Issue: Insurance & Global Pandemics

Last week, Judge Douglas L. Rayes dismissed a lawsuit filed by a group of Minor League Baseball teams against their insurers, rejecting the teams’ assertion that their insurers cannot enforce the virus exclusions in their contracts.

In their lawsuit, the group of baseball teams cited certain circumstances related to the pandemic that stopped them from continuing business-as-usual: a lack of players, government-issued stay-at-home orders, and mandatory shutdowns. As with many standard business interruption contracts in the U.S., these contracts have virus exclusions. Consequently, insurers cannot be held responsible for coronavirus-related losses. 

This latest decision continues to underscore the fact that global pandemics are not insurable. There are at least two more still-pending lawsuits involving Minor League Baseball clubs suing their insurers over business interruption claims. 

You can access the full Bloomberg Law article on the decision here.

For more resources and information, visit fairinsure.org.

Insurers would need to collect business interruption insurance premiums for 150 years to absorb losses caused by the COVID-19 pandemic, according to insurance experts at the global insurance research group, The Geneva Association and researchers at the University of St. Gallen.

The new report on the insurability of pandemic risk offers a quantitative assessment of the protection gap—the share of uninsured losses in total economic losses—in business continuity that the pandemic exposed. Key findings include:

• Pandemic-related business losses are not privately insurable. “The property & casualty insurance industry, which collects USD 1.6 trillion in premiums per year for all policies – and a mere USD 30 billion for business interruption risk – is not the right vehicle for shouldering the projected global loss in GDP for 2020 of USD 4.5 trillion.” 
  
• Forcing insurers to underwrite all of the economic losses associated with the pandemic threatens the entire sector’s solvency. “The mismatch between the insurance sector’s current levels of capital, on the one hand, and the probability and exposure levels of pandemic risk, on the other, would impose a material solvency risk on the industry, as well as create a potential financial stability threat.”
  
• Governments have a responsibility to involve themselves in closing the protection gap. “Systemic pandemic economic and business continuity risk cannot be treated in the same way as other (catastrophic) risks. Government and society must accept this distinction when setting their expectations for the role of the insurance industry in addressing this issue in future.”

As Walter R. Stahel, expert in sustainable policy and former Head of Risk Management Research at The Geneva Association, wrote nearly two decades ago, “risks that can be insured need not be ‘legislated’; uninsurable risks, however, have to be dealt with by nation states.” Governments and insurers must think and agree upon feasible solutions to better protect society from extreme risks, the report concludes.

Read the full report here.

For more information and resources, visit fairinsure.org.

In a recent article, Insurance Information Institute (Triple-I) CEO Sean Kevelighan affirmed that insurance companies are prioritizing efforts and resources to make sure all policyholders know about the coverage they have and need in this challenging COVID-19 environment.
 
Here are a few highlights from Kevelighan’s piece:

• Explaining how pandemics are uninsurable is a crucial part of insurers’ mission to make people more prepared, resilient, and informed. “Unlike covered events, which are limited in time and geography, pandemics simultaneously affect everybody. This is something we’ve explained in briefings to legislators, legal experts and consumer and trade media.”

• There is a consensus that pandemic business recovery requires federal solutions, as insurers continue to play their vital role in covering losses from hurricanes, wildfires, and civil unrest. “Insurance simplifies a rather complex risk management process and creates products that deliver simpler ways for people to be more prepared and resilient. Covering these hazards demands immense capital resources.”
   
• Insurance policies, including standard business interruption policy triggered by direct physical damage, stem from a strong working partnership between insurers and regulators. “As many courts and academics around the country have stated, neither a virus nor bacteria leads to the direct physical damage of a business’s structure. This contract language is well-established; moreover, every policy is approved by individual states before they are issued to BI policy holders.”

“In an age when we’re all accustomed to just clicking the ‘terms and conditions’ box, ignoring agreements, paradoxically, has become something everybody can agree with,” wrote the Triple-I CEO of the organization’s endeavor in educating insurers and policyholders alike. “We view it as a success when nobody is shocked by what’s covered, and what’s not, under their insurance policies.”
 
If interested in engaging or sharing, the full piece can be found on LinkedIn here. For more information and resources, visit fairinsure.org.

