By Norton Cutler and Bradley Dlatt
The general intent of business interruption (BI) insurance is to cover unexpected losses to the business from the inability to use property necessary to run the business. The current form BI policies have a mechanism for making a claim for loss of revenue and/or increased costs to the business. They typically also have Civil Authority coverage to replace lost revenue when the government closes a business’s property, but carriers generally consider this a limited remedy for a short time period (such as a month). The real disagreement from carriers regarding coronavirus (COVID-19) claims is that there must be “property damage”, and even if there is property damage, the virus exclusion present in some policies prevents claims for losses from COVID-19. Moreover, carriers argue that if these coverage issues are defeated in court or removed by legislation, the carriers do not have sufficient reserves to cover the anticipated BI-related claims caused by COVID-19. For example, the American Property Casualty Insurance Association has recently claimed that being forced by legislative intervention to cover small business BI losses related to COVID-19 would cost insurers $383 billion a month.
The same issues arose after 9/11 because most property policies in existence then contained an exclusion for terrorism. In response, the federal government created a terrorism insurance fund and invalidated the exclusion for damages from terrorism. Similarly, the federal government increased flood insurance borrowing authority after Hurricanes Katrina and Harvey to pay for losses that exceeded the amount in the Federal Flood Insurance Fund.
As this blog has previously reported, several states such as New Jersey, New York, Ohio, and Massachusetts are considering legislation to provide policyholders with increased access to their BI coverage, regardless of whether the policy at issue has a virus exclusion and how the applicable jurisdiction interprets the “property damage” issue. But even if these statutes pass, insurance carriers are likely to raise serious constitutional issues or legal challenges as to their validity and may even claim that the statutes effect a constitutional taking for which they deserve just compensation.
If the federal government decides that a further stimulus is needed to keep afloat businesses that have lost revenues due to closure of either their own or their customers’ facilities because of COVID-19, then it seems that creating a fund or simply using the terrorism or flood funds, as augmented by a further appropriation or borrowing authority, might be the best way to provide compensation for an appropriate percentage of BI claims. This approach would pass constitutional muster as the Terrorism Risk Insurance Act of 2002, PL107-297 (TRIA), which invalidated all terrorism exclusions in property insurance policies, was deemed constitutional.
Under TRIA, the federal government agreed to pay 90% of all losses from terrorism up to $100 billion, which presumably offset any potential taking from the carriers who lost their exclusions. TRIA also allowed carriers to charge forward-looking supplemental premiums to set up a terrorism fund for the future and repay the government for its terrorism payments. A similar separate statute addressing pandemics or an amendment to the existing statute to cover pandemics might well solve the current issue relating to BI coverage for COVID-19 losses and be found constitutional. The Problem Solvers Caucus and a few trade associations have proposed modifying the Terrorism Fund or creating a separate fund. Similarly, the association of British Insurers has said that it will discuss setting up such a fund with the UK government.
Setting up borrowing authority for a pandemic fund and increasing it when necessary could also solve these issues, similar to when the borrowing authority of the Federal Flood Insurance Program was increased from $1.5 billion to $20 billion after Hurricane Katrina.
Under either approach, insurance companies would be allowed to collect premiums going forward to replenish the fund and perhaps eventually pay back the government. The Massachusetts bill also proposes a method of state reimbursement for claims with increased premiums to pay back the state funding.
Insurance companies already have the personnel and the methods available to audit any claims for lost income and would save the government the expense of setting up a separate claim auditing service.
Rather than setting up yet another expensive method of distributing stimulus funds, the various governments might want to piggyback on existing insurance systems and pay at least some portion of the anticipated trillions of dollars of BI claims. This might also alleviate the biggest challenge of this solution, placing the money in the correct hands and getting funds to businesses in time, to prevent them from going under while they wait for the funds.
In fact, this past week, a group of 30+ major trade associations, including several insurance associations, sent a letter to the President, the Secretary of the Treasury, and senior congressional leadership seeking creation of a designated federal fund to cover small businesses losses. The largest insurance broker in the world, Marsh, has also sent letters to senior government officials seeking creation of a federal pandemic insurance program similar to TRIA.
During this period of uncertainty over BI coverage, all businesses who have BI policies should closely review their policies for potential coverage for COVID-19–related losses and consult with their insurance agent and counsel regarding the same. Businesses must act now to avoid any problems with late claims that might arise if they wait longer than the time limit specified to report claims, which can be as short as 30 days from the date of the loss.