That the insurance industry alone can’t be expected to cover future pandemic risk seemed to be a given at yesterday’s hearings by the House Finance Subcommittee on Housing, Community Development, and Insurance.
But, as is so often the case, the devil is in the details.
The session – Insuring Against a Pandemic: Challenges and Solutions for Policyholders and Insurers – was chaired by Rep. William Lacy Clay. In his opening statement, Clay said, “It is not realistic or practical to expect the insurance industry to shoulder the astronomical cost of a global pandemic. The American Property and Casualty Insurance Association has estimated that paying all [COVID-19-related] claims, regardless of exclusions, would amount to $1 trillion per month.”
With respect to business interruption coverage claims currently being adjudicated, Clay referenced both the virus exclusions in most commercial property policies and the lack of “direct physical damage or loss” in COVID-19-related cases.
John Doyle, president and CEO of global insurance broker Marsh, testified on the importance of a public-private partnership to address pandemic risk, as well as to the need to “act now” on a solution for future pandemics.
“Acting now on a public-private pandemic risk solution will accelerate the economic recovery by reducing uncertainty,” Doyle said. “Moving forward, capital markets will seek assurances that companies have protection against prospective pandemic risk. The pace of recovery will depend upon the nature and degree of confidence in the marketplace.”
Doyle said the credit and power of the U.S. government is essential – “at the same time, I believe the insurance industry has a role to play.”
The Pandemic Risk Insurance Act (PRIA), introduced by Rep. Carolyn B. Maloney of New York, provided the jumping-off point for the testimonies and discussions of alternative proposals. PRIA, patterned after the Terrorism Risk Insurance Act (TRIA) put in place after the 9/11 terrorist attacks, was generally recognized as a good start – but several other structures were proposed to address perceived weaknesses.
One is the Business Continuity Protection Program (BCCP), advanced by the National Association of Mutual Insurance Companies (NAMIC), the American Property Casualty Insurance Association (APCIA) and the Independent Insurance Agents & Brokers of America (Big “I”).
Brian Kuhlmann, chief corporate counsel for Shelter Insurance, speaking on behalf of NAMIC and APCIA, described BCCP as a program that “would provide straightforward revenue replacement for businesses and nonprofits of all sizes” using a parametric approach that wouldn’t require claims adjustment. Unlike traditional insurance, which pays for damage if it occurs, parametric insurance automatically pays when specific conditions are met – regardless of damage incurred.
Michelle Melendez McLaughlin, chief underwriting officer for the small commercial and middle market at Chubb, presented a “bifurcated” framework that would treat small businesses differently from mid-size to large corporations.
“Pandemics affect small and large businesses differently,” she said. The Chubb framework would cover small companies for up to three months of payroll and other expenses. Policyholders would be paid a pre-determined amount when the policy is triggered. “This provides policyholders with certainty that they will receive timely financial assistance after an event.”
For businesses with more than 500 employees, the Chubb proposal would create Pan Re – a federal reinsurance facility. “Private insurance companies that choose to sell coverage would write pandemic policies at market terms and retain some portion of the risk. The rest of the risk would be reinsured through Pan Re.”
R.J. Lehmann, senior fellow at the International Center for Law and Economics, agreed with other witnesses that the insurance industry isn’t equipped to handle pandemic risk alone. He went further to question whether insurance is the best structure for addressing this problem.
“Insurance is a system of risk transfer, not a system of economic relief,” Lehmann testified. “Even if private insurers could provide this coverage—on their own or with government support—it is not clear their incentives would align with public health goals or with the aims members of Congress likely have in mind.”
The best argument for a public-private partnership, he said, is that insurers can help policyholders mitigate risks. “But it’s important to ask, ‘Mitigate the risk of what’? The risk you’re trying to reduce is the risk that a business will shut down. But, in a pandemic, you want businesses to shut down. We want them to have a safety net so they can shut down and survive.”
Hartmann counseled legislators to take their time and get the solution right, drawing from all the options that exist.
“Let’s be humble about how little we know, even about the current pandemic,” he said. “Get help to the businesses, workers, and communities who need it now. Don’t legislate for the next pandemic while we’re in the midst of the current one.”