By Sean Kevelighan, CEO, Insurance Information Institute

Insurers have responded quickly and effectively to 2020’s extraordinary volume of hurricanes, wildfires, and civil unrest. These events are resulting cumulatively in billions of dollars in insured claim payouts.  

Yet a recent Forbes article stated that the owners of one of the largest Broadway theater chains were “shocked to learn that its insurance companies would not cover most of its losses during the COVID-19 pandemic.”

Making people more prepared and resilient is our fundamental goal at the Insurance Information Institute (Triple-I). We seek every opportunity to educate customers about how their insurance works before they suffer an insured loss. Part of this mission is to explain how pandemics are uninsurable. That’s because, unlike covered events, which are limited in time and geography, pandemics simultaneously affect everybody. This is something we’ve explained in briefings to legislators, legal experts and consumer and trade media.

Large-Scale Solutions to Large-Scale Problems

As a result, a consensus is forming around the idea that the federal government is the only entity with the reach and financial resources to help businesses recover from an event the magnitude of a global pandemic. It’s in this spirit that we help inform public discussions about the need for a federal governmental role in protecting the U.S. against future pandemics.

Still, while insurers, regulators and the U.S. government work to deliver relief to business financially affected by future pandemics, we need to stay focused on the present. And to do this, we need to take a quick look into the past:

Insurance has been around for 350 years as a way for households, businesses and communities to recover and rebound after wildfires, hurricanes and other catastrophes. Time and again insurers have been there for their customers because that’s what they do. For example, in the months after 9/11, insurers paid out tens of billions of dollars to keep affected businesses afloat while New York and Washington, DC rebuilt from the rubble.

In 2020, insurers continue to perform their vital societal role, covering insured losses from record hurricane and wildfire seasons, as well as the most destructive civil demonstrations in more than a quarter-century. Insurance simplifies a rather complex risk management process and creates products that deliver simpler ways for people to be more prepared and resilient. Covering these hazards demands immense capital resources.

Questions? Your Policy Documents Have the Answers

Insurance is heavily regulated, and as the Triple-I reaffirmed at September’s annual summit of the National Association of Insurance Commissioners (NAIC), the industry we represent relies on a strong working partnership with regulators and government agencies across America to help make insurance work better for everybody.

One of the tangible results of this partnership is something that anybody can literally hold in their hands: insurance policy documents. Reading these documents to understand what you’re purchasing is an essential part of preparedness.

Business income (interruption) or BI insurance losses caused by a pandemic are not covered because direct physical damage, such as that caused by a hurricane or a fire, is what triggers a standard BI policy. As many courts and academics around the country have stated, neither a virus nor bacteria leads to the direct physical damage of a business’s structure. This contract language is well-established; moreover, every policy is approved by individual states before they are issued to BI policy holders.

We view it as a success when nobody is shocked by what’s covered, and what’s not, under their insurance policies. This is why the Triple-I regularly urges business owners to become familiar with their insurance documents and have regular conversations with their agent or broker to discuss anything they don’t understand.

In an age when we’re all accustomed to just clicking the “terms and conditions” box, ignoring agreements, paradoxically, has become something everybody can agree with. Social scientists consider this to be a form of cognitive dissonance: We know we should read our insurance policies, and yet few of us do. This is a behavioral pattern we’re all guilty of and the Triple-I understands there are many demands on a customer’s time.

Which brings us back to an essential point, that insurance companies prioritize their efforts and resources into making sure that everybody knows about the coverage they have and need.

Pandemics are uninsurable because insurers don’t collect premiums to cover business losses due to viruses and other pathogens. There are products available for this purpose, but an overwhelming majority of businesses decline to purchase them. These exclusions and the availability of pandemic insurance is a fact well known by many experienced professionals—notably risk managers and trial attorneys. The Triple-I is willing to work with anybody to make the public better aware of the risks and how to prepare for them.

The next pandemic surely will come. How insurers, their customers, and the federal government respond now will ensure our resources and energies are devoted to saving lives from all the threats the U.S. faces.  

---

Article originally published on the Triple-I website.

Sean Kevelighan is Chief Executive Officer of the Insurance Information Institute (Triple-I), a non-profit research, education and communications organization dedicated to improving public understanding of insurance—what it does and how it works. 

It’s been more than six months since the pandemic first struck our economy, and millions of small business owners are still hurting. Yet a few trial attorneys see this disaster as an opportunity to line their pockets through costly insurance litigation. 

