Issue: Insurance & Global Pandemics

Earlier this month, a North Carolina court judge ruled in favor of a group of restaurants, finding that the insurer must cover losses resulting from state-mandated COVID-19 shutdowns even if COVID-19 had not caused property damage.

This is a first in more than 15 rulings that did not rely on the historical legal precedent that a virus does not cause direct physical damage. A few key conditions contributing to this decision have been overlooked, according to a summary by the Centers For Better Insurance.

The ruling also gave rise to the notion that ambiguous language favors the plaintiff, and for this reason, many more decisions like this will ensue. This assumption, however, is inaccurate for various reasons:

• Insurance contracts are carefully underwritten, with clear parameters guiding the coverage. Litigation attempts to characterize insurance language as unclear or ambiguous often seek to rewrite existing policies.
  

• As shown in our court decisions tracker, judges presiding over both federal and state courts overwhelmingly ruled in favor of insurers, citing that the COVID-19 virus does not cause “direct physical damage.”
  

• This decision is not yet the final word on the case, given that the insurance company involved, Cincinnati Insurance Co., is appealing the decision.
  

Read more in-depth analysis on the decision here.

For more information and resources, visit fairinsure.org

With the election weeks away, the post-COVID economy is the top-of-mind issue for politicians and voters alike. Policymakers must establish a viable, sustainable, and inclusive government-backed solution to provide the immediate relief that business owners need if America’s economy is to truly recover. 

Although global pandemics are uninsurable, business owners around the nation are currently caught up in pricey, slow-moving litigation to fight their insurers for claims their business interruption insurance contracts did not cover. At least 13 court decisions made so far affirm that insurers cannot be held responsible for the economic devastation caused by this pandemic.

A new report by ratings company AM Best asserts that a government-backed pandemic risk backstop is necessary given that pandemics are uninsurable and the policyholder’s surplus is only so large. “Uncertainty from lawsuits aimed at insurers and legislative policy measures being contemplated that would nullify business interruption exclusions” will create major challenges for the insurance industry in determining reserve estimates and payout patterns.

In an Insurance Journal piece on the election’s potential impacts for the insurance industry, Andrew Simpson notes that the need for a government solution for managing pandemic risks won’t disappear when 2021 rolls around, “[r]egardless of whether Democrats or Republicans are in charge.” 

There are several proposed solutions out there already, including the Business Continuity Protection Program (BCPP) and the Pandemic Risk Insurance Act (PRIA), but no matter which policymakers are elected to serve in 2021, we need a solution that adheres to the following principles:

• Maintain the federal government as a primary provider of relief, reflecting the reality that pandemic risks are not privately insurable.
   
• Provide widely accessible relief payments to businesses in a fast and efficient manner once a pandemic is declared by the federal government, with minimal chance of abuse.
   
• Protect businesses from losses, and incentivize businesses to retain employees, without jeopardizing existing insurer commitments.

For more information and resources, please visit fairinsure.org 

Sean Kevelighan, CEO of the Insurance Information Institute (Triple-I), recently discussed the need for forward-looking federal solutions to support businesses impacted by the pandemic in an interview with Slayton Search Partners.

Kevelighan highlighted why insurers should not be asked to cover pandemic losses:

• “Most insurable events are limited by time and geography,” said Kevelighan, “whereas the pandemic is impacting everyone, at the same time, everywhere.”
  
• “If businesses have to close because of direct physical damage, business interruption policy will cover the losses incurred while closed. Viruses and bacteria do not trigger physical damage,” the Triple-I CEO further explained.

“These are trying times for businesses, but it’s not the insurance element that will get that relief,” concluded Kevelighan. “Only the federal government has the wherewithal to help support businesses and provide relief in this time of need.”

Watch the interview here.

For more information, please visit fairinsure.org.

Over the past couple of weeks, two additional court rulings have reaffirmed that business interruption (BI) policies are only triggered by direct physical damage to property and are not designed to cover pandemic-related losses. These are part of a nationwide litigation trend—spearheaded by trial attorneys—attempting to retroactively change BI contracts to cover uninsured pandemic claims, jeopardizing insurers’ ability to meet promises to policyholders’ on covered claims.

• U.S. District for the Middle District of Florida: “The judge rejected [policyholder’s] argument that economic damage is synonymous with physical loss. ‘Plaintiff’s argument is unpersuasive because Florida law and the plain language of the policies reflect that actual, concrete damage is necessary,’ he said.” (WestLaw Today, 9/29)
  

• U.S. District Court for the Northern District of Georgia: “A Georgia federal judge has dismissed a [policyholder’s] COVID-19 business interruption coverage lawsuit, ruling that a government stay-at-home order did not cause the eatery to sustain ‘direct physical loss of or damage’ to its insured property or surrounding premises.” (HarrisMartin, 10/7)
  

To date, there has been a growing list of court decisions across the U.S. that affirm 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. For more information, please visit fairinsure.org.

