Unprecedented.

That’s the word that keeps popping up everywhere over the past few weeks. Honestly, I can’t think of a better word for what is happening all around us lately but I am not even sure it portrays the catastrophic magnitude that the COVID-19 crisis is having on businesses and their employees.  The layoffs, furloughs, closings and bankruptcies are unlike anything our economy has seen since the Great Depression yet the speed and worldwide impact is far worse than what happened in the 1930’s. Perhaps worse yet is that this seems only the beginning and that the economic impact will exponentially grow in the months ahead as business remains interrupted.

Some businesses carry business interruption insurance, coverage designed to provide money to offset one’s economic losses after a covered loss such as a fire or hurricane impacts their ability to operate in the same manner as before the loss. In some cases one’ business insurance can also help provide lost revenue when a civil authority (the government) demands the business close as happened in the days before and after 2017’s Hurricane Irma in places like Miami Beach when the city issued an evacuation order. These coverages are designed to provide for lost revenues and expenses such as payroll, one’s rent or mortgage, employee benefits and other such costs while one is rebuilding their business following a loss.

This topic of business interruption has been in the news a good bit in recent weeks and I suspect that you will hear far more about it in the weeks and months ahead. We have posted articles about it on our Business & Benefit’s blog, http://morrisandreynolds.xyz/the-coronavirus-your-businesss-insurance/, for our business clients and we are suggesting that those businesses that have been interrupted file claims so as to allow their insurers to make a definitive decision about their coverage while also explaining that most policies have long had exclusions for perils such as ‘virus or bacteria’ dating back to the SARS and EBOLA viruses or even the Anthrax scare. Insurance policies are legal contracts and they include a range of exclusions for a variety of reasons. In the case of things like war, a nuclear disaster or a pandemic’s virus most property and liability insurers long ago deemed such risks too large to cover. That’s also true with most flood losses, crop failures and terrorism attacks.

Litigation concerning insurance disputes is unfortunate but not, of course, unprecedented. In fact, litigation on a range of topics related to COVID-19 have already begun all over America and some seek to question whether an insurer can decline a claim by relying upon an exclusion  for ‘virus’ as a covered peril, questioning whether the business suffered the typically required ‘direct damage’ to tangible property and other elements of their insurance contracts. These cases and the others to follow will be important to watch in light of the magnitude of the crisis and whether courts will somehow overlook exclusions or other wording.  

And speaking of this question of ‘direct damage’, thanks to my friend Dean Milber from California, the Director of claims at Lancer Claims Services, for pointing out that within its recent Emergency Order Broward County stated; “Whereas, this Emergency Order is necessary because of the propensity of the virus to spread person to person and also because the virus is physically causing property damage due to its proclivity to attach to surfaces for prolonged periods of time.” It’s likely not a coincidence that Broward used that wording and did so try and help businesses ‘trigger’ their coverage for business interruption claims.  

Although many are likely to find that their insurance includes such standard exclusions countless businesses and trade groups are rightfully concerned about the fact that the virus and various government mandates are causing them to lose unprecedented revenue and creating dire business losses. According to the American Property Casualty Insurance Association business interruption losses from COVID-19 are estimated to range between $ 200 and $ 383 Billion per month and could lead to as many as 30 million claims from small businesses suffering from COVID-19’s impact. To put this into perspective that range of losses would equal somewhere between ¼ and ½ of the entire property casualty insurance industry surplus that is on hand to pay claims. In one month. To look at this another way, in 2005 the industry processed a record three million claims from Hurricane’s Katrina, Rita, Wilma and other storms.  Or, for that matter, consider that within the recent Federal government’s $2 Trillion CARE Act there is a $ 359 Billion SBA ‘forgiveness’ loan program, an amount within the likely range of just one month of the losses business face while being interrupted from the virus.

This is certainly an unprecedented interruption of commerce and one that could last many months, even a year or longer until a vaccine is invented. And until a solution is found many businesses are in truly terrible trouble. In addition to folks filing claims and in some cases lawsuits there is a growing movement all over America to create, here’s that word again, unprecedented, legislative solutions. I can’t recall a situation where a government retroactively required insurers to change their contracts and cover a loss after the fact but it is clear that efforts are now underway to try and make exactly that happen.

Members of Congress, for example, recently sent a letter to four insurance industry trade organizations urging insurers to retroactively provide business interruption coverage for COVID-19.  According to the letter, the congressmen argued that COVID-19 fulfills the requirement of “direct physical loss” or damage to property and local curfew and “shelter in place” orders trigger civil authority coverage as well.  Insurers were urged to accept claims for business interruption caused by COVID-19 related shutdowns.

