Author: HPS_III

In case you missed it, a Michigan judge dismissed earlier this month COVID-19 business interruption claims brought by two restaurants. As this JD Supra article explains, the court found that business interruption (BI) policy only covers direct physical loss of or damage to property, and that since the policyholder alleged only loss of use of the restaurants, the policy did not apply. Most importantly, the judge further ruled that the policy’s virus exclusion would apply even if physical loss or damage had been alleged. 

Additionally, in response to policyholders’ attempt to circumvent the application of the virus exclusion by claiming that government orders, or civil authority—not COVID-19—caused the loss of use of the restaurants, the court was unequivocal in response: 

• This line of argument is “simply nonsense, and it comes nowhere close to meeting the requirement that there has to be some physical alteration to or physical damage or tangible damage to the integrity of the building.”

To get the facts on business interruption, visit fairinsure.org.

Earlier this month, former insurance regulator and legislator Howard Mills added his take to the current debate surrounding business income (interruption) insurance (BI). Mills argues that the important role of insurers in driving the economic recovery should not be jeopardized by proposals to retroactively rewrite BI policies. 

“These legislative efforts to abrogate insurance contracts, if successful, would destroy the property/casualty insurance industry, turning COVID-19 into something it is not: a solvency-threatening event for the American P/C industry.”

As the former New York state superintendent of insurance and former deputy minority leader of the New York State Assembly, Mills has a unique insight into both the insurance and policymaking worlds. He argues:

• Pandemics are uninsurable. “Pandemic is an excluded loss in the standard business interruption insurance policy because it is an uninsurable event. Business interruption insurance covers financial losses, such as lost income or operating expenses, when a business cannot function because of physical damage to a commercial property—think fire, hurricane, tornado or damage caused by civil unrest.”
  

• Efforts to rewrite BI policies would delay the recovery from COVID-19. “What those who would retroactively force insurers to cover pandemics through BI policies need to understand is that this would devastate industry surplus and jeopardize the financial stability of the property/casualty industry and further damage the U.S. economy and delay the recovery.”
  

• Proposals to force insurers to pay for uncovered risks are grounded in a lack of understanding of insurance, and would only serve to enrich trial lawyers. “As a former New York state legislator and superintendent of insurance, I was not surprised to see these ill-conceived attempts to hold insurers liable for risks they had not insured. The ‘deep pockets’ of insurers are a tempting target for those who may not have a deep understanding of how risk-transfer works—or in the case of trial lawyers, simply represent a gold mine of personal gain.”
  

Read Howard Mills’ full column here, via Best’s Review.

Recently, there has been a surge of policy proposals calling for action from the federal government to provide financial relief to businesses that have suffered losses due to the COVID-19 pandemic. This policy debate—happening among the insurance industry, policymakers, and other stakeholders—is critical as only the federal government has the financial capacity to cover losses from pandemics and to protect businesses from similar future events.
 
As a reminder, standard business interruption (BI) policies necessitate direct physical damage to cover claims and were never meant to cover pandemics, considering the scale of such an event. Forcing insurers to cover these losses would jeopardize the industry’s solvency and hence its ability to meet its promises to policyholders.

Here’s what stakeholder experts have said on the exclusion of pandemics from BI insurance:
 

• Attorneys General Mike Hunter of Oklahoma, Steve Marshall of Alabama, Doug Peterson of Nebraska, Kevin Clarskson of Alaska, Alan Wilson of South Carolina, Curtis Hill of Indiana, and Ken Paxton of Texas, in a letter to the White House: “The risk of pandemics is typically not included in the price of business interruption insurance policies. As the name would imply, those policies cover a business’s losses due to suspended operations. What may not be obvious from the name is that those policies typically require physical loss. This requirement exists because the policy is written and priced to cover events that cause direct physical damage, like fires or weather events.”
  

• David Sampson, American Property Casualty Insurance Association (APCIA) President & CEO: “Business interruption insurance covers the financial impact of an interruption to the normal course of business caused by physical damage to a commercial property, such as a fire. Since viruses, like COVID-19, do not cause physical property damage, they are not typically covered under this insurance. In the vast majority of cases, insurers did not price policies to include such coverage, and policyholders did not pay premiums to have this coverage.”
  

