How Social Inflation May Affect Coronavirus Business Interruption Losses

COVID-19 could produce a big increase in social inflation, according to A.M. Best. The reason: expectations that businesses will sue their insurers in an attempt to access their business interruption coverage for losses relating to the coronavirus pandemic.

A.M. Best said in a commentary that insurers will likely suffer potential business interruption and related contingent business interruption losses until the pandemic dies down. In more normal times, both coverages would apply until consumers reached any limits or sublimits, and during the entire “period of restoration,” A.M. Best said. But COVID-19 is likely to be around for some time, so A.M. Best said it will be hard to determine how long the “period of restoration” will be for affected businesses.

As a result, the ratings agency said it expects defense and containment costs to rise.

What’s more, insurers stand to lose more than in the past when they face jury trials.

“With the impacts of social inflation becoming more severe in recent years for insurers due to shifting jury demographics, legal judgments may be more unfavorable to the insurers than in prior years,” A.M. Best added.

As A.M. Best explained, many business interruption or contingent business interruption policies won’t kick in until there is direct physical loss or damage. In other words, where no physical damage has taken place, those coverages may not apply. On the other hand, business interruption could apply if it includes some sort of denial-of-access provision, which could enable coverage if government denies access to a property. Whatever option is chosen, as A.M. Best points out, depends on the policy’s specific wording.

Whether such provisions will apply to a given BI or CBI claim is subject to the specific wording of the policy. Businesses ceasing operations voluntarily are unlikely to recoup loss costs because of the voluntary nature of the closure. The insurance industry learned from the 2003 outbreak of severe acute respiratory syndrome (SARS) that communicable diseases can be a material cause of loss, so many policies may exclude communicable diseases, A.M. Best said.

Instead of lawsuits, some consumers could access claims coverage if there are any fungi, bacteria or virus coverage options, which A.M. Best said some policies contain in a limited fashion. But those provisions can just as easily limit or exclude losses stemming from a virus. The resulting ambiguity could spur lawsuits, leaving courts to interpret what is actually covered, A.M. Best said.

In the end, it may be up to the government to decide. A.M. Best noted that federal and state governments are looking at possibly mandating business interruption to include COVID-19 losses retroactively. But if most COVID-19 business losses aren’t covered by the primary market, the U.S. could just as easily come up with some sort of federal backstop, A.M. Best said.

A.M. Best’s full report is “Social Inflation May Affect COVID-19 Business Interruption Losses.”