By James Ballot, Senior Advisor, Strategic Communications, Triple-I
It’s been more than eight months since COVID-19 first struck the U.S., and millions of small business owners are still hurting. All the while, a few plaintiffs’ attorneys are treating the pandemic as another opportunity to profit from costly insurance litigation.
At a time when businessowners are looking for leadership to bring much needed financial support, these same attorneys are hoping legislators and judges will help them retroactively rewrite business income (interruption) (BI) insurance contracts. One key figure in this effort is John Houghtaling, a New Orleans-based plaintiffs’ lawyer who was featured in a recent Bloomberg Businessweek profile.
Adds Michael Barry, Head of Media and Public Affairs, at the Insurance Information Institute, “Not one business interruption insurance policy in the U.S. was written on the assumption nearly every business would be interrupted at the same time.” Barry adds, “This is why regulators and judges are consistently siding with insurers who argue direct physical damage to property is needed to trigger a business interruption policy.”
Irrespective of insurers’ and trial attorneys’ competing points of view, the authors of the Bloomberg Businessweek article cite the need for timely and decisive action: “A yearslong legal battle might not be much help to struggling businesses,” the article states. As the end of 2020 approaches, litigation seeking to compel insurers to cover pandemic-related income losses appears likelier to further the lawyers’ interests as opposed to those of businessowners seeking financial support.
Other potential solutions are on the table, most of which are taking shape around the idea that the federal government is the only entity with the reach and financial resources to help businesses recover from an event the magnitude of a global pandemic. On this point, a growing consensus of legal scholars and insurance industry experts concur, with Stefan Holzberger, AM Best chief rating officer, concluding in commentary to a recent report, that “pandemic risk does not afford insurance companies any geographic diversification due to its global nature … Only a governmental program, or perhaps a public-private partnership, could provide the backstop sufficient to compensate for lost revenue to businesses.”
As a counterpoint to statements made by Houghtaling and other plaintiffs’ attorneys, Sherman Joyce, President of the American Tort Reform Association presents a competing vision for how American businesses can unite to recover economically from the COVID-19 pandemic: “Americans’ elected representatives — not the trial bar — should have the authority to regulate business within the U.S.” Joyce continues, “The courts must restore that balance of power by rejecting the dreaded return of regulation through litigation.”
A North Carolina court has ruled that Cincinnati Insurance Co. must pay 16 restaurants’ claims for business income (interruption) losses due to government-ordered COVID-19 shutdowns – a decision that runs counter to those of most judges who’ve ruled on similar cases.
As hundreds of COVID-19-related lawsuits regarding business interruption coverage make their way through U.S. courts, judge after judge has found in favor of insurer defendants. The central point has been that coverage depends – as specified in the insurance policies – on the policyholder suffering a “direct physical loss.”
“Business income (interruption) policies generally reimburse a business owner for lost profits and continuing fixed expenses when its facilities are closed due to direct physical damage from a covered loss, such as a fire, a riot, or a windstorm,” said Triple-I CEO Sean Kevelighan. “Insurers have been prevailing nationwide in nearly all of the litigated COVID-19 BI lawsuits because, as North Carolina’s Insurance Commissioner has noted, ‘Standard business interruption policies are not designed to provide coverage for viruses, diseases, or pandemic-related losses because of the magnitude of the potential losses.’ ”
“Policy language controls whether COVID-19 interruptions are covered,” said Michael Menapace, a professor of insurance law at Quinnipiac University School of Law and a Triple-I Non-Resident Scholar. “The threshold issue will be whether the insureds can prove their business losses are caused by ‘physical damage to property’.”
Cincinnati Insurance has said it plans to appeal the ruling.
Recent advisories from two U.S. Treasury agencies – the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC) – indicating that companies paying ransom or facilitating such payments to cyber extortionists could be subject to federal penalties are a reminder of the importance of good cyber hygiene.
The notices also underscore businesses’ need to consult with knowledgeable, reputable professionals long before a ransomware attack occurs and before making any payments.
