When disasters strike, many businesses rely on insurance to carry them through economic and financial rough patches. Not this time.
The COVID-19 pandemic and the subsequent government-mandated business shutdowns wrecked many companies’ top and bottom lines. While there are some noteworthy exceptions, like “Amazon, grocery stores, and other ‘essential’ businesses, overwhelmingly, the impact [of the pandemic] ranges from hugely negative to devastating to business-threatening or business-ending,” says John Ellison, a partner in the insurance recovery practice at Reed Smith LLP.
Unfortunately, these businesses have had to make do without the benefit of insurance payouts, even though many held so-called “business interruption” policies that they thought would cover them. Companies filed claims as far back as early March, but they have been almost uniformly denied.
Insurance providers contend that given the nature of the COVID-19 pandemic—and the subsequent government-mandated business closures—the policies are not applicable in most if not all cases.
That stance has set off a monumental and precedent-setting debate over what expenses and lost revenue (if any) from the pandemic should be covered by such insurance.
Robert Gordon, senior vice president for policy, research, and international for the American Property Casualty Insurance Association (APCIA), says that because government emergency orders closed businesses to limit human transmission of COVID-19 and not because there had been direct property loss or damage, business interruption policies are not relevant.
Further, Gordon points out, government closures “have now caused what is expected to be one of the greatest domestic and global economic loss events in history… in the range of $255 billion to $431 billion in losses per month.” In other words, in Gordon’s opinion, the scale of potential losses is too great for the private sector to shoulder.
In an April 3 statement, Jimi Grande, senior vice president for the National Association of Mutual Insurance Companies (NAMIC), said that no insurance company or industry could cover the pandemic’s costs to businesses and the economy — nor should the onus be primarily on insurers.
Many business leaders and the law firms that represent them, however, vehemently disagree. One attorney estimates there are more than 900 lawsuits filed by businesses against insurance companies over pandemic-closure coverages.
The question of insurance coverage, of course, is often in the details of the policy. The trigger for any property insurance policy, and resulting time element or business interruption coverage, is physical damage to insured property by an insured peril, according to Jill Dalton, group managing director for property risk consulting at Aon.
“Insurers are and will most likely be taking the position that the introduction of a virus does not constitute direct physical loss or damage to insured property nor is it a covered peril,” Dalton says. So, most insurers have been viewing losses directly related to COVID-19 as “not covered due to standard policy exclusions.”
Legal experts who specialize in insurance, however, are taking to court, defending their corporate clients’ policies and claims as not only valid and relevant but necessary to the health of the economy.
Most large to mid-size businesses have business interruption coverage as a natural part of their property insurance policies, says Linda Kornfeld, vice chair for insurance recovery at Blank Rome LLP. While most of those policies do not have express pandemic coverage, she says, most also do not have an express pandemic exclusion.
“Some policies include the term ‘virus’ in an exclusion, but that term is surrounded by many other terms that suggest that ‘virus’ in the context of the exclusion is not meant to exclude losses due to a pandemic,” Kornfeld says.
Instead, those exclusions cover only “traditional ‘pollution’ events,” she explains. An example would be matter growing in standing water or water-damaged wood after a flood, hurricane, or natural disaster, causing dry rot, wet rot, or fungi. Those damages would not be covered under business interruption insurance.
Regardless of any of this language, though, the property insurance industry is taking a hardline “no coverage” approach to all COVID-19 business interruption claims, says Kornfeld, by “stating that their policies are not even triggered unless there has been some physical event akin to a hurricane, tornado, earthquake, or other disaster.”
When an insurance company denies what the insured and its attorney view to be a legitimate claim, attorneys fight back with letters, calls, arbitration, and, if necessary, lawsuits. Peter Halprin, a partner for insurance recovery at Pasich LLP, represents business-policyholders in such cases. March was a busy time for him, as businesses lined up to consult him on denied business interruption claims. “Companies were just trying to survive and understand what [coverage] they had,” he says.
What do these policies look like? Small or mom-and-pop businesses generally buy a policy “off the rack,” Halprin says. Larger companies buy what’s known as a “manuscripted policy” tailored to their needs. For large policyholders, virtually every policy is different, and many of these insurance policies can run 600 or 700 pages long, according to Halprin.