Last week, the legal panel overseeing multidistrict litigation (MDL) in U.S. federal courts ruled that the hundreds of billions of dollars’ worth of business interruption (BI) claims tied to the pandemic cannot be consolidated. In their decision, the panel noted consolidation would slow down the progress of individual cases, many of which have reached the point where judges are ready to make decisions. 

“Having one judge oversee more than 1,000 cases — grouped by individual insurers — would be too cumbersome and it’s more efficient to have courts around the U.S. decide whether the coronavirus fallout triggered coverage by major insurers such as Hartford, Travelers and Lloyds of London, the legal panel ruled Friday,” a Bloomberg Law article explained. 

Bloomberg Law covered the story on October 2, and the Triple-I’s non-resident legal scholar Michael Menapace provided the insurance industry’s perspective in a written statement: “‘This is the correct result,’ Michael Menapace, a lawyer and member of the Insurance Information Institute, said in an emailed statement. ‘There are no efficiencies to be gained by combining different insurers who write different policies for different policyholders who are in different industries and made claims under different factual scenarios.'”

His comment was also picked up by the Insurance Journal for their coverage of the MDL decision.

A key consideration at hand in this decision is time. It will take months, if not years, to settle these cases in court. The plaintiffs in these cases are business owners in need of true relief that only the federal government can provide. The immense cost and great time spent litigating will only further harm business owners.

And as we’ve seen in most cases decided thus far, court decisions are likely to simply reaffirm that BI contracts are not designed to cover pandemics and necessitate a direct physical loss to property to be activated. 

You can read the Bloomberg Law article here and the Insurance Journal article here. For more information, please visit fairinsure.org.

Earlier this week, the American Action Forum (AAF) held a virtual forum examining the COVID-19 policy responses and their successes and failures in providing relief for businesses during the pandemic. In a companion report, AAF Director of Financial Services Policy Thomas Wade dove into the state of play of financial support for businesses during this crisis

In his piece, Wade discusses several important topics, including the Federal Reserve’s emergency lending facilities, business interruption (BI) insurance, and protecting businesses from a new class of coronavirus litigation. 

Former Nebraska Governor and U.S. Senator Ben Nelson, a longtime insurance executive and regulator, said the following after the event: 

“The COVID-19 pandemic has brought unprecedented financial harm and uncertainty for businesses across the country. If COVID-19 has shown us anything is that global pandemics are uninsurable; only the federal government has the financial ability to provide business relief during this crisis. AAF’s report comes as a timely and crucial reminder that while some financial relief measures have been enacted, they have not done enough to support American business owners during this crisis. Now it’s time for Congress to come together to find a government-backed solution that brings much-needed relief for struggling businesses around the country.” 

Wade provides an important summary of the ongoing BI debate in his report, highlighting the implications of the absence of a federal backstop during a pandemic for insurers and businesses alike. 

• Wade reiterates what insurers have been showing for months: only the government has the financial means to provide business relief during a crisis of this scope and magnitude. “Despite most insurance policies explicitly excluding viral risks, insurers face enormous pressure to pay business-interruption claims; a possible solution in the future is to create a federal reinsurance program with a backstop, allowing insurers to write pandemic-related policies.”
  

• Additionally, he points out that without a federal solution, businesses are turning to litigation against insurers. Still, courts are overwhelmingly siding with insurance companies because contracts are clear. “The primary battleground for insurers are courts across the world; in the United States a growing number of courts appear to be finding in favor of insurers by noting the necessity of physical damage as a trigger to business interruption insurance.”
  

• Wade also emphasizes, “Without further government aid, the temporary closure of hundreds of thousands of small businesses could be permanent by the time the national emergency is lifted.” He continues, “the government’s role must be to provide the financial relief required to keep businesses afloat and not choose winners or losers by vilifying certain industries, from insurers to landlords.”

For a full event recap, check out FAIR’s latest blog post. For more information on the ongoing BI debate, visit fairinsure.org.

Earlier today, FAIR unveiled a new educational resource that offers a comprehensive overview of business interruption (BI) insurance and explores the need for a federal solution to pandemic recovery. The resource breaks down core insurance concepts such as risk pooling, underwriting, insurance premiums, and industry surplus in a visually-appealing and digestible way through graphics and real-life cases. It also explains the purpose and physical damage requirement for BI insurance.

Citing industry projections, polling data, court rulings, and quotes from Members of Congress, the resource also highlights the consensus among the public, policymakers, and the legal community that the federal government should be the sole provider of pandemic relief, and that litigation attempts to retroactively rewrite BI contracts are harmful to consumers as well as insurers.

You can view and download the resource here. Let us know if we can ever be of any additional assistance on this topic. For more information, visit fairinsure.org.