By James Ballot, Senior Advisor, Strategic Communications, Triple-I
It’s been more than eight months since COVID-19 first struck the U.S., and millions of small business owners are still hurting. All the while, a few plaintiffs’ attorneys are treating the pandemic as another opportunity to profit from costly insurance litigation.
At a time when businessowners are looking for leadership to bring much needed financial support, these same attorneys are hoping legislators and judges will help them retroactively rewrite business income (interruption) (BI) insurance contracts. One key figure in this effort is John Houghtaling, a New Orleans-based plaintiffs’ lawyer who was featured in a recent Bloomberg Businessweek profile.
Adds Michael Barry, Head of Media and Public Affairs, at the Insurance Information Institute, “Not one business interruption insurance policy in the U.S. was written on the assumption nearly every business would be interrupted at the same time.” Barry adds, “This is why regulators and judges are consistently siding with insurers who argue direct physical damage to property is needed to trigger a business interruption policy.”
Irrespective of insurers’ and trial attorneys’ competing points of view, the authors of the Bloomberg Businessweek article cite the need for timely and decisive action: “A yearslong legal battle might not be much help to struggling businesses,” the article states. As the end of 2020 approaches, litigation seeking to compel insurers to cover pandemic-related income losses appears likelier to further the lawyers’ interests as opposed to those of businessowners seeking financial support.
Other potential solutions are on the table, most of which are taking shape around the idea that the federal government is the only entity with the reach and financial resources to help businesses recover from an event the magnitude of a global pandemic. On this point, a growing consensus of legal scholars and insurance industry experts concur, with Stefan Holzberger, AM Best chief rating officer, concluding in commentary to a recent report, that “pandemic risk does not afford insurance companies any geographic diversification due to its global nature … Only a governmental program, or perhaps a public-private partnership, could provide the backstop sufficient to compensate for lost revenue to businesses.”
As a counterpoint to statements made by Houghtaling and other plaintiffs’ attorneys, Sherman Joyce, President of the American Tort Reform Association presents a competing vision for how American businesses can unite to recover economically from the COVID-19 pandemic: “Americans’ elected representatives — not the trial bar — should have the authority to regulate business within the U.S.” Joyce continues, “The courts must restore that balance of power by rejecting the dreaded return of regulation through litigation.”
By Sean Kevelighan, CEO, Insurance Information Institute
Insurers have responded quickly and effectively to 2020’s extraordinary volume of hurricanes, wildfires, and civil unrest. These events are resulting cumulatively in billions of dollars in insured claim payouts.
Yet a recent Forbes article stated that the owners of one of the largest Broadway theater chains were “shocked to learn that its insurance companies would not cover most of its losses during the COVID-19 pandemic.”
Making people more prepared and resilient is our fundamental goal at the Insurance Information Institute (Triple-I). We seek every opportunity to educate customers about how their insurance works before they suffer an insured loss. Part of this mission is to explain how pandemics are uninsurable. That’s because, unlike covered events, which are limited in time and geography, pandemics simultaneously affect everybody. This is something we’ve explained in briefings to legislators, legal experts and consumer and trade media.
Still, while insurers, regulators and the U.S. government work to deliver relief to business financially affected by future pandemics, we need to stay focused on the present. And to do this, we need to take a quick look into the past:
Insurance has been around for 350 years as a way for households, businesses and communities to recover and rebound after wildfires, hurricanes and other catastrophes. Time and again insurers have been there for their customers because that’s what they do. For example, in the months after 9/11, insurers paid out tens of billions of dollars to keep affected businesses afloat while New York and Washington, DC rebuilt from the rubble.
In 2020, insurers continue to perform their vital societal role, covering insured losses from record hurricane and wildfire seasons, as well as the most destructive civil demonstrations in more than a quarter-century. Insurance simplifies a rather complex risk management process and creates products that deliver simpler ways for people to be more prepared and resilient. Covering these hazards demands immense capital resources.
Questions? Your Policy Documents Have the Answers
Insurance is heavily regulated, and as the Triple-I reaffirmed at September’s annual summit of the National Association of Insurance Commissioners (NAIC), the industry we represent relies on a strong working partnership with regulators and government agencies across America to help make insurance work better for everybody.