Here’s Exhibit A of what we’re talking about: Plaintiffs lawyer John Houghtaling’s recent profile in Bloomberg Businessweek, a piece which touts his Lamborghini collection, lavish dinner parties, and multi-million dollar real estate.

Here are the facts:  

• Global pandemics are simply uninsurable. As opposed to epidemics and natural disasters, pandemics occur on a global scale, making risk pooling impossible. Business interruption (BI) premiums were not priced to factor in the “estimated $4.5 trillion global output loss inflicted by COVID-19 and its handling in 2020” according to the Geneva Association. Property/casualty insurers would have to collect BI premiums for 150 years to cover that cost. 
   
• This issue will not be solved in the courts. The majority of business interruption contracts expressly require the necessity of physical damage and explicitly don’t cover losses due to viruses or pandemics. So far, at least 17 judges in the U.S. have upheld these contract stipulations and dismissed suits against insurers. Despite this reality, trial attorneys continue to pursue expensive lawsuits against insurers that will not be won by their plaintiffs.
   
• The insurance industry needs its policyholder’s surplus to fulfill their commitments to policyholders for covered risks. We are still in the middle of hurricane season in the southeast U.S. and there continue to be wildfires on the west coast. If the insurance industry is forced to spend the policyholders’ surplus on uncovered COVID-19 losses, that will further destabilize the economy because there will be no money left over for covered losses for physical damage from hurricanes, wildfires, tornadoes, and riots.
   
• No matter which policymakers are elected to serve in 2021, we need a viable government-backed solution to provide immediate relief to business owners if America’s economy is to recover. There are several proposed solutions out there already, including the Business Continuity Protection Program (BCPP) and the Pandemic Risk Insurance Act (PRIA). You can read about the key principles necessary for a forward-looking government-backed pandemic recovery solution here. 

To put it simply, litigation is a trend driven by greedy attorneys, and a misguided effort to alter existing contracts. The only true solution is government-backed pandemic relief. If you’d like to discuss this pressing issue with insurance industry experts, please reply to this email to reach the Insurance Information Institute.

For more information and resources, visit fairinsure.org.

President of the American Tort Reform Association (ATRA) Sherman Joyce recently published an op-ed criticizing the trial bar’s nationwide pursuit of misguided litigation against insurers, in an attempt to force business interruption insurance (BI) to cover COVID-19 losses.
 
Key takeaways from Joyce:

• Many trial attorneys are seeking to capitalize on the pandemic crisis and judicial system for their own financial gain. “Now, trial lawyers are at it again, upending the legal and regulatory systems for their own benefit. Only this time, they’re using the suffering caused by COVID-19 to target a critical sector of the American economy: the insurance industry.”
  

• It is clear that plaintiff attorneys are misguided when it comes to their anti-insurer litigation trend on BI claims. “For trial lawyers, there’s a lot of money to be made in suing insurance companies for COVID-19 relief. But there’s a problem: On this issue, plaintiffs simply don’t have the law on their side. Business interruption insurance has generally been understood to protect against losses caused by physical destruction or property loss.”
  

• Forcing insurers to cover COVID-19 BI claims would be detrimental to the insurance industry—a backbone of the U.S. economy. “Their business interruption campaign not only threatens the integrity of the insurance industry and the American economy more generally, but it also weakens our nation’s fundamental democratic institutions.”
  

To date, there has been a growing list of court decisions in state and federal courts across the U.S. that prove standard BI policies don’t cover COVID-19 shutdowns. Direct physical loss or damage must occur for a BI claim to be triggered, and government orders do not constitute direct physical loss or damage to property.

If interested, the op-ed can be found here and is pasted below. For more information and resources, go to fairinsure.org.

---

Law360: Virus Insurance Shouldn’t Be Regulated Through Litigation
By: Sherman Joyce, 10/27/20

It’s been nearly two decades since Robert Reich, the former U.S. secretary of labor, wrote a prescient op-ed about what he called the era of regulation through litigation.

In the piece, Reich outlined a pattern of behavior in which litigators manipulate the American judicial system, using it to circumvent our nation’s traditional regulatory procedures and practices. Through the process of regulation through litigation — Reich’s aptly coined term — unscrupulous attorneys utilize lawsuits as a tool to establish judicial precedent, effectively imposing de facto regulation over the industry they wish to target. 