“Even a very sophisticated financial professional may not necessarily sit down and read an entire policy, or digest and understand it,” he adds. As a specialist in insurance law with decades of experience, “it takes me a significant amount of time to read these policies,” Halprin admits.
In a government shutdown, Halprin believes, insurers should pay claims on business losses because they qualify as a valid business interruption. And yet, insurers have been rejecting these claims as exclusions to the policy. As early as March, Halprin says, before policyholders even filed claims, insurers sent out notices saying, “we’re not going to cover you for this.”
Unfortunately, the many lawsuits against insurance companies are generally on hold. Fear of the virus’s spread forced courts to stay closed from early spring through mid-summer. Among the businesses bringing legal action are restaurants, nail salons, hotels and other hospitality businesses, casinos, music festivals, and entertainment venues. Halprin expects many more suits will be filed.
For corporate business interruption policyholders that haven’t taken action, Kornfeld advises they not take insurers at their word regarding the existence of coverage. Professionals should instead carefully evaluate existing policy language to determine whether there may be any clear exclusions related to COVID-19 or pandemic coverage, she adds.
“Ultimately, this dispute will be resolved to some degree in the courts,” says Kornfeld, “before insurers acknowledge coverage and start paying claims.”
Should chief financial officers, general counsels, and risk managers have had their companies better-insured? Even if managements could have predicted the pandemic, strictly from an insurance coverage perspective, “it is hard to say that any particular business was not adequately prepared, given the unprecedented nature of this event,” Kornfeld says.
“If policyholders had some form of ‘virus’ exclusion in their property policies, it is unlikely that they would have appreciated that any such language would apply in the essentially unheard-of event that we are experiencing.”
Regardless of what happens with COVID-19 claims, insurers, businesses, and governments will have to wrestle with a tough question: Can future pandemics be insured by the private sector, and if so, how?
The APCIA’s Gordon firmly maintains that “pandemics cannot be insured because they are uninsurable. The risks are too unknowable to price.”
Maybe pandemics can’t be insured. But some experts dispute the notion that the insurance industry couldn’t possibly cover the large losses from the COVID-19 shutdown.
Tyler Leverty and Lawrence Powell, professors at the University of Wisconsin and the University of Alabama, told Reuters that insurers could be on the hook for a maximum of $120 billion a month in claims (versus the $431 billion the APCIA has been citing). That’s on the basis that only two out of five small businesses have business interruption policies, according to the Insurance Information Institute. If the professors’ estimate counted only businesses without explicit exclusions for pandemics, claims would only be in the millions per month.
Not surprisingly, the insurance trade group APCIA has been lobbying against politicians’ and businesses’ efforts to make insurance companies pay out on business interruption claims. The group maintains that since the government mandated the business shutdowns, the federal government should be bailing out the businesses that have a qualified need.
The APCIA has rallied for U.S. legislation to establish a workplace recovery fund. The fund would provide immediate assistance to businesses so they can maintain their viability and pay employees. The APCIA also backs the creation of a business continuity protection program (BCPP) to financially protect businesses in the case of future pandemic-related government shutdowns. The BCPP would provide revenue replacement and protection subsidized by the federal government, similar to the Federal Flood Insurance Program.
Insurers would administer the policies. Similarly, The Risk Management Society (RIMS) is backing legislation that would create a pandemic risk reinsurance program with the U.S. Department of Treasury.
John Doyle, CEO of Marsh LLC, a New York-based insurance broker, believes there is a potential middle ground between relying on the private sector and having the government underwrite pandemic coverage.
“Companies need access to a viable pandemic insurance market that helps protect their bottom lines in the event another crisis occurs,” he says. A public-private partnership, where policyholders, the insurance industry, and the federal government each share in the risk would establish such a market, he proposes.
Meanwhile, business policyholders are not yet letting go of their insistence that insurers cover their losses. Particularly rankling for some owners and management teams may be that insurance companies have reaped enormous profits off of the business policies in question.
Says Reed Smith’s Ellison, “Businesses have been purchasing business interruption insurance for decades, and most of them have paid huge premiums over the years with little or no claims made against those policies.”
Karen Epper Hoffman is a freelance business writer.