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Digital EditionCOVID-19 Coverage Disputes? Let’s Let the Courts Decide
Robert Tomilson is a partner at the international law firm, Clark Hill. Robert is a nationally recognized subject matter legal expert in insurance and reinsurance, as noted by Who’s Who Legal and Best Lawyers. He is an advisor to the American Law Institute’s Restatement of the Law of Liability Insurance, an adjunct Professor of Insurance Law at Drexel University’s Thomas R. Kline School of Law, and sits on the law school’s Advisory Board. Robert regularly represents and advises insurers and reinsurers in contentious and non-contentious matters. He can be reached at [email protected]
On March 18, 2020, a bipartisan group of U.S. House members asked the insurance industry to retroactively recognize financial losses relating to COVID-19 as covered claims under commercial property insurance policies that either explicitly or implicitly do not provide such coverage.
Subsequently, the state legislatures in Ohio, New Jersey, Pennsylvania, Massachusetts and New York (more are sure to follow) proposed legislation mandating the same coverage, either retroactively or prospectively. These actions by federal and state legislatures reveal a profound underestimation of the complexity of the insurance business and pose a serious threat to a vital component of the U.S. economy.
It is easy to forget that insurance is a very complicated business. The industry calculates the future frequency of damage, destruction and loss of life for millions of people and businesses in thousands of occupations and industries against a backdrop of varying geography and disparate circumstances.
Simultaneously, it quietly pays millions of unrelated claims in compensation every day, allowing us to invest in own our futures without apprehension or fear. The security insurance provides, however, has contractual and financial limitations that the industry fiercely protects, not simply for its own sake but for its policyholders and society, more generally.
There are approximately 2,500 U.S.-based property and casualty (P&C) insurance companies employing nearly 2.7 million people. These companies annually write more than $600 billion a year in net premium, primarily auto, home, and commercial lines.
Strategic Survival
In 2018, the combined ratio (premium minus claims and expenses) for the P&C industry was 99.1%, meaning that the industry paid out an amount equal to .99 cents of every dollar collected in premium. Only a combined ratio below 100% reflects an underwriting profit.
The combined ratio for 2018 was better than the prior two years: 103.9 % (2017), 100.5% (2016). Only the return on investments (invested reserves) kept the insurance industry collectively solvent and profitable. As these numbers illustrate, insurance is not a high margin business. The industry’s survival, to say nothing of its success, depends upon disciplined underwriting and a clear-eyed knowledge of the risks it accepts.
Business interruption or business income coverage is frequently included in the commercial property insurance policies issued to millions of U.S. small businesses. The coverage is meant to offset lost “income” from the damage or destruction of the business’ insured property.
A claim for lost income needs to be sustained as a result of “direct loss, damage, or destruction” to the insured property by a covered “cause of loss.” A fire in a restaurant, for example, results in a claim for property damage as well as for the income lost during the time needed restore the property.
There are instances where courts have found that gas, ammonia, or other airborne hazards constitute “physical damage” to an insured property, resulting in covered claims for lost business income. The millions of businesses across the country that have been shuttered due to local and state regulations, not physical damage. This is evident from the fact that “essential” businesses remain open without difficulty.
The insurance industry is neither unfamiliar nor unprepared for losses resulting from communicable diseases. The insurance industry is neither unfamiliar nor unprepared for losses resulting from communicable diseases.
State Legislatures, Let the Courts Decide
Moreover, in 2006, the Insurance Services Offices, which drafts policy forms for the industry, promulgated a virus or bacteria exclusion for commercial property policies; the exclusion was drafted in the wake of outbreaks of SARS, Avian Flu, Rotavirus and similar diseases. This virus exclusion is in virtually every standard commercial property policy and specifically applies to business income coverage. Having excluded viruses and other infectious diseases from property and other policies the industry created a product to explicitly covers such risk. In 2018, Marsh created and promoted PathogenRx, a parametric (pays based on an event rather than loss) insurance policy triggered by communicable or infectious diseases. The policy was aimed at cruise lines, amusement parks, and other hospitality industries. Although there was some interest in the product, not a single policy was purchased prior the outbreak of COVID-19.
The American Property Casualty Insurance Association (APCIA) estimates that there could be as many as 30 million claims from small businesses related to COVID-19 losses if legislatures mandate coverage nationwide. These claims could total anywhere from $220 million to $383 billion per month for lost income.
Even without these claims, the insurance industry will almost certainly pay billions of dollars in claims related to COVID-19, including claims under Directors & Officers, Commercial General Liability, Workers Compensation, Employers’ Liability, Cyber, and Excess and Specialty Surplus policies. The estimated payout for business income claims for the first month of coverage alone would draw down nearly half of all the reserves held by the P&C industry.
If the stay-at-home orders persist beyond mid-year, the P&C industry’s reserves would be exhausted as we enter the hurricane season. The insurance industry, however, did not and could not underwrite a worldwide pandemic. The legislatures should not attempt to retroactively rewrite coverage but rather leave to the courts the interpretation of the insurance contracts at issue. &