Ransomware on the rise
In a ransomware attack, hackers use software to block access to the victim’s own data and demand payment (usually in Bitcoin or another cryptocurrency) to regain access. It has been a growing problem in recent years, and such attacks have intensified since the COVID-19 pandemic has led to many people working from home for the first time.
The FBI warns against paying ransoms, but studies have shown that business leaders today pay a lot in the hope of getting their data back. An IBM survey of 600 U.S. business leaders found that 70% had paid a ransom to regain access to their business files. Of the companies responding, nearly half have paid more than $10,000, and 20% of them paid more than $40,000.
Sanctioned entities
The OFAC advisory specifically targets transactions benefiting individuals or entities on OFAC’s Specially Designated Nationals and Blocked Persons List, other blocked persons, and those covered by comprehensive country or region embargoes (e.g., Cuba, the Crimea region of Ukraine, Iran, North Korea, and Syria).
“Companies should rely on experts to assist with their due diligence and work with the FBI,” writes law firm BakerHostetler in a recent blog post. “Experience in incident response is key, and your counsel should be an informed, confident partner as you navigate this rapidly evolving area.”
“Before a payment is made,” the law firm writes, “a company generally retains a third party to conduct due diligence to ensure that the payment isn’t being made to a sanctioned organization or a group reasonably suspected of being tied to a sanctioned organization. Additionally, checks are in place to ensure that anti-money laundering laws are not being violated.”
Many insurers are working with their clients to put such practices in place and taking a variety of other steps to address the threat of ransomware attacks. Cyber-insurance premiums started rising 5% to 25% late last year, according to Robert Parisi, U.S. cyber product leader at insurance broker Marsh & McLennan. Parisi called the increases “dramatic” but said insurers have not scaled back coverage.
Marsh has issued a client advisory — What OFAC’s Ransomware Advisory Means for US Companies — explaining what U.S. businesses need to know about the OFAC advisory and the importance of completing an OFAC review before payment of ransom demands. Marsh’s advisory also makes recommendations for re-assessing ransom incident response plans, mitigating ransomware risk, and preparation for and recovery from ransomware and cyber extortion attacks.
Future of American Insurance and Reinsurance (FAIR) has released a new interactive tool to help showcase the need for a federal solution to pandemic relief. The Business Interruption Insurance “explainer” utilizes digital storytelling techniques to help clarify information about this complex topic.
The digital explainer complements the FAIR campaign’s other recently-released digital assets, including a video overview of BI and pandemics, and a primer deck that provides quantitative backing to the assertion that pandemics cannot be privately insured.
As trial attorneys attempt to retroactively force uninsurable pandemic coverage in business interruption insurance contracts, this tool is designed to show what business interruption insurance covers, how surplus helps pay for covered perils such as hurricanes and wildfires, how insurers have stepped up to help policyholders, and the need for a federal solution to the pandemic.
ABOUT FAIR FAIR is an initiative of the Insurance Information Institute and its member companies whose mission is to ensure fairness for all customers and safeguard the industry’s longstanding role as a pillar of economic growth and stability.
While ridiculous sounding lawsuits are common in our litigious society, some stand out because they sound so preposterous they could have been the plot of a “Seinfeld” episode.
For example, in 2019 an infamous Long Island attorney nicknamed the “Vanilla Vigilante,” sued Whole Foods for $5 million, claiming the store’s vanilla soy milk is flavored with ingredients in addition to vanilla. The American Tort Reform Association (ATRA) highlights this case and others as part of Lawsuit Abuse Awareness Week (October 5-9).
Food disappointments appear to be a common theme among these suits:
A December 2019 complaint filed in federal court alleged a Panera blueberry bagel purchased in Manhattan didn’t contain blueberries but “dyed lumps.” The complaint argues that the bagel’s advertising breached the New York Deceptive and Unfair Trade Practices law, among others.
A May 2020 lawsuit contends that Haagen-Dasz milk chocolate coated ice cream bars should be labeled as milk chocolate and vegetable oil coated chocolate bars. The company says vegetable oil is used as an ingredient to help overcome the difficulties of applying a coating of chocolate to ice cream; the oil is not otherwise included in milk chocolate.
