Breaking the Rules

Despite requirements in business interruption policies that physical damage occur and exclusions for communicable diseases, legislators in four states are demanding that insurers pay business interruption claims.

Bills in the legislatures of New York, Massachusetts, Ohio and New Jersey, if passed, would require insurers to cover claims for companies with between 100 and 150 employees, depending on the state.

“Consumer advocates and political activists are saying the insurance industry must step up and absorb business income losses, maintaining that this is what business interruption insurance is for, whereas the industry is responding that it never underwrote or reserved capital for pandemic-induced business interruption losses,” says attorney Dan Rabinowitz, partner and chair of the insurance group at law firm Kramer Levin Naftalis & Frankel. “For the time being, both sides are at an impasse.”

An Unfair Burden

The insurance industry is not completely off the hook for substantial virus-linked losses in several lines of business. If insurance carriers in the four states were compelled to absorb business income losses that their contractual obligations do not require, the American Property Casualty Insurance Association estimates, the expense could reach an alarming $383 billion per month. For the most part, industry participants are sanguine that state legislators will not achieve their aims.

“Legislative efforts to retroactively change contracts are ill-advised and have been struck down by the courts in the past,” says Joseph Peiser, executive vice president and global head of broking at Willis Towers Watson. “While we recognize that these are unprecedented conditions, our general expectation is that clients should not rely on this happening.”

Agreeing with this position is Robert Hartwig, associate clinical professor of finance at the University of South Carolina’s Darla Moore School of Business. “The contractual language is crystal clear,” says Hartwig, former chief economist at the Insurance Information Institute. “There will be no coverage forthcoming for companies with business interruption coverages that exclude losses due to viral and bacterial contagion.”

Nevertheless, the U.S. Congress on March 18 reached out to The Council and three other major insurance trade groups to request that the industry recognize financial loss due to COVID-19 as part of policyholders’ business interruption coverage.

The leaders of the four trade associations, while sharing the government’s commitment to finding solutions to the ongoing economic debacle, responded that business interruption policies “do not, and were not, designed to provide coverage against communicable diseases such as COVID-19.” They further pointed out that the insurance industry’s policies are “vetted and approved by state regulators.”

The National Association of Insurance Commissioners, an organization composed of state insurance regulators, affirmed this role, commenting that business interruption policies were neither designed nor priced (in most cases) to provide coverage for a coronavirus and, in fact, exclude this risk.

“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 stated. 

Hartwig concurs. “Putting insurers on the hook for claims they never collected a single penny for will create chaos, to the point that the business interruption insurance market will disappear overnight,” he says.

Bridging the Divide

Many insurance brokers feel stuck in the middle between clients hurting from the business impact of COVID-19 and insurance policies that do not provide these businesses with a financial recourse.

“We understand the fear and uncertainty our policyholders feel,” says Bumpy Triche, president of the Mid-South region at Arthur J. Gallagher. “The number of companies impacted is astounding. We also understand why some legislators are in a rush to find a vehicle to provide relief and recognize why they look to insurance to be that vehicle. Historically, the industry has been the front line in a catastrophe, providing capital to help businesses reopen and communities rebuild. But retroactively redrafting contracts is a frightening and dangerous precedent.”

There’s still an important role the industry can play, by participating in an insurance solution with government and industry to ensure the next pandemic doesn’t take the wind out of the sails of so many businesses, Rabinowitz says.

“We need a thoughtful and nuanced approach, whereby the industry’s unique architecture to assess business risks, measure exposure frequency and severity, collect premiums, and pay claims is brought to bear, with the federal government absorbing the bulk of catastrophic losses by spreading these costs across society,” he explains. “If a viable private-public solution gets traction, there will be less pressure on legislators in the four states to continue with their demands.”

He adds, “You can’t rewrite insurance policies to cover something they don’t.”

Read our related feature story, Searching for True North.