First-party commercial insurance policies generally do not provide insurance coverage for COVID-19 related business interruption losses because there is no physical loss or damage and because the policy may contain a virus exclusion.
On June 22, 2020, the National Association of Insurance Commissioners (“NAIC”) released its first update relating to the current pandemic and the insurance industry entitled A Report of the NAIC on the State Insurance Regulatory Response to COVID-19. The report provides an overview of the NAIC’s role and findings, a timeline of 2020 milestones, and a chronicle of the state insurance regulators’ actions in the life and health and property and casualty insurance industry from January 1, 2020 through May 31, 2020.[i] One of NAIC’s Committees worked with State Insurance Departments in obtaining data and noted that:
- Preliminary findings show that nearly 8 million commercial insurance policies include business interruption coverage
- Of that amount, 90% were for small businesses, as defined as having 100 or fewer employees; 8% for medium businesses; and 2% for large businesses
- Significantly, 83% of all policies included an exclusion for viral contamination, virus, disease, or pandemic and 98% of all policies had a requirement for physical loss
Anticipating (or acknowledging) the coverage issues for business interruption losses resulting from COVID-19, legislatures in many states, Washington, D.C. and the federal government introduced legislation to mandate retroactive insurance coverage for business interruption losses stemming from COVID-19. Those states include Louisiana, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and South Carolina.
Assembly Bill No. A3844 was introduced in New Jersey on March 16, 2020, and provided that commercial insurance policies in force on the date of the act that insured against loss or damage to property and business interruption be deemed to provide “coverage for business interruption due to global virus transmission or pandemic.” The Bill applies to insureds with less than 100 full-time employees. The Bill has been shelved.
Similar legislation in the other jurisdictions has also stalled. For example, in Pennsylvania H.B. 2372 was introduced and referred to the Committee on Insurance on April 3, 2020, where it has remained and S.B. 1114 was introduced and referred to the Committee on Banking and Insurance on April 15, 2020, where it remains. Subsequently introduced, S.B. 1127 took a different approach and attempts to mandate coverage under the guise of interpreting ambiguous policy provisions. It was referred to the Committee on Banking and Insurance on April 30, 2020, where it likewise remains with no further action. Additionally, there are currently pending in the New York State Senate two proposed bills requiring insurers to cover COVID-19 business interruption losses: S 8178, which would be applicable only to companies with 100 employees or less, and S 8211, which would be applicable to businesses with 250 employees or less. The New York Assembly also has a proposed bill, A-10226B, that would apply to businesses with 250 employees or less. Similar bills in Massachusetts, Bill S.2655 (applicable to business with 150 employees or less), and in Rhode Island, H8064 (applicable to businesses with 100 employees or less), likewise remain in preliminary phases.
Connecticut has not introduced business interruption legislation related to COVID-19. It seems highly unlikely that Connecticut will do so in the future considering the state’s longstanding relationship with the insurance industry and the jobs and revenue in the state that are dependent on the industry.
Retroactive legislation understandably has been strongly opposed by the insurance industry, insurance regulators and certain legislators. Requiring insurance coverage retroactively where it was not underwritten and no premium was collected raises several concerns, including constitutional and legal questions, lack of reserves, insurer solvency, and reinsurance issues. It also would undermine the ability of insurers to pay other types of claims.
On May 26, 2020, the American Property Casualty Insurance Association (“APCIA”) released a white paper entitled Uninsurability of Mass Market Business Continuity Risks from Viral Pandemics, co-authored by Dr. Robert Hartwig, the director of the Risk and Uncertainty Management Center at the University of South Carolina’s Darla Moore School of Business.[ii] It explains why pandemics are inherently uninsurable and outlines the risks to the economy if the property insurance industry were forced to cover COVID-19 related losses. The white paper concludes:
Business continuity losses arising from widespread viral risks represent an uninsurable risk for the private property casualty insurance industry. The magnitude of potential losses exceeds the claims paying resources of the industry while a lack of historical data impairs the ability of insurers to precisely model the frequency and severity of losses and determine premiums. This problem is exacerbated by the fact that the majority of business continuity losses are driven not by random events, but by the unprecedented and deliberate actions of thousands of public policymakers. The consequences of these actions are not insurable and potentially pose a systemic risk to the industry as a whole and the economy broadly.
The experience of COVID-19 suggests that apart from highly specialized, niche products, it is unlikely that business continuity coverage for pandemic risks can be provided to the mass market by private insurers. The ability to pool and redistribute losses within the private insurance sector is severely compromised. Consequently, any solution involving the financing of pandemic-driven business continuity losses will necessarily require widespread government protection, which could, in turn, encourage increased innovation of specialized products by private insurers and reinsurers.
All current and any future legislation requiring retroactive business interruption coverage for losses resulting from COVID-19 will, and should, be vehemently opposed by the industry. Any proper solution to the problem of COVID-19 or future pandemic business interruption losses will require a comprehensive financial response of the federal government, of which a future insurance component may only be a part.[iii]
[1] See https://content.naic.org/sites/default/files/inline-files/naic_covid_19_report_1.pdf for a copy of the report or contact the authors of this article to receive a copy by e-mail.
[2] See http://www.pciaa.net/docs/default-source/default-document-library/apcia-white-paper-hartwig-gordon.pdf for a copy of the report or contact the authors of this article to receive a copy by e-mail.
[3] While outside the scope of this article, we note that on May 21, 2020, the APCIA, the National Association of Mutual Insurance Companies and the Independent Insurance Agents & Brokers of America, Inc., unveiled a proposal for a federal program tailored to help businesses meet the economic and financial challenges from any future pandemics. See http://www.pciaa.net/pciwebsite/cms/content/viewpage?sitePageId=60933
PartnerAaron Gould is a civil litigator and trial attorney whose practice focuses on representing clients in complex commercial litigation and complex insurance coverage disputes, including catastrophic claims. Aaron also counsels ...