We are seeing an emergence of state and federal activity to redefine certain terms in insurance contracts (most notably, property) in order to “re-engineer” the business interruption coverage to respond to non-physical damage claims arising out of the COVID-19 pandemic. The consequences are profound to both sides (policyholders and insurers), both in the magnitude of the potential insurance recoverables currently uninsured, and the threat to insurer insolvency caused by a catastrophic loss that was never modeled or priced for an insurer/reinsurer’s balance sheet.
At the federal level, a bipartisan group of U.S. House members signed a letter asking insurer trade groups to recognize COVID-19 losses as included under policies’ business interruption coverage. In response, the four industry groups said they’re working to provide relief to policyholders, but not through the coverage in question, indicating that business interruption policies do not, and were not, designed to provide coverage against communicable diseases such as COVID-19.
- There are very preliminary discussions to contemplate a federal backstop for COVID-19 business interruption claims, given the lack of perceived coverage with respects to property policies, along with the economic loss sustained by policyholders.
- Trade groups (the American Property Casualty Insurance Association and the Reinsurance Association of America) have joined the discussion with a proposal to create a small business compensation fund (small business being described as less than 500 employees) as follows:
- Creation of a federal financial facility under the stewardship of Treasury (IRS) funded by the federal government under the jurisdiction of a Chair/Czar appointed by the president and authorized by Congress.
- The federal facility would process, validate and pay claims submitted by claimants. An immediate minimum payment or floor would be provided upon submission of a valid claim.
- Claims criteria would include (1) business interruption losses based on factors such as maintaining a working employee headcount, economic and financial impact, or lost revenue, and (2) employee indemnity and medical benefits resulting from COVID-19 virus for employees that would not be covered by applicable workers’ compensation insurance.
- The potential for a reinsurance vehicle somewhat similar to the introduction of TRIA(Terrorism Risk Insurance Act) in 2002 funded by the United States, but absorbing COVID-19 losses on a retrospective basis. TRIA was designed to provide coverage behind property/casualty insurers on a prospective basis (not for historical uninsured/underinsured losses) for future terrorist acts as certified by Treasury.
- Several substantive issues would need to be addressed to make this a viable approach
- This “facility” would be construed as a necessary additional means of financial support to insureds over and above the estimated $2 trillion stimulus package currently being voted on by the US Congress
- The logistics of execution (reinsurance to insurers, a direct payment by the federal government, some component of loss sharing, what lines of coverage and time period, etc.)
- Congressional support to effect into viable legislation
It’s speculative to determine the direction of such federal intervention other than (1) it will probably be driven by the risk of insolvency of large number employers due to the lack of viable insurance recoverables out of COVID-19, (2) how it fits with other “relief” legislation addressing similar issues, and (3) potential participation by insurers (either simply as administrators and/or as risk sharing participants).