Whether it’s within the tobacco industry or the firearms business, litigators have previously used this technique to affect policy and alter law in their favor. It’s undeniably an insidious scheme — but nevertheless an effective one. Now, trial lawyers are at it again, upending the legal and regulatory systems for their own benefit. Only this time, they’re using the suffering caused by COVID-19 to target a critical sector of the American economy: the insurance industry. 

Keen observers of the legal sphere likely have noticed a growing trend as of late: the increasing frequency of COVID-19-related business interruption lawsuits. Across the nation, litigants have filed over 1,300 suits against insurance companies.

Interestingly, though, seemingly all those cases make essentially the same argument. They each claim insurers should be held liable for the financial damages incurred due to COVID-19 and the resulting economic lockdowns, despite Congress already providing nearly $350 billion in relief aid. If that sounds like a coordinated effort, that’s because it is. 

Why go through all that trouble, though? For trial lawyers, there’s a lot of money to be made in suing insurance companies for COVID-19 relief. But there’s a problem: On this issue, plaintiffs simply don’t have the law on their side.

Business interruption insurance has generally been understood to protect against losses caused by physical destruction or property loss. According to the National Association of Insurance Commissioners, business interruption insurance doesn’t typically cover losses related to a reduction of services or viral contamination.

This makes sense because if insurers were forced to cover the costs of every business across the nation affected by the lockdown, the insurance industry would collapse into bankruptcy. And the industry’s assets, needed for assistance during hurricanes, wildfires and other disasters, would cease to exist.

But for greedy trial lawyers, broader considerations for the economy always elude them. They want to profit off the backs of insurers and businesses struggling under COVID-19 — and they are using the process of regulation through litigation as a means to that end. 

Indeed, this campaign to flood America’s civil court system is straight out of the trial lawyer’s playbook. These civil attorneys first concoct far-flung legal theories which, conveniently, happen to further their own ambitions. They then market these theories to potential plaintiffs — individuals and businesses harmed by COVID-19 and desperate for relief. And after the lawyers have inundated the judicial system with thousands of meritless lawsuits, they wait for an activist judge to effectively rewrite the law by ruling in their favor. 

Such a ruling would establish the needed judicial precedent — a model for other courts to follow — providing the legal basis for insurers to bear financial responsibility for business losses associated with COVID-19. This creates a snowballing effect. One court’s decision influences a second, the second’s is then cited as precedent for the third, and so on.

The pattern continues until once plain reading of the general policy is lost under the rising tide of judicial precedent. In this way, trial lawyers can regulate the insurance market without ever passing a single piece of legislation. That is the power of regulation through litigation, and as is readily apparent, the consequences of that scheme are quite dangerous.

As Reich foresaw in his op-ed nearly 20 years ago, trial attorneys’ efforts to regulate industries through the judicial system create blatant end-runs around the democratic process. Their business interruption campaign not only threatens the integrity of the insurance industry and the American economy more generally, but it also weakens our nation’s fundamental democratic institutions.

Americans’ elected representatives — not the trial bar — should have the authority to regulate business within the U.S. The courts must restore that balance of power by rejecting the dreaded return of regulation through litigation. 

Sherman Joyce is the president of the American Tort Reform Association. 

Yesterday, U.S. District Judge Charles R. Breyer dismissed a proposed class action by Bay Area restaurants against a California insurance company because the insurer has a virus exclusion. 

When explaining his decision, the California federal judge said, “COVID-19 remains the ‘indirect’ cause of the insured’s harm,” meaning the virus exclusion expressly bars coverage. Plain and simple, Judge Breyer acknowledged that “the court cannot ignore that the insurance policy excludes coverage for losses caused by viruses, like COVID-19.”

Judge Breyer also held that the insurer’s virus exclusion refers not only to a stand-alone virus, but also pandemics. 

This is an important development in the ongoing litigation fight between business owners and their insurers across the U.S. You can review a compendium of court decisions affirming the necessity of direct physical damage in BI coverage here. 

Judge Breyer’s decision is further confirmation that insurers shouldn’t cover the costs of pandemic losses. Global pandemic risks are uninsurable, and the majority of policyholders’ business interruption contracts and premiums reflect that standard. 

You can read more about the California case in Law360 here.

For more information, visit fairinsure.org.