Insurance Policies Stacked Against Covid-19 Claims: State Survey

Bloomberg Law
04/17/2020

New data from Washington State paints a grim picture about just how few insurers are likely to cover business insurance claims stemming from the Covid-19 crisis.

Only two of 84 insurers that responded to a state survey say they offered pandemic coverage in their base policies, Washington State’s Office of the Insurance Commissioner said today.

An additional 15 insurers in Washington State, including Chubb Ltd., Liberty Mutual Insurance Co., and the Travelers Companies, Inc. offered limited pandemic coverage through add-ons to standard policies.

Washington is the first state to survey the insurance industry for pandemic-related coverage since the start of the pandemic outbreak in the U.S.

The results highlight the uphill battle businesses across the U.S. face in seeking payouts from their insurers due to a drop or halt in business operations because of the global Covid-19 pandemic.

“Until this epidemic, I’m not sure that we really were aware of just how much the insurance companies had taken to heart the threat of what happened with SARS, and a quick move then toward having exclusion language in their policies,” Washington Insurance Commissioner Mike Kreidler told Bloomberg Law.

Many Questions

The commission has been bombarded by questions from business owners, lawmakers and others about whether business interruption coverage policies cover the ongoing national crisis, Kreidler said.

The business community has a greater awareness of the low rate of pandemic coverage, and the magnitude of economic interruption they can cause, Kreidler said.

The American Property Casualty Insurance Association estimated that Covid-19 closures are costing U.S. small businesses an estimated $431 billion a month, according to an April 6 release.

Kreidler said he wants to make sure policyholders can have greater transparency into what their policies do and don’t cover.

Insurers also need to provide the legal rationale based on the contract terms to policyholders about why pandemic-related business interruptions aren’t covered, he said. “You can’t just go out and say ‘no, we’re not covering that’.”

“If they’re culpable they’re going to pay. If they’re not culpable, we can’t go after them retroactively and make them pay for what they didn’t insure,” Kreidler said.

Lawsuits File In

Courts in many states are seeing waves of lawsuits filed as businesses try to force the matter or seek declaratory judgments that pandemics are covered under “physical damage” clauses in insurance policies.

For small business owners, rejected business interruption claims have often come as a shock.

Julia Mayer, the owner of Santa Barbara, Calif.-based Dune Coffee Roasters, had expected the state-mandated closure of her specialty coffee roasting business to be covered under her insurance policy.

Mayer’s insurer denied her claim and informed her they don’t cover pandemics or viruses, despite the civil authority order. That clause would only have gone into effect had her business suffered “physical” property damage, Mayer said an agent for her insurance company told her.

“I’m not trying to put blame on anybody but it just feels in a lot of ways like the small businesses in this country have a big battle to fight, and it was already uphill for us,” Mayer said.

“We’re not alone, this is happening to everyone,” Mayer noted. Small business, particularly in the restaurant and services industry, are waiting to see what comes of high-profile lawsuits by famed chef Thomas Keller and others against their insurers over their own business interruption claims.

“Thankfully it’s him, he’s so successful and vocal and known,” Mayer said. “If I tried to do that it wouldn’t have as much traction. Maybe it will poke holes into how the insurance system works and doesn’t work.”

Forcing the Matter

Insurers are facing legislative challenges in addition to legal ones.

Lawmakers in multiple states—including Louisiana, Massachusetts, New Jersey, New York, Ohio, and Pennsylvania—have introduced legislation to require insurers to pay business interruption claims related to the pandemic, even on policies that excluded disease outbreaks.

None of those state bills have gained much momentum but insurance industry lawyers said they expect similar proposals to continue cropping up as the pandemic continues.

State regulators, through the National Association of Insurance Commissioners, are opposing state legislative efforts to force insurers to retroactively provide such coverage. Requiring insurance companies to pay for claims they never covered “would create substantial solvency risks for the sector,” and undermine insurers’ ability to pay other types of claims, a spokeswoman for the NAIC said in an emailed statement.

Congress is also monitoring the issue. Rep. Pramila Jayapal (D-Wash.) asked nine insurance companies to provide information on Covid-19-coverage under their commercial insurance policies, according to an April 13 letter.

Several Republican senators have voiced strong opposition to the state-level legislation or other efforts to force insurers to retroactively cover pandemic-related business interruption claims.

“Insurance contracts are a foundational pillar of our economy and attempting to ex-post facto rewrite them through knee-jerk administrative action would undoubtedly undermine our insurance system and create major unintended consequences for new contractual relationships going forward,” seven GOP senators said in the letter lead by Sen. Tim Scott (R-S.C.).

Industry Stance

Chubb Ltd. Chief Executive Officer Evan Greenberg said efforts to force insurers to pay pandemic-related business interruption claims “would bankrupt the industry,” in an interview Thursday interview with Bloomberg News.

The insurance industry held $812 billion in reserves at the end of September 2019, but that surplus has fallen “significantly” since then, according to the Insurance Information Institute, whose members include more than 60 insurance companies.

“If insurers nationwide had to pay business interruption policy claims for which insurers collected no premium, it could cost the industry each month anywhere from roughly $150 billion to nearly as high as $380 billion,” Michel Leonard, the group’s vice president and senior economist, said in a Thursday release.

The small amount accounts for small and medium-sized businesses that currently have business interruption coverage, and the larger amount includes those who do not, the release said.

Policyholder attorneys continue to dispute the notion that filing Covid-19 business interruption claims is a lost cause. Insurance companies may be taking too tight a view of what constitutes “physical damage,” said Rhonda Orin, an insurance recovery partner in Anderson Kill’s Washington office.

Physical damage doesn’t mean the same as structural damage, otherwise it would be specified as such in the policies, Orin said.

“There can be invisible, nonstructural damage,” such as due to carbon monoxide filling a building that would constitute physical--but not structural--damage to a business, she said.

“The insurance companies are staking their claim” on the interpretation of the word, Orin said. “Policyholders think they’re wrong.

Link to Article on Bloomberg Law

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- Insurance Recovery Attorney | Anderson Kill LLP
Rhonda D. Orin
Partner
Washington, DC

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