2 Reasons COVID-19 Legislation is the Wrong Solution

Back in March and April, I gave two webinars on COVID-19 for the Academy of Insurance.

If you haven’t had a chance to take those, click here to get the Academy of Insurance COVID-19 related classes.

One of the topics that we touched on more than once was legislative action to compel insurance companies to cover COVID-19 related business income losses.

Whether you saw our classes or not, you’ve likely read at least one story about a business income (or business interruption) suit filed because an insurance company denied a claim for business income losses related to COVID-19 shutdowns. You really don’t need my opinion on that.

Except to remind you that business income losses due to mandated COVID-19 shutdowns are not going to be covered in many situations. Are there times when it’s possible to find coverage? Sure. There has to be but for most insureds, it’s just not covered for more than one reason.

What’s the solution? That question suggests that there is a problem. That means that the bigger question is what is the problem that needs to be solved?

Is the problem that insurance companies aren’t paying for COVID-19 business income losses? No. That’s not the problem. The claims are being denied because the companies are reading the policies correctly in this case.

Is the problem that some insurance policies exclude coverage for property losses related to viruses? No. That’s not the problem. If the policy is written by an admitted carrier, the state had to approve all of the forms before they were issued. If the policy is written by a surplus carrier, that’s another issue altogether and the insured should have been made aware by their agent that they have a surplus lines policy and that means the policy should be reviewed in great detail.

Is the problem that businesses were shut down due to no fault of their own and they had a serious loss of income because of it and now they want someone to cover that loss? Yes. That’s the problem. Small businesses have been hit hard by the decisions of others while we’ve been dealing with this virus.

Whether the business shut down out of civic duty and the desire to help “flatten the curve” or would have remained open had there not been a governmental order to shut down doesn’t matter. All of those businesses that had to shut down lost money and time with their customers. The local auto parts store in my town still can’t get many of the simple parts that their customers need because their suppliers are still ramping up production from when they were shut down.

Does any of this make the problem an insurance problem? No. It’s still not an insurance problem for all of the reasons already listed. The issue that we have is that customers who don’t understand their insurance policies still think its an insurance problem. They don’t understand their policy like their insurance professionals do and whether or not their agent explained their policy to them, the fact remains that they won’t be convinced that it’s not an insurance problem.

Enter the government. As of this writing, 10 states, the District of Columbia, and the United States Congress have introduced legislations that would in one form or another mandate that business income insurance policies should cover losses due to COVID-19 shutdowns. All of these laws have one thing in common, making coverage for pandemic a required offering by insurance companies or mandating coverage on existing insurance policies.

Take it from someone who lives in a state where property insurance is changed by the state legislature almost every year. This is a terrible idea. The legislatures should stay out of mandating insurance coverage. They don’t know what they’re doing.

The bills appear to leave more questions asked than answered.

Having read several of these bills, I feel confident that I’m right in at least one statement. Legislators don’t have a clue how insurance works. Take, for example, New Jersey Assembly Bill 3844. Let’s look at some legalese.

Notwithstanding the provisions of any other law,… every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic, …

I understand that the legislature demands that pandemic is now a covered cause of loss. That’s great, but what if there hasn’t been any actual damage? You may remember that much of the issue with these claims is that no actual physical damage has happened at many of the locations in question. Therefore, this bill (and those like it) only address one coverage issue among the other issues involved.

This bill also includes a provision allowing companies that pay claims based on the shutdowns to apply to the state for recoupment of those funds. This sounds good, but where does that money come from? That’s a good question.

That money comes from the state initially, then the state will seek to recoup those funds from insurers based on their written premiums. Where do you think this money is going to come from? Every time I’ve see an insurer receive and assessment from the state, that assessment is pushed down to the individual policyholder. When a customer asks about it, the answer is generally the same. It’s a state fee.

While those questions may seem simple to answer, there are more questions.

• What claims will be eligible for state repayment?
• How long will it take to receive payment?
• Are those payment guaranteed, or is there a process that the state will use to qualify payments?
• When will the system be set up by the state to handle these requests?

The bills appear to have been introduced as noise, not substance.

As these bills were submitted to their respective state legislatures, it’s possible that the press were alerted, that social media buzzed, and that the people of those states were notified that the bills were pending. People began to hear that their government was planning to come to their rescue all due to the efforts of Senator, Representative, Assemblyperson, or other title Somebody.

In fact, these bills seem fairly popular. The New Jersey bill was sponsored by three Assemblypeople and co-sponsored by another 13. One of the bills in the U.S. House has 10 co-sponsors. No matter how many have added their names to the list of people who support these bills, they are out there, on the public record. But what’s been done since?

We remember that states declared a state of emergency as early as March 2020 and many of these bills were introduced in March 2020. Some of them even used language to indicate that this is an issue of great need that should be taken up with all due speed. So what’s happened with these bills? The list below show several of the bills and their status as of this writing according to the legislatures’ websites.

• NJ A3844 – Introduced in New Jersey Assembly March 16, 2020. Passed Homeland Security Committee. No action taken since.
• Ohio HB 589 – Introduced in House on March 24, 2020. Referred to Insurance Committee on May 5, 2020. Initial hearing on June 9, 2020. No action taken since.
• Massachusetts SD 2888 – Referred to rules committee on April 6, 2020. Referred to Financial Services committee on April 21, 2020. No action taken since.
• NY A10226 – Introduced and referred to insurance committed on March 27, 2020. Amended and referred back to committee on April 8, 2020. Amended and referred back to committee on April 29, 2020. No action taken since.
• Pennsylvania HB 2372 – Referred to insurance committee on April 3, 2020. No action taken since.
• HR 6494 – Introduced in U.S. House and referred to Financial Services committee on April 14, 2020. No action taken since. (2% chance of being enacted according to govtrack.us)
• HR 7412 – Introduced in U.S. House and referred to Financial Services committee on June 29, 2020. No action taken since. (1% chance of being enacted according to govtrack.us)
• CA AB 685 & CA SB 1159 – Introduced February 20,2020. Signed into law September 17, 2020.

Only two of these bills have gotten past the house that they were introduced in. Most haven’t had any action taken in months. You may say that the legislative process is slow and cumbersome. That is true, but they can make the process easier. We’ve seen it in our time when something becomes critically important, they can speed up the process.

I have two theories as to why these bills haven’t had any movement in months. I am dismissing the idea that there are more important matters in all of these cases since they all claim that this crisis is an emergency. There could be more important issues, but we are doubtful.

It’s possible that someone met with the legislators and told them that what they are planning has little to no chance to pass and if it does, is likely to face serious opposition since many of them are changing a previously agreed upon contract and that’s not good precedent even if the contract is an insurance policy.

It’s also possible that they were less interested in the disposition of the bills than they were being visible in putting forth the bill. It could be all about the show because it is, after all an election year for at least some of these people.

We return to the original problem. It’s not an insurance problem because these losses, while awful, do not break the existing policy barriers that were set in place well before most of us had heard the words Wuhan, Coronavirus, or pandemic.

It’s a problem. It’s just not an insurance problem.