A June 2020 lawsuit against a snack food manufacturer alleges the “potato skin snacks” do not contain potato skins but potato starch and potato flakes.
Such cases are fun to laugh about, but increasing willingness of plaintiffs to bring suits of all kinds – and of juries to pay out large settlements, known as “nuclear verdicts” – feeds the phenomenon of social inflation, which drives up claims costs for insurers and premiums for policyholders.
ATRA warns that a wave of such lawsuits is expected against businesses as they reopen during the ongoing COVID-19 pandemic.
The U.K. High Court last week issued a ruling involving business-interruption claims against policies issued by eight insurers. Jason Schupp of the Centers for Better Insurance says the ruling is a “mixed bag” for U.K. insurers and policyholders and has little relevance for their U.S. counterparts.
In the U.K. case, Schupp writes, “the fundamental theme running through the insurers’ defense was that the policies only covered localized outbreaks, not global pandemics.”
“More to the point for U.S. property/casualty insurers,” says Michael Menapace, a professor of insurance law at Quinnipiac University School of Law and a Triple-I non-resident scholar, the U.K. case involved disease coverage – “an affirmative coverage not included in most U.S. commercial property policies.”
U.S. business interruption disputes so far have turned on two key policy features:
U.S. business-interruption coverage almost always requires property damage to trigger a payout.
Nearly all U.S. COVID-19-related court cases have involved policies that specifically exclude viruses.
“The U.K. court did not address either the question of property damage or the applicability of a virus exclusion,” Schupp writes.
As Menapace put it in a recent blog post about U.S. business-interruption cases, “Policy language controls whether COVID-19 interruptions are covered…. The threshold issue [for U.S. insurers] will be whether the insureds can prove their business losses are caused by ‘physical damage to property’.”
Perhaps the most emotionally compelling data point invoked by those who would compel insurers – through litigation and legislation – to pay business-interruption claims explicitly excluded from the policies they wrote is the property/casualty insurance industry’s nearly $800 billion policyholder surplus.
Many Americans hear “surplus” and think of a bit of cash they have stashed away for emergencies. And when you consider that nearly 40 percent of Americans surveyed by the Federal Reserve said they would either have to borrow or sell something to cover an unexpected $400 expense – or couldn’t pay it at all – that number may sound like overkill.
Not as much as you think
But policyholder surplus isn’t a “rainy day fund.” It’s an essential part of the industry’s ability to keep the promises it makes to policyholders. And although a number like $800 billion may raise eyebrows, when we look more closely at its components, the amount available to cover claims turns out to be considerably less.
Insurers are regulated on a state-by-state basis. Regulators require them to hold a certain amount in reserve to pay claims based on each insurer’s own risk profile. The aggregation of these reserves – required by every state for every insurer doing business in those states – accounts for about half the oft-cited industry surplus.
Call it $400 billion, for simplicity’s sake.
Each company’s regulator-required surplus can be thought of as that company’s “running on empty” mark – the point at which alarms go off and regulators start talking about requiring it to set even more aside to make sure no policyholders are left in a lurch.
By extension, $400 billion is where alarms begin going off for the entire industry.
It gets worse – or better, depending on your perspective.
In addition to state regulators’ requirements, the private rating agencies that gauge insurers’ financial strength and claims-paying ability don’t want to see reserves get anywhere near “Empty.” To get a strong rating from A.M. Best, Fitch, S&P, or Moody’s, insurers have to keep even more in reserve.
Why do private agency ratings matter? Consumers and businesses use them to determine what insurer they’ll buy coverage from. Also, stronger ratings can contribute to lower borrowing expenses, which can help keep insurers’ operating costs – and, in turn, policyholders’ premiums – at reasonable levels.
So, let’s say these additional reserves amount to about $200 billion for the industry. The nearly $800 billion surplus we started with now falls to about $200 billion.
To cover claims by all personal and commercial policyholders in a given year without prompting regulatory and rating agency actions that could drive up insurers’ costs and policyholders’ premiums.
Which brings us to today.