One of the tangible results of this partnership is something that anybody can literally hold in their hands: insurance policy documents. Reading these documents to understand what you’re purchasing is an essential part of preparedness.
Business income (interruption) or BI insurance losses caused by a pandemic are not covered because direct physical damage, such as that caused by a hurricane or a fire, is what triggers a standard BI policy. As many courts and academics around the country have stated, neither a virus nor bacteria leads to the direct physical damage of a business’s structure. This contract language is well-established; moreover, every policy is approved by individual states before they are issued to BI policy holders.
We view it as a success when nobody is shocked by what’s covered, and what’s not, under their insurance policies. This is why the Triple-I regularly urges business owners to become familiar with their insurance documents and have regular conversations with their agent or broker to discuss anything they don’t understand.
In an age when we’re all accustomed to just clicking the “terms and conditions” box, ignoring agreements, paradoxically, has become something everybody can agree with. Social scientists consider this to be a form of cognitive dissonance: We know we should read our insurance policies, and yet few of us do. This is a behavioral pattern we’re all guilty of and the Triple-I understands there are many demands on a customer’s time.
Which brings us back to an essential point, that insurance companies prioritize their efforts and resources into making sure that everybody knows about the coverage they have and need.
Pandemics are uninsurable because insurers don’t collect premiums to cover business losses due to viruses and other pathogens. There are products available for this purpose, but an overwhelming majority of businesses decline to purchase them. These exclusions and the availability of pandemic insurance is a fact well known by many experienced professionals—notably risk managers and trial attorneys. The Triple-I is willing to work with anybody to make the public better aware of the risks and how to prepare for them.
The next pandemic surely will come. How insurers, their customers, and the federal government respond now will ensure our resources and energies are devoted to saving lives from all the threats the U.S. faces.
By John Miklus, President, American Institute of Marine Underwriters (AIMU)
While it’s not a panacea, a vaccine for COVID-19 is expected to go a long way toward reducing the number of cases and slowing transmission of the virus. Development and testing is moving at a frenetic pace, meaning that in the not too distant future a fully-approved vaccine will need to be shipped in unprecedented volumes.
Experts predict it will take anywhere from 8,000 to 15,000 fully loaded flights to transport 20 billion doses around the world. While air is often the preferred method for shipping pharmaceuticals because of time sensitivity, it’s likely that large ocean transport companies will take on some of the load.
Once a COVID-19 vaccine is approved and manufactured, cargo insurance will be imperative to ensure speedy and safe distribution. Insurance coverage for pharma products, which encompass vaccines, is widely available and written by a number of AIMU’s member companies.
When one considers the infrastructure required to ship billions of doses from manufacturing facilities to hospitals and clinics around the world, this could be one of the biggest logistical challenges in modern history. Pharma shipments such as vaccines present a number of unique underwriting challenges, including:
High valuations: According to one industry analyst, the market for COVID vaccines is estimated at $100 billion, with $40 billion in profits. Shipping companies will handle a lot of valuable inventory and pharmaceutical companies have a lot at stake. A single shipment could be valued into the millions of dollars.
Time and temperature sensitivities: Vaccines currently under development require precise handling. Some need to be stored at temperatures as low as -80C (-112F), which will require special refrigerated containers, along with rigorous temperature monitoring and quality control.
Careful packaging and handling requirements: The vaccine will require special packaging such as cold-resistant vials and boxes to hold multiple vials. Dry ice may be required, along with syringes and protective equipment for healthcare workers administering the vaccine. Besides pharmas, the vendors who supply these products will also have skin in the game.
High theft exposure: Pharma companies plan to use everything from GPS to track their product to fake shipments to confuse criminals. One glassmaker plans to use black-light verification to prevent counterfeiting. Since the start of the pandemic, tests, masks and other gear have gone missing, so it’s not a stretch to think professional thieves and cargo theft gangs will want to get their hands on a precious and valuable vaccine.
The involvement of experienced loss prevention experts is vital to provide advice on proper packaging, proper handling and storage, setting standards and procedures for transportation providers, and recommending security measures to ensure safe delivery. AIMU member companies believe in the old saying that the best loss scenario is preventing one from ever occurring.
