COVID-19 and Business Interruption

Pandemics are uninsured because they are uninsurable events. Commercial property insurance policies that include business interruption coverage generally are not intended to cover disease or pandemic-related losses. Business interruption insurance covers the financial impact of an interruption to the normal course of business caused by physical damage to a commercial property, such as a fire. Since viruses, like COVID-19, do not cause physical property damage, they are not typically covered under this insurance. In the vast majority of cases, insurers did not price policies to include such coverage, and policyholders did not pay premiums to have this coverage.

Insurers are paying – and will continue to pay – every covered insurance claim related to the pandemic, just like we have for other major events. For example, approximately 33 percent of all paid insured losses after 9/11 were from covered business interruption claims.

However, retroactive mandates impose massive liability on the insurance industry for a risk that insurers explicitly did not assume under their contracts. Simply put, if insurance companies are required to cover claims they never sold, it would significantly undermine the ability of insurers to pay other types of claims which are covered – such as wind damage, fire losses, and automobile crashes.

  • APCIA estimates that closure losses just for small businesses with 100 or fewer employees is between $255 billion to $431 billion per month.
  • These numbers dwarf the premiums for all relevant commercial property risks in the key insurance lines, which is estimated at $4.5 billion a month. (APCIA’s calculation based on S&P Global Market Intelligence)
  • That means continuity losses for small businesses are in the general range of 50 to 100 times the monthly commercial property insurance premiums, which includes coverage for losses as a result of such perils as fire, wind, hail, and water leaks.
  • The total surplus for all of the U.S. home, auto, and business insurers combined to pay all future losses is roughly only $800 billion, with the combined capital of the top business insurance underwriters representing only a fraction of that amount. Surplus represents dollars held by companies, required by law, to pay future losses for existing contracts.
  • To put the scope and scale of these losses in perspective, Hurricane Katrina caused the greatest insured loss in U.S. history – roughly $54 billion in today’s dollars.
  • All losses from the 9/11 attacks were roughly $48 billion.
  • The potential for such losses for all businesses in the U.S. of all sizes is currently estimated at $1-$1.1 trillion.
  • The International Monetary Fund (IMF) estimates that the coronavirus is likely to cause $9 trillion in global losses – more than the size of the Japanese and German economies combined.

Ramifications of Retroactively Rewriting Contracts

  • We strongly oppose any proposals that retroactively rewrite insurance contracts and threaten the stability of the sector, to the detriment of all policyholders.
  • Retroactively rewriting contracts for products that were never sold could have dramatic repercussions for all families, individuals, motorists, and businesses—in addition to the broader economy and supply chain.
  • Industry stability is especially important in a time of increased natural catastrophes. Spring flooding season is underway and hurricane season is around the corner. The people who rely on insurers to keep their everyday promises made in existing insurance policies should not be put at risk.
  • Changing property insurance perils retroactively is unprecedented and did not happen after any of the most recent catastrophic events such as: Hurricane Andrew; 9/11; Hurricane Katrina; Deepwater Horizon; H1N1; the Boston Marathon attack; California Wildfires; or Superstorm Sandy. Those disasters – costly and devastating as they were – were regionally localized.
  • The present COVID-19 crisis is not local. It is not national. It is global. The cost impact of retroactively changing insurance policies cannot be overstated. It is not even possible to estimate it as the crisis continues to unfold.
  • Executive orders, regulations, or legislation rewriting existing insurance contracts by nullifying the virus and communicable disease exclusions or the direct physical damage requirement ignore clear constitutional provisions, harming the consumers who rely on them. Retroactively raiding funds insurers have set aside for other consumer risks will create false promises that will only result in years of costly litigation without benefit to anyone.
  • Equally important, taking such action for insurance policies undermines a bedrock principle of the U.S. free market system, undermining the certainty of contracts for all businesses.
  • If insurance contracts can be retroactively nullified, no contracts are safe.

Solutions for COVID impacted businesses and workers

  • Insurers understand the urgency of helping businesses and individuals recover from this unprecedented crisis and mitigate a larger shut down of the economy.
  • Insurers are voluntarily implementing new discounts and refunds for policyholders; expanding flexible payment solutions for families, individuals, and businesses; suspending premium billing for small businesses such as restaurants and bars; and pausing cancellation of coverage for motorists due to non-payment and policy expiration.
  • Only the federal government can be the bridge for a crisis of this proportion. The property casualty industry supports federal assistance programs that are delivering aid directly to vulnerable business communities, particularly affected small businesses.
  • Insurers have also joined a broad business trade coalition calling for the COVID-19 Business and Employee Continuity and Recovery Fund, which would provide immediate grants to impaired businesses to help them survive, reopen, and retain and rehire employees. Insurers and the business community are working together for enactment of the Recovery Fund in the next federal COVID-19 relief package.

Regulation of insurance

  • Property casualty insurance is stringently regulated at the state level for solvency, price adequacy, and consumer protection.
  • The National Association of Insurance Commissioners (NAIC) affirmed in a statement on March 25, 2020 that, “While the U.S. insurance sector remains strong, if insurance companies are required to cover such claims, such an action would create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing.”
  • Furthermore, the NAIC stated that, “…swift action by Congress to directly address the needs of citizens and our economy is the most effective and expedient means to addressing the devastating impact of COVID-19.”