State legislature’s all over America (New Jersey, Ohio, California and others) are also discussing potential state mandates including a New Jersey bill, A3844, which would retroactively demand that business interruption coverage include losses from COVID-19.

The City of Boston has also now filed proposed legislation that seeks to retroactively change business insurance contracts to demand they cover COVID-19.

Some within the insurance industry have responded by saying such actions will bankrupt some insurers while others suggest it unconstitutional. Interestingly the proposed law would seem to require insurer’s to pay a claim, seek reimbursement from the state’s Commissioner of Insurance and then over-time pay the state back.

To those that know me they know that I am not an apologist for the insurance industry or insurance companies. Insurers are nearly all profit seeking businesses and the products they sell, insurance contracts, competently cover some things (the horrific losses from 911 for example) and consciously exclude others. The perspective by many within the industry that they are very worried about being made to cover losses they have (or thought they had) contractually excluded will not surprise you but are worth noting in light of all else that is in motion on this topic all over our country right now. From a fine article last week on all of this from the folks at the Insurance Journal that you can read here you find these perspectives on such a mandate;

“Pandemics are an extraordinary catastrophe that can impact nearly every economy in the world, so it is hard to predict and manage the risk. Pandemic-caused losses are excluded from standard business interruption policies because they impact all businesses, all at the same time. The exclusions for pandemic-caused losses have been incorporated into standard business interruption policies for years.”
Sean Kevelighan
CEO
The Insurance Information Institute

“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.”
Charles M. Chamness
President and CEO
National Association of Mutual Insurance Companies

And speaking of possible government solutions there is also a recent congressional proposal to create a Business Continuity and Employee Protection and Recovery Fund within the U.S. Department of the Treasury. The Fund is modeled after the September 11th Victim Compensation Fund, operated by the federal government and run by a presidential appointee with the authority to enter into contracts with interested businesses to administer the Fund and facilitate the distribution of federal funds to affected businesses. The Fund is meant to protect lost wages for employees unable to work because of COVID, preserve jobs through payroll assistance for closed businesses that continue to retain their employees, and prevent businesses from insolvency.

I don’t yet know how these or other current legislative steps will unfold but I will venture a strong educated guess that a federal Pandemic Insurance Program will be created or that the Terrorism Risk Insurance Act will be expanded to include pandemics or, perhaps, to even use the surplus it has today towards business interruption claims from COVID-19.  I was very proud of how the insurance industry paid its claims from the terrorist attacks of 911 but following that horrific day was not surprised that insurers decided to cease covering such losses and that doing so led to 2002’s Terrorism Risk Insurance Act, commonly known as TRIA, that the Bush Administration created to offer coverage for terrorism losses.

The federal government has long filled gaps within the private insurance market for risks deemed too large for private insurers to cover no matter the premium they charge. The National Flood Insurance Program, created six decades ago and today part of FEMA, is one example and is used to cover flood losses. The Federal Crop Insurance Program is another example, one that helps protect America’s farm and agricultural industry. For decades there was even a Federal Crime Insurance Program that was used to provide theft coverage in areas, often within large cities, that the private industry could not insure at a reasonable cost. And let’s not forget mentioning the many state programs such as Florida’s Citizens Property Insurance Corporation that’s used to offer windstorm coverage or the California Earthquake Authority as yet another example of government insurance programs to cover risks the private industry believes too large to insure.   

For over two decades since Hurricane Andrew devastated much of South Florida I have suggested a National Catastrophe Insurance Program that bundles all of the existing federal insurance organizations into one entity. Such a program could be used to insure those losses deemed simply too large for the private insurers to comfortably, or affordably, cover such as windstorm, flood, terrorism, crop and so forth. Let’s throw wildfires and earthquakes in there too along, of course, with pandemics. It’s logical to think that there’s got to be an economy of scale by incorporating the various existing state and federal governmental programs and their bureaucracies into one entity. If now is not the time to consider a National Catastrophe Insurance Program I can’t imagine what more it would take to see the benefit to so many in our society.   

I believe that some sort of Pandemic Insurance Program will be created to offer business interruption coverage in the future for the type of losses that COVID-19 is causing but what’s important today is finding solutions to help businesses right now. Standard policy exclusions or lengthy, perhaps, unsuccessful litigation would not seem the answer. I’d not be surprised, and in fact would favor, to see some sort of private/public partnership fund created between insurer’s and the government to help businesses right now. These are unprecedented, dire, times and they call for unprecedented, creative, solutions that will sustain all aspects of America’s economy.     

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