A North Carolina court has ruled that Cincinnati Insurance Co. must pay 16 restaurants’ claims for business income (interruption) losses due to government-ordered COVID-19 shutdowns – a decision that runs counter to those of most judges who’ve ruled on similar cases.
As hundreds of COVID-19-related lawsuits regarding business interruption coverage make their way through U.S. courts, judge after judge has found in favor of insurer defendants. The central point has been that coverage depends – as specified in the insurance policies – on the policyholder suffering a “direct physical loss.”
“Business income (interruption) policies generally reimburse a business owner for lost profits and continuing fixed expenses when its facilities are closed due to direct physical damage from a covered loss, such as a fire, a riot, or a windstorm,” said Triple-I CEO Sean Kevelighan. “Insurers have been prevailing nationwide in nearly all of the litigated COVID-19 BI lawsuits because, as North Carolina’s Insurance Commissioner has noted, ‘Standard business interruption policies are not designed to provide coverage for viruses, diseases, or pandemic-related losses because of the magnitude of the potential losses.’ ”
“Policy language controls whether COVID-19 interruptions are covered,” said Michael Menapace, a professor of insurance law at Quinnipiac University School of Law and a Triple-I Non-Resident Scholar. “The threshold issue will be whether the insureds can prove their business losses are caused by ‘physical damage to property’.”
Cincinnati Insurance has said it plans to appeal the ruling.
Future of American Insurance and Reinsurance (FAIR) has released a new interactive tool to help showcase the need for a federal solution to pandemic relief. The Business Interruption Insurance “explainer” utilizes digital storytelling techniques to help clarify information about this complex topic.
The digital explainer complements the FAIR campaign’s other recently-released digital assets, including a video overview of BI and pandemics, and a primer deck that provides quantitative backing to the assertion that pandemics cannot be privately insured.
As trial attorneys attempt to retroactively force uninsurable pandemic coverage in business interruption insurance contracts, this tool is designed to show what business interruption insurance covers, how surplus helps pay for covered perils such as hurricanes and wildfires, how insurers have stepped up to help policyholders, and the need for a federal solution to the pandemic.
ABOUT FAIR FAIR is an initiative of the Insurance Information Institute and its member companies whose mission is to ensure fairness for all customers and safeguard the industry’s longstanding role as a pillar of economic growth and stability.
Commercial insurance loss estimates related to the COVID-19 pandemic vary widely, with Lloyd’s estimating global claims as high as $107 billion in 2020 and analysts from investment bank Berenberg projecting total claims between $50 billion and $70 billion.
But a new Allianz paper says the unprecedented size of pandemic-related claims is only part of the story. The paper discusses the changes in loss patterns and causes spurred by the pandemic that “may be the prologue to more far-reaching and disruptive changes in years to come.”
The pandemic has reduced risk in some areas while heightening it in others. The paper points to “material reductions [in claims] in some lines of property and liability insurance, most notably in the aviation sector.”
Reliance on technology and the shift to homeworking for staff and remote monitoring of industrial facilities make companies more vulnerable to cyber-attacks. Reduced air travel and increased emphasis on hygiene standards could benefit the risk profile of many industries, while changes in production line processes to facilitate social distancing could increase error rates.
According to Allianz, the cost of business interruption not related to COVID-19 fell in many cases as many manufacturers, their customers, and their suppliers either shut down or scaled back operations. On the other hand, COVID-19 containment measures have led to longer disruptions and more costly claims in some cases.
“For example, a fire at a chemical plant in South Korea forced the closure of the facility,” Allianz reports. “Restricted access due to the coronavirus lockdown prolonged the reinstatement period, increasing the overall cost of the standstill.”
The hibernation of some industries, such as aviation, doesn’t mean all loss exposures have equally disappeared, Allianz says. They’ve just changed, creating new risk accumulations: “For example, large parts of the worldwide fleet are grounded in airports, many of which might be exposed to hurricanes, tornados, or hailstorms. The risk of shunting or ground incidents, when large aircraft fleets are parked temporarily, also increases and can result in costly claims.”
Business resumption brings its own risks. Opening factories and restarting production lines are high-stress situations that can involve machinery breakdowns and fires.
Eye on supply chains
Allianz points to “the current rethinking and de-risking of global supply chains to achieve more operational resilience” as a trend to watch.