• John Dowd Jr., Dowd Agencies President & CEO: “Obviously COVID isn’t covered — the loss that triggers business interruption has to be the result of physical damage to the property. The problem with COVID is that’s not physical damage; it’s a virus. It’s specifically excluded, like other transmittable diseases. The way it’s worded, it’s not a coverage situation. As a matter of fact, the insurance industry cannot cover something like that because they can’t estimate the catastrophic potential of such a situation.”
  

• Larry Hogan, Maryland Governor: “Certain risks of loss are just too great for insurers’ underwriters to price at a level that allows for protection of basic insurance coverage needs to be affordable. For this reason, these types of risks have always been excluded from property and casualty insurance policies including the risks associated with pandemics and virus going back to the SARS and swine flu events of more than 10 years ago.”
  

• Mike Causey, North Carolina Insurance Commissioner: “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. 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.”
  

• Sean Kevelighan, Insurance Information Institute (Triple-I) CEO: “What we are experiencing economically is unprecedented as it is impacting every single state, and all of the economies within are being negatively impacted – at the same time. With that type of impact, it is not possible to offer insurance, and for this reason pandemics are not included in standard policies. For times like these, it is essential that we look to the government for assistance. Thankfully, the United States government has and continues to present financial relief for Americans.”
  

• Thomas Wade, American Action Forum (AAF) Director of Financial Services Policy: “At a fundamental level, the insurance industry is not designed to address such widespread problems as the coronavirus. Insurance works by pooling risk. The fact that policies against fire damage are so universal, combined with the fact that incidences of fire damage are relatively rare, allows the insurance industry to provide fire insurance payouts to those who need it at the cost of a low premium to the entire population that pays for it. Here, neither of those factors are true. Pandemic insurance is not widespread, but more crucially the impacts of the coronavirus are not localized. It would not be possible to build an insurance industry that might have to pay claims to the entire country at a single point in time.”
  

For more information and resources, go to fairinsure.org.

We wanted to make sure you saw the recent court ruling by Michigan’s 30th Circuit Court that sided in favor of insurers and rejected restaurants’ business interruption claims, as covered in the Insurance Journal. 

With Judge Joyce Draganchuk stating that the virus did not cause physical damage to the plaintiffs’ property, this ruling is a definitive outcome in that insurers are not liable for financial damages caused by virus closure orders. This marks the second ruling in as many months to chart the historic legal precedent set years prior, along with several other instances of cases already being withdrawn. The judge’s interpretation is consistent with the approach of other states and should play a pivotal role in shaping future decisions. 

A few key highlights from the case are below: 

• “Draganchuk rejected the central argument made by plaintiff’s attorney Matthew Heos: that the government order that restricted business to dine-in only amounts to a physical loss because the order effectively blocks public entry to the property. ‘That argument is simply nonsense,’ [Judge Draganchuk] said.”
  

• “‘There has to be something that physically alters the integrity of the property,’ she said. ‘There has to be some tangible, i.e. physical, damage to the property.'”
  

• “Draganchuk recited one of [the insurance industry’s] main points during her oral ruling — that the virus harms people, not property.”
  

For more information and resources, go to fairinsure.org.

Former New York state superintendent of insurance Howard Mills shared his perspective with Best’s Review on the importance of a strong insurance market for the U.S.’ economic recovery from the pandemic. Similarly, Forbes contributor Joshua Stein published an article explaining business interruption (BI) insurance and why contracts do not cover pandemic losses. The articles shed light on the following key points:

• Standard business interruption insurance policies necessitate direct physical damage to property and are not designed to cover losses from pandemics.
  • “Pandemic is an excluded loss in the standard business interruption insurance policy because it is an uninsurable event. Business interruption insurance covers financial losses, such as lost income or operating expenses, when a business cannot function because of physical damage to a commercial property—think fire, hurricane, tornado or damage caused by civil unrest,” writes Mills. “These losses, which insurers pay out claims for every year to re-build American businesses, are limited to specific areas and time frames and thus make the spreading of risk possible and, as a result, business interruption insurance is readily affordable. This is how insurance works.
  • “Business interruption coverage is not a stand-alone insurance policy that covers just any interruption of business. If such a policy were to exist, how would one define the interruptions of business that trigger coverage?” reports Stein. “It’s just not practical for an ordinary property insurance policy to cover every possible business interruption, except one arising from direct physical loss.”
    