Losses ordinary and extraordinary
In the first quarter of 2020, the industry experienced its largest-ever quarterly decline in surplus, to $771.9 billion. This decline was due, in large part, to declines in stock value related to the economic recession sparked by the coronavirus pandemic.
Nevertheless, the industry remains financially strong, in large part because the bulk of insurers’ investments are in investment-grade corporate and governmental bonds. And it’s a good thing, too, because the conditions underlying that surplus decline preceded an extremely active hurricane season, atypical wildfire activity, and damages related to civil unrest approaching levels not seen since 1992 – involving losses that are not yet reflected in the surplus.
Insured losses from this year’s Hurricane Isaias are estimated in the vicinity of $5 billion. Hurricane Laura’s losses could, by some estimates, be as “small” as $4 billion or as large as $13 billion.
And the Atlantic hurricane season has not yet peaked.
The 2020 wildfire season is off to a horrific start. From January 1 to September 8, 2020, there were 41,051 wildfires, compared with 35,386 in the same period in 2019, according to the National Interagency Fire Center. About 4.7 million acres were burned in the 2020 period, compared with 4.2 million acres in 2019.
In California alone, wildfires have already burned 2.2 million acres in 2020 — more than any year on record. For context, insured losses for California’s November 2018 fires were estimated at more than $11 billion.
And the 2020 wildfire season still has a way to go.
All this is on top of routine claims for property and casualty losses.
Four billion here, 11 billion there – pretty soon we’re talking about “real money,” against available reserves that are far smaller than they at first appear.
No end in sight
Oh, yeah – and the pandemic-fueled recession isn’t expected to reverse any time soon. Economic growth worldwide remains depressed, with nearly every country experiencing declines in gross domestic product (GDP) – the total value of goods and services produced. GDP growth for the world’s 10 largest insurance markets is expected to decrease by 6.99 percent in 2020, compared to Triple-I’s previous estimate of a 4.9 percent decrease.
If insurers were required to pay business-interruption claims they never agreed to cover – and, therefore, didn’t reserve for – the cost to the industry related to small businesses alone could be as high as $383 billion per month.
This would bankrupt the industry, leaving many policyholders uninsured and insurance itself an untenable business proposition.
Fortunately, Americans seem to be beginning to get this. A recent poll by Future of American Insurance and Reinsurance (FAIR) found the majority of Americans believe the federal government should bear the financial responsibility for helping businesses stay afloat during the coronavirus pandemic. Only 16 percent of respondents said insurers should bear the responsibility, and only 8 percent said they believe lawsuits against insurers are the best path for businesses to secure financial relief.
The policymaking arm of the American Bar Association (ABA) recently approved a set of best practices for litigation funding arrangements.
Litigation funding is an increasingly popular technique in which investors finance lawsuits in which they are not a party against companies – often insurers – in return for a share in the settlement. It contributes to “social inflation” – rising litigation costs that affect insurers’ claim payouts, loss ratios, and, ultimately, how much policyholders pay for coverage.
The resolution – adopted by the ABA’s House of Delegates by a vote of 366 to 10 – lists the issues lawyers should consider before entering into agreements with outside funders. While it avoids taking a position on the use of such funding, it recommends that lawyers detail all arrangements in writing and advises them to ensure that the client retains control.
“The litigation should be managed and controlled by the party and the party’s counsel,” the report says. “Limitations on a third-party funder’s involvement in, or direct or indirect control of or input into (or receipt of notice of), either day-to-day or broader litigation management and on all key issues (such as strategy and settlement) should be addressed in the funding agreement.”
It also cautions attorneys against giving funders advice about the merits of a case, warning that this could raise concerns about the waiver of attorney-client privilege and expose lawyers to claims that they have an obligation to update this guidance as the litigation develops.
Opponents of litigation funding have pushed for rules requiring mandatory disclosure of funding arrangements during litigation. The resolution doesn’t take a position on whether disclosures to judges or adversaries should be required, but it urges lawyers to be prepared for the possibility of funding arrangements being scrutinized.
The launch of a new $200 million fund by Pravati Capital this week brings litigation finance firms over the $1 billion mark for funds raised in 2020, according to Bloomberg Law.
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.
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.