“Many companies are reviewing their supply chain strategies and evaluating options such as parallel supply chains with more redundancies or some reshoring from low-cost countries back to more developed markets,” Allianz says. “This will have an important impact for insurers, both in terms of generating demand for new protection solutions, as well as new claims scenarios.”
Potential also exists for claims to materialize from long-tail lines, such as directors and officers (D&O) or professional liability, as well as workers’ compensation, if any negligence or failures to adequately protect against the coronavirus outbreak have been perceived.
On September 29, the American Action Forum (AAF) hosted an event convening experts to discuss the urgency of government-backed financial relief for businesses whose incomes have suffered under the coronavirus pandemic conditions and what challenges lie ahead.
Entitled “Assessing Financial Support for Businesses During the Pandemic,” the discussion was centered on the following key topics:
The impact and success of the Paycheck Protection Program and the Federal Reserve’s emergency lending programs, particularly the Main Street Lending Program
Pandemic business interruption insurance and the potential for a federal pandemic program
Protecting businesses from shouldering excessive costs due to the new field of coronavirus litigation
Among the event participants was Insurance Information Institute (Triple-I) CEO Sean Kevelighan. In a discussion with AAF’s Director of Financial Services Policy Thomas Wade, Kevelighan provided an overview of the business interruption (BI) insurance landscape in the context of the pandemic. Key highlights included:
Global pandemics are largely uninsurable. “Compared to other covered catastrophes—hurricanes, wildfires, vandalism from civil unrest—a pandemic is not limited to time or geography. What we’re seeing now with COVID-19 is impacting every community, every economy, and all at the same time. And with this, from an industry that relies on the law of large numbers, you simply can’t price risk in a way that would be efficient.”
Standard business interruption (BI) insurance necessitates direct physical damage. “Beyond the enormity of a pandemic catastrophe, a virus does not cause direct physical damage, which is nearly always needed to trigger a property insurance policy, particularly for businesses insurance and business interruption insurance policies.”
The lack of a federal system to provide the critical financial relief businesses has created an opportunity for trial attorneys to capitalize on business owners’ desperation. “Sensing [business owners’] desperation, trial attorneys have unfortunately dusted off their playbooks and seized on the opportunity. They’re selling a false sense of hope to consumers; they’re filling court houses with litigation that is attempting to retroactively rewrite contracts by manipulation of language and interpretations.”
As insurers work to meet promises for policyholders facing covered events such as wildfires, forcing insurers to retroactively cover pandemic-related losses is detrimental to the insurance industry—a backbone of the economy. “The insurance industry is concerned about these misguided and costly attempts—mainly by trial attorneys—to take capital away that we’ve set aside for claims that are actively being paid right now as we are in the midst of extreme seasons of hurricanes and wildfires. We’ve also seen incidents of rioting and civil unrest. To be clear, our own economic analysis at Triple-I shows that any attempt to retroactively pay business interruption claims would put systemic strain on the insurance industry. Notably, this industry was one of the financial services industries that weathered our previous recession well because of how safely we manage our capital. But in this case, it would only take a matter of months to bankrupt the industry.”
More about this discussion and the broader state-of-play for business relief is available from a companion report released by Thomas Wade. For more information on the ongoing business interruption debate, visit fairinsure.org
In the U.K. case, Schupp writes, “the fundamental theme running through the insurers’ defense was that the policies only covered localized outbreaks, not global pandemics.”
“More to the point for U.S. property/casualty insurers,” says Michael Menapace, a professor of insurance law at Quinnipiac University School of Law and a Triple-I non-resident scholar, the U.K. case involved disease coverage – “an affirmative coverage not included in most U.S. commercial property policies.”
U.S. business interruption disputes so far have turned on two key policy features:
U.S. business-interruption coverage almost always requires property damage to trigger a payout.
Nearly all U.S. COVID-19-related court cases have involved policies that specifically exclude viruses.
“The U.K. court did not address either the question of property damage or the applicability of a virus exclusion,” Schupp writes.
As Menapace put it in a recent blog post about U.S. business-interruption cases, “Policy language controls whether COVID-19 interruptions are covered…. The threshold issue [for U.S. insurers] will be whether the insureds can prove their business losses are caused by ‘physical damage to property’.”