The battles over business interruption insurance claims continues, but the war is essentially over.
The losers? The businesses that lost employees to illness or were forced by state governments to close their doors for weeks or months during the COVID-19 pandemic and thought their insurance payouts would cushion the financial blow.
Very few companies have received payouts from their so-called “business interruption” policies — a form of commercial insurance that replaces income lost if business is halted.
The National Association of Insurance Commissioners (NAIC) counted business interruption claims and loss data in October 2020. It found that U.S. insurers had received 201,285 claims for business-interruption losses caused by coronavirus shutdown orders. Of those, 164,178 (81%) were closed without payment, 34,106 remained open and 3,001 were paid.
In the ensuing years, businesses haven’t fared much better in the courts. As much as 75% of the more than 2,000 lawsuits by businesses have been dismissed by federal and state courts, according to the COVID litigation tracker from the University of Pennsylvania’s Carey Law School.
While many insured businesses suffered extensive losses during the pandemic — many suing insurers over claims were food and drinking places, ambulatory health-care services, and hotels and other accommodation businesses — business interruption policies were written to cover direct physical loss or damage to covered property. And the courts are ruling that a pandemic does not fulfill those conditions.
Nearly eight million commercial insurance policies included business interruption coverage, and 90% of those were for businesses with 100 or fewer employees, according to a study by the NAIC and state regulators in 2020. But 83% of all those policies included an exclusion for viral contamination, virus, disease, or pandemic, and 98% required physical loss.
"In general, carriers in the U.S. are not willing to provide coverage for communicable disease ... all direct and reinsurance carriers have been focused on excluding coverage and any business interruption from such.”
Mike Rouse
US Property Practice Leader, Marsh
Insurers started excluding viral and bacterial infections from business interruption policies after the Severe Acute Respiratory Syndrome outbreak in 2003, according to the NAIC. SARS caused “massive losses to insurers,” including a $16 million payout to the Mandarin Oriental hotel chain.
The insurance industry has declared pandemics uninsurable events — beyond the financial wherewithal of the private market.
Said Mike Rouse, Marsh’s U.S. property insurance practice leader: “In general, carriers in the U.S. are not willing to provide coverage for communicable disease. While there was some limited coverage available in the market prior to 2020, all direct and reinsurance carriers have been focused on excluding coverage and any business interruption from such.”
The Next Pandemic
So, what happens if there’s another pandemic?
According to estimates from The Organization for Economic Co-operation and Development (OECD), businesses across OECD countries faced an estimated $1.7 trillion in revenue losses for one month of strict confinement or shutdown measures.
Congress and state legislatures have tried to write laws to that in some way force insurers to pay out on business interruption claims or develop emergency mechanisms for insurance payouts, but those efforts have stalled.
The insurance industry has proposed various programs to co-insure small and medium-size businesses alongside the government, with policyholders paying premiums based on the share of losses borne by the market.
Ultimately, said the OECD, governments will need to consider whether it is more cost-effective to provide financial support for a catastrophe risk insurance program for pandemic or pandemic-like losses or provide this support directly to businesses from the general government budget.
Cyber Business Interruption
In the meantime, CFOs buying insurance must be careful, reviewing insurance policies line by line and pressing their insurers for more straightforward language on what a policy does and does not cover and its specific exclusions.
That’s especially true for cyber insurance policies, some of which are now including business interruption coverage. The coverage is supposed to reimburse the business for income losses from a shutdown caused by a cyber security breach.
However, according to the Insurance Training Center, potential policy buyers should be wary of the language in such policies. For example, a cyber policy with business interruption coverage could require a complete shutdown of business operations instead of just reputational damage. In addition, some policies may limit scope to cyber attacks with malicious intent. And there is generally a waiting period of 24 or 48 hours until coverage kicks in.
Some insurers also have contingent business interruption coverage available, which provides for loss of income due to an interruption in the service of a third-party service provider caused directly by the failure of that provider’s network.