Lawmaker Details Federal Reinsurance for Pandemic Business Interruption, Event Losses

New York Congresswoman Carolyn Maloney has introduced the Pandemic Risk Insurance Act of 2020, a federal backstop for pandemic-related business interruption insurance modeled after the Terrorism Risk Insurance Act.

“This is the only bill I have written that people are endorsing even before it’s introduced,” Maloney said, joined by representatives of business associations for the nonprofit, travel and retail sectors at a press briefing on March 26.

“We want to solve a market failure by allowing companies to purchase business interruption insurance that covers pandemics so that they can stay in business and keep their workers employed when they’re forced to close during public health emergencies,” she said.

In short, the bill, H.R. 7011, creates a program in which insurer participation is voluntary. Insurers that do participate would offer pandemic-related business interruption and event cancellation coverage, and they would be reimbursed by a federal backstop for some of their losses.

No losses would be paid under the program until aggregate industry insured losses exceed a $250 million aggregate trigger. The federal share of losses would be 95 percent of insured losses above each insurer’s deductible defined under the program. The insurer deductible is defined as “the value of the participating insurer’s direct earned premiums during the immediately preceding calendar year, multiplied by 5 percent.”

The bill establishes a $750 billion annual aggregate cap for federal compensation. If losses exceed the cap, the Secretary of the Treasury is authorized to determine the allocation of pro-rata payments beyond the cap.

The bill includes language relating to coverage of event cancellations in addition to business interruptions. The event cancellation insurance in this bill has been expanded from an earlier draft to include additional event types such as competitions, sporting events, film and television productions and award shows that were not listed before.

The three industry representatives speaking during the press conference thanked Maloney specifically for the event cancellation provisions. “This is absolutely vital, not just for the retail industry, but for hotel and lodging, for the travel industry and for convention bureaus and for cities. These business sectors hold large conventions and generate billions of dollars annually, not just for their organizations but for the cities and locales which host [them],” said Leon Buck, of he National Retail Federation, noting that canceled events cause “a devastating ripple effect and a sharp decline in revenue that [is] virtually irreparable.”

Given the possible resurgence of COVID-19 in the fall, something which Maloney mentioned in her remarks, a more significant change would seem to be the specification of Jan. 1, 2021 as the date which applies to define of a covered public health emergency, which was absent in earlier drafts.

A covered public health emergency is identified as means any outbreak of infectious disease or pandemic for which an emergency is declared, on or after January 1, 2021, under the Public Health Service Act; and that is certified by the Secretary of Health and Human Services, as a public health emergency.

“We must act now before we’re faced with another wave of coronavirus cases, which is predicted by the CDC as early as September,” Maloney said.

Pandemics Excluded

The Democratic congresswoman offered an assessment of the current situation with respect to insurance coverage that was markedly different from President Donald Trump’s reading of existing policy language.

“As we’ve all seen, the COVID-19 pandemic has caused unprecedented damage to our economy, forcing businesses across the nation to close their doors. And while [insurers] typically compensate some business owners when they need to shut down due to circumstances outside their control, like a tornado ripping through Main Street, these policies explicitly exclude pandemics,” she said.

President Trump, during an April coronavirus briefing, had a different view. “I don’t see pandemic mentioned. Now, in some cases it is; it’s an exclusion. But in a lot of cases I don’t see it,” Trump said.

The Business Interruption Group, a coalition of restaurants, other businesses and non-profits pressing for business interruption payments, represented by Louisiana attorney John W. Houghtaling II, has offered an alternative to PRIA—and to continued coverage litigation.

At a House subcommittee hearing last week, Houghtaling proposed a federal subsidy program that insurers would be allowed to opt into. Lawmakers listening to the proposal expressed some confusion over the details, but Houghtaling seemed to indicate that insurers opting into the program would pay claims under policies with and without virus exclusions, but for loss payments they made under the policies in which “the word virus appears in an exclusion,” they would receive federal reimbursement.

“We… stand with the industry that class actions or ideas that are more for lawyers than for individual rights of business owners is not the answer. But today we need big compromise. We need a win-win,” he told the committee members. “This program will work. It will avoid the litigation costs. It will avoid us, and people like me, litigating over the ashes of these businesses,” he said.

Three insurance trade groups—the National Association of Mutual Insurance Companies, the American Property Casualty and Insurance Association, and the Independent Insurance Agents & Brokers of America— have offered an entirely different proposal. rUnder their proposed Business Continuity Protection Program (BCPP) businesses would be allowed to purchase revenue replacement assistance from the government for up to 80 percent of payroll and other expenses. The program would be fully taxpayer funded and run by the Federal Emergency Management Agency.

Maloney said she had support from “more than two dozen national business and trade associations and organizations, whose members represent some of the most impacted businesses and employees…in New York and across the country.”

“That’s not going to pass,” she said when Reuters asked about the industry’s FEMA- based plan.

Maloney recalled how the New York City economy completely shut down after the 9/11 attacks. “We couldn’t build anything because insurance companies would not insure any property against terrorist attacks. You couldn’t even insure a hot dog stand,” she said, noting that the only “expensive” insurance available was from Lloyd’s of London.

“So, we came together in a strong bipartisan way to solve this problem and pass the Terrorism Risk Insurance Act….TRIA successfully unlocked the terrorism insurance market, got the economy moving again and put people back to work,” she said. “Terrorism insurance is now widely available at affordable prices and Congress has reauthorized TRIA four times with broad bipartisan support. That’s what we’re trying to do with the Pandemic Risk Insurance Act too,” she said.

Pandemics Uninsurable

Some insurance representatives believe that pandemics and terrorist attacks are very different types of events, however, and maintain that pandemics are uninsurable.

“Terrorist attacks, as awful as they are, do have limits in geography. They have limits in scope and frequency,” Jimi Grande, senior vice president of government relations for NAMIC told Carrier Management last week. “This pandemic would be like having 9/11 every day for 60 days or 90 days,” he said, also pointing to a misalignment of goals for risk-based insurance underwriting and responding to a public health crisis response.

A new white paper released by the insurance industry explains why the industry believes pandemic risks are “inherently uninsurable and discusses the “potential systemic risk to the economy if the property casualty insurance industry were forced to insure COVID-19.”

The paper concludes that the magnitude of potential losses exceeds the claims paying resources of the industry. However, it appears to leave the door open for some involvement of the private insurance industry. While any solution involving the financing of pandemic-driven business continuity losses “will necessarily require widespread government protection,” the paper says, this government involvement could, in turn, “encourage increased innovation of specialized products by private insurers and reinsurers.”

The paper was released by the American Property Casualty Insurance Association (APCIA) and Dr. Robert Hartwig, director of the Risk and Uncertainty Management Center at the University of South Carolina’s Darla Moore School of Business.