Can Insurance Save Our Economy from COVID-19?

As the COVID-19 pandemic evolves, business interruption claims have become a national topic.  Pundits, insurance commissioners, trade spokespersons, national legislators, and even POTUS are weighing in on whether existing insurance contracts are enforceable by businesses now experiencing losses due to mandatory civil closures and other pandemic-related causes.

President Trump, speaking at a daily White House Coronavirus Task Force Update in early April, said that while some insurance policies specifically exclude pandemic coverage, “in a lot of cases, I don’t see it. I don’t see reference, and they don’t want to pay up. I would like to see the insurance companies pay if they need to pay.” These comments sent many lawyers to the courthouse to file a plethora of unwarranted lawsuits and burdened insurer’s across the country with defending the facts of the policy against the president’s implication that the “coverage” exists and they should “pay up”.

The question, though, isn’t whether it would be great for the economy if insurers swooped in and cleaned up the whole economic fall-out of an unprecedented national pandemic. The question is whether existing policy language creates a contractual obligation for insurers to pay and a bigger question of, Can they afford to pay?

Are COVID-Related Interruption Claims Covered By Existing Policies?

Feasibility aside for the moment, most “all-risk” policies wouldn’t cover these losses because, as we understand but the general public does not, pandemic-related losses do not cause “physical property damage”, a required trigger on most commercial policies for the extension of coverage for business interruption claims.  Plaintiff insureds might allege that the virus itself is a hazardous substance, and its presence at the business location constitutes property damage.  This strategy might mirror federal cases in New Jersey, Oregon, and New Hampshire, where the presence of ammonia or other harmful gases was found to be “property damage”.  However, if a plaintiff’s own house, car, church, grocery store, and every other place in the country is also filled with the same harmful substance (the virus), could one argue that subrogation needs to be equally extended to all of the above parties for contributing to the loss…the argument sounds as ridiculous as the strategy. 

Unfortunately, there may be more pressure on insurance companies to wave magic wands and fix the economy.  Class action lawsuits over denied business interruption claims are forming and lining up in court to be heard (to name just a few:  Bridal shop class-action over biz interruption claim denial; Pizza restaurant class-action; Midwest restaurants class-action; New Jersey restaurant class action). A Texas plaintiff movie theater is now suing Lloyd’s of London over a $1 million policy with a specific endorsement for pandemics caused by SARS-mutated viruses, which COVID-19 is.  After witnessing Ebola, Lloyd’s created this policy endorsement to plug the pandemic loophole, although hardly anyone could have imagined business interruptions on our current global scale.  Lloyd’s denied the theater’s claim because the endorsement doesn’t explicitly mention COVID-19, but this kind of hair-splitting over undefined policy terms can only be settled by expensive litigation and attracts negative press and political attention.

A group of small businesses in California is trying a different approach to their losses.  They filed a class-action suit against China, alleging business losses due to the COVID-19 pandemic.  Don’t hold your breath on that one.

Can Insurers Fund a National Bailout Via Interruption Claims?

On March 26, the Association of Property and Casualty Insurance estimated that business-closure losses for employers with fewer than 100 workers would total $220 billion to $383 billion per month. Then on April 6, those numbers were updated to $255 billion to $431 billion. (Note: these projections are ALL losses, not just those suffered by businesses that had purchased business-interruption coverage. Still, those are huge numbers, and more than the insurance industry could possibly absorb.

As North Carolina Insurance Commissioner Mike Causey said in his April 17 letter, “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,” Causey said.

Causey went on, “Insurability requires that loss events are due to chance and that potential losses are not too heavily concentrated or catastrophic. This is not possible if everyone in the risk pool is subject to the same loss at the same time.”

Legislative Response To Denied COVID Claims

Legislators are scrambling to transfer businesses losses to insurers, even if they have to essentially re-draft existing insurance contracts.  Mike Thompson (D-CA) and eight Democratic co-sponsors have introduced House Resolution 6494, which would require insurance companies to offer interruption insurance for any viral pandemic.  It also appears from the language on its face that coverage exclusions in existing policies for business interruptions caused by viral pandemic, including our current COVID-19 pandemic, would be rendered void.

While this partisan effort from California might win applause from the sponsors’ constituents, it’s doubtful that the courts would support this unilateral attempt to rewrite existing contracts.  This House Resolution appears more grandstanding than a serious attempt at legislating since it’s almost certain to fail.

Representative Carolyn Maloney’s (D-NY) work-in-progress, a Pandemic Risk Insurance Act (“PRIA”), appears somewhat more likely to succeed.  This proposal would bring in the federal government to share risk on future business interruption policies, similar to our existing Terrorist Risk Insurance Act.  Some in the insurance industry have responded that paying all pandemic-related business interruption claims would wipe out reserves and preclude paying any other types of claims.

The future of this proposed legislation, and the growing number of lawsuits over denied claims, is uncertain.  For now, we wait to see the outcomes.  Meanwhile, the economic fallout from COVID-19 mounts and the cost of defending against these claims will only continue to rise.