatives’ Small Business Committee on the subject of business interruption
coverage.
Since the
outbreak of COVID-19, some legislators and advocates have pushed for policies
that would retroactively force insurers to pay for claims their insurance
policies were not priced to cover. The U.S. House session, “Business Interruption Coverage: Are
Policyholders Being Left Behind?,”
gave members of the committee the opportunity to hear from policyholders and
other interested stakeholders.
“An event like a global pandemic is uninsurable,” said Kevelighan in his statement. “Unlike a typical covered catastrophe, which is limited in terms of geography and time, pandemics have the potential to impact everywhere, all at once…. As such, this type of magnitude requires government resources to step in and provide support.”
Property
business insurance, in general, is meant to cover physical damage from perils
like fire, tornado, or hurricane,” he said. Forcing insurers to cover losses
related to the pandemic – which don’t involve physical damage to property – would
cost the industry between $150 billion to $400 billion per month.
“Make no
mistake; retroactive business interruption payouts would bankrupt insurers,”
said Kevelighan. “A recent Triple-I
economic analysis determined this type of approach would decimate the
industry’s financial resources in a matter of months, and at a time it needs
those monies for major natural disasters that insurance policies cover, such as
tornadoes, hurricanes, and wildfires.”
“Any efforts to retroactively rewrite business
interruption policies are not only unconstitutional (Article I) but would
imperil the insurance industry’s ability to pay covered insurance claims filed
by American homeowners, drivers, and injured workers,” Kevelighan said.
“The current
government shut-down orders do not trigger the vast majority of standard
business interruption policies because those orders do not qualify as direct
physical loss to property—a requirement under the policies,” he said.
“The insurance
industry is stepping up for Americans, with the likes of $10.5 billion in
personal auto insurance premium relief, $220 million in charitable donations,
and even more by keeping nearly two million Americans employed so insurance
customers will be covered, and have their claims handled, when other disasters
strike,” Kevelighan concluded.
View the full testimony and a recording of the webcast here.
The insurance industry is united in its position that pandemics are uninsurable, and the industry has some formidable support in that view. In a letter to the committee, the National Association of Insurance Commissioners (NAIC) said: “The current COVID-19 crisis has highlighted that many existing business interruption (BI) policies have specific exclusions for viruses or other diseases, and coverage is generally only triggered by actual physical damage. Therefore, these policies were generally not designed or priced to provide coverage for claims arising from COVID-19.”
The NAIC letter
said that the group opposes efforts to legislatively apply business
interruption coverage retroactively to claims based on COVID-19 and “has
serious concerns that requiring retroactive coverage of BI claims based on
COVID-19 would pose significant risks to the solvency of insurance companies
and could have systemic impacts on the industry as a whole and potentially the
financial system.”
And in a letter
to President Trump on May 18, six Republican Senators warned that altering
insurance law to cover all pandemic claims under business interruption policies
would devastate the capital reserved for paying other insurance claims.
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.
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.
