Issue: Insurance & Global Pandemics

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months to chart the historic legal precedent set years prior, along with several other instances of cases already being withdrawn.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.