P/C Insurers Put a Price Tag on Uncovered Coronavirus Business Interruption Losses
The property/casualty industry estimates that business interruption losses from the coronavirus just for small businesses in the U.S. could be between $220-$383 billion per month — or a quarter to half of the total industry surplus available to pay all P/C claims.
David A. Sampson, president and CEO of the American Property Casualty Insurance Association, said the $220-383 billion per month loss estimate assumes there could be as many as 30 million claims from small business that suffered coronavirus-related losses. According to APCIA, that is 10 times the most claims ever handled by the industry in one year. The industry processed more than three million from the 2005 hurricane season that included Hurricanes Katrina, Rita, Wilma and several other storms, the trade group said.
Sampson said the combined capital of the top business insurance underwriters represents only a fraction of the amount that might be expected in coronavirus losses from just small businesses.
“Insurance stability is especially important in a time of increased natural catastrophes. Spring flood season is underway, hurricane season is around the corner, and wildfires pose a threat year-round,” he said.
While the industry has little business interruption coverage to offer for this pandemic, Sampson said it is willing to discuss “forward-looking answers that speed economic recovery from future pandemics” with lawmakers.
State Bills
The industry is fighting attempts in a few states, in Congress and in courts to force it to pay for these business income losses that most policies were never intended to cover.
Ohio and Massachusetts have now joined New Jersey as states considering legislation to force carriers to cover losses for businesses closed or restricted because of social distancing and shutdowns to combat the coronavirus.
The New Jersey proposal states that every insurance policy for loss or damage to property, which includes business interruption, in force from March 9 will be understood to include coverage for business interruption due to a global virus transmission or pandemic.
“This bill is intended to hold harmless a certain portion of the business sector, which had the foresight to purchase business interruption insurance, for losses sustained as a result of the current health emergency, but for which no such coverage is currently offered,” according to the proposed legislation.
The bill’s progress through the Garden State’s legislature has been slowed.
“A-3844 is a work in progress,” Assemblywoman Annette Chaparro, a sponsor, told Insurance Journal. “We are working on finalizing the legislation to ensure it is the fairest and most responsible bill possible.”
Critics have questioned its constitutionality.
“The New Jersey legislation would alter multiple policy provisions that the parties had agreed to, including in some policies, a specific exclusion for loss or damage caused by any virus,” said Kristin Cummings, attorney-at-law at Dallas, Texas-based law firm Zelle LLP. “That’s a very dangerous precedent.”
Dean Fadel, president of the Ohio Insurance Institute, told Insurance Journal that the bill in his state could potentially hurt the ability of small businesses to receive approval for loans and grants provided through the Small Business Administration because of the Administration’s prohibition against “double-dipping on the same loss.”
While the bills are filed in states, they have gotten the attention of the national P/C insurance lobbyists.
National Concern
“Pandemics are an extraordinary catastrophe that can impact nearly every economy in the world, so it is hard to predict and manage the risk,” Sean Kevelighan, CEO of the Insurance Information Institute, stated. “Pandemic-caused losses are excluded from standard business interruption policies because they impact all businesses, all at the same time.”
Moreover, he said, the exclusions for pandemic-caused losses have been incorporated into standard business interruption policies for years.
Charles M. Chamness, president and CEO, National Association of Mutual Insurance Companies, warned of dire consequences from such approaches.
“If elected officials require payment for perils that were excluded, never underwritten for, and for which no premium was ever collected, catastrophic results will occur and we may deal with a second crisis: insurance insolvencies and impairments. There will also be irreparable harm done to contract law, and the impact of this will be felt by every business in America,” said Chamness.
The industry has state insurance regulators on its side in opposing retroactive business interruption coverage. The National Association of Insurance Commissioners (NAIC) issued a statement cautioning against and opposing “proposals that would require insurers to retroactively pay unfunded COVID-19 business interruption claims that insurance policies do not currently cover.”
“While the U.S. insurance sector remains strong, if insurance companies are required to cover such claims, such an action would create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing,” the NAIC said.
The NAIC, too, offered to play a role in figuring out if the business interruption insurance sector can “play a vital role in addressing the policy challenges of future pandemics.”
Federal Level
As for doing something at the federal level, lawmakers and lobbyists in Washington have been focused on passage of the $2.2 trillion CARE Act signed into law by President Trump last Friday. This relief package will provide funds for individuals and businesses affected by the shutdowns and stay-at-home public health policies of the states and the Administration.
There are some other ideas floating around Capitol Hill that might more directly involve the P/C insurance industry in this or future pandemics.
A bipartisan group of House members known as the Problem Solvers Caucus proposed legislatively declaring the “coronavirus a public health crisis, and, as such, a qualifying event for all existing force majeure contract provisions and business interruption insurance policies.”
Rep. Maxine Waters (D-Calif.), chair of the House Financial Services Committee, has advanced the idea of the Pandemic Risk Insurance Act, which would create a reinsurance program similar to the Terrorism Risk Insurance act for pandemics by capping the total insurance losses that carriers would face. This was a request from the National Retail Federation, according to the committee.
An Alabama insurance agent, Jason Upton, president of The Upton Group, believes Congress should declare this current national crisis in such a manner that it would trigger the current TRIA program, thereby accessing coverage for which premiums have already been collected. If such a declaration is not possible, then Congress should act to amend the TRIA law to include COVID-19, he said.
R Street
However, free market think tank R Street, which typically opposes government insurance programs, thinks a federal pandemic insurance program has merit. In his blog on Insurance Journal, Right Street’s Ray Lehmann writes that if the private insurance market cannot absorb the risk of pandemics, there has to be an alternative to allowing businesses to fail and employees to be laid off.
“It falls to government to step into the breach,” Lehmann stated, noting that that’s what government is doing with the unprecedented $2 trillion recovery package. “But ad hoc responses are less than ideal. Better still would be a permanent government solution,” he wrote.
“The devil, obviously, is in the details,” he added.
Court Challenges
The industry is also watching lawsuits over business interruption coverage. Several restaurants and a casino have asked courts to rule that their commercial insurance policies cover business interruption from the pandemic.
The owner of the famed French Laundry and the Bouchon Bistro in the Napa Valley sued a unit of The Hartford, seeking a declaration that the owner’s commercial insurance policy covers losses caused by a statewide business shutdown ordered to prevent the spread of coronavirus. That suit followed a similar suit by the Oceana Grill in New Orleans against a Lloyd’s of London insurer.
The same attorney— John Houghtaling II of Metairie, Louisiana — is behind both lawsuits.
Houghtaling wants to challenge the argument by insurance defense attorneys that business interruptions in reaction to the coronavirus are not covered losses under most business insurance policies.
“To avoid payments for a civil authority shut down the insurance industry is pushing out deceptive propaganda that the virus does not cause a dangerous condition to property,” Houghtaling said. “This is a lie, it’s untrue factually and legally.”
Last week, a Native American tribe in Oklahoma sued a group of insurance companies, asking a court to declare that losses it is incurring from shutting down its casinos during the coronavirus pandemic are covered by insurance. Among the defendants named in the lawsuit filed by the Chickasaw Nation in Oklahoma state court are several underwriters for insurance marketplace Lloyd’s of London, a unit of American International Group Inc. and XL Insurance America, now part of AXA SA.