• Retroactively forcing insurers to cover losses from pandemics threaten the solvency of the market, hence prohibiting it from covering existing contracts and helping rebuild the economy.
  • “What those who would retroactively force insurers to cover pandemics through BI policies need to understand is that this would devastate industry surplus and jeopardize the financial stability of the property/casualty industry and further damage the U.S. economy and delay the recovery. Business owners would not have the ability to purchase affordable BI insurance and would be deprived of coverage when non-pandemic disaster strikes,” says Mills.
  • “Any such retroactive rewrite of insurance policies would be just like retroactively revising a construction contract to say that the contractor must build a two-story house instead of the one-story house the contract required, but the contractor can’t charge a penny more for the extra work. It makes no sense at all,” reports Stein.
    

• Trial lawyers are looking to exploit a “gold mine of personal gain” with “ill-conceived” lawsuits targeting insurers instead of meaningful relief for small businesses.
  • “As a former New York state legislator and superintendent of insurance, I was not surprised to see these ill-conceived attempts to hold insurers liable for risks they had not insured. The “deep pockets” of insurers are a tempting target for those who may not have a deep understanding of how risk-transfer works—or in the case of trial lawyers, simply represent a gold mine of personal gain,” shares Mills.
    

For more information and resources, go to fairinsure.org.

Yesterday’s announcement of a new lawsuit from plaintiffs attorneys pits minor league baseball franchises against their insurers and marks another misguided attempt to force business interruption policies to retroactively cover uninsured pandemic claims.

As industry experts and early court decisions have emphasized, business interruption claims require physical damage. Below are some expert perspectives to consider:

• Losses resulting from a pandemic were never intended to be covered by business interruption policy, considering the scale of such an event. “Business interruption coverage due to a virus outbreak has been excluded from standard policies issued to business owners across the insurance industry for quite some time,” said Ryan Ankrom, a spokesman for Nationwide Mutual Insurance Co., which insures some of the teams. “The risk for such an event is so vast, including it in standard coverage would make such coverage unaffordable or even unavailable.”
  

• Forcing insurers to cover losses from a pandemic would jeopardize the solvency of the insurance industry, making it impossible to meet the covered needs of policyholders. “Companies with 100 employees or fewer could see losses of as much as $431 billion a month, the American Property Casualty Insurance Association estimated without breaking down how much would be covered by insurance,” reported Bloomberg Government. “That’s nine times as much as the $47 billion the industry said it paid for covered losses from the 9/11 terrorist attacks, when only a third of claims were for business interruption, according to the Insurance Information Institute.”
  

• A New York federal court ruled against a preliminary injunction request to require an insurer to pay for the plaintiff’s losses from the pandemic, affirming viruses are not a form of direct physical damage—a requirement for BI coverage. “New York law is clear that this kind of business interruption needs some damage to the property to prohibit you from going.  You get an A for effort, you get a gold star for creativity, but this is not what’s covered under these insurance policies.”
  

• The National Association of Insurance Commissioners noted that business interruption policies are not “priced or designed” to cover claims in a pandemic: “Business interruption policies were generally not designed or priced to provide coverage against communicable diseases, such as COVID-19 and therefore include exclusions for that risk. Insurance works well and remains affordable when a relatively small number of claims are spread across a broader group, and therefore it is not typically well suited for a global pandemic where virtually every policyholder suffers significant losses at the same time for an extended period.” 3/25/20
  

• In an April 2020 letter, Sens. Scott, Crapo, Tillis, Rounds, Toomey, Sasse, and Perdue explained the consequence of forcing insurers to pay uncovered pandemic claims: “If the insurance industry were now forced retroactively to cover perils that were never accounted for, commercial insurers could experience significant economic strain and/or insolvencies, given the magnitude of the current cumulative estimated claims. Adding another point of stress during these times, this would likely put our businesses in an even worse position – draining the U.S. insurance reserves to pay these claims could leave us in a position of having inadequate reserves to cover claims that are actually intended to be covered, such as damage from wind, fire, hail, and other covered perils.”

Only the federal government has the financial capacity to provide the critical relief that businesses and minor league baseball clubs need now and to protect them from similar events in the future.
 
For more information and resources, go to fairinsure.org.