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.