Pressure has been building on the insurance industry to reimburse companies big and small for their losses after a proposal began circulating in Congress that would treat the COVID-19 pandemic like an act of terrorism for insurance purposes.
The Pandemic Risk Insurance Act would require insurers to cover business losses resulting from pandemics. The federal government would serve as a backstop for insurance companies. Some are arguing that the coverage should be offered to companies retroactively as a solution to the massive losses hitting nearly all sectors of the economy during the outbreak.
“If they don’t do this, we’re in very, very big trouble,” said Zachary Finn, director of the risk management program at Butler University. “Business interruption spreads through the economy like a contagion. What’s happening is Congress can’t bail us out fast enough.”
Mr. Finn drafted a proposal for Congress based on a project created by four of his former students to address business losses from a theoretical cyberattack. The measure is modeled on the Terrorism Risk Insurance Act of 2002.
The proposal has the backing of House Financial Services Committee Chairwoman Maxine Waters, California Democrat.
“The circumstances we are facing are unprecedented and will require creative approaches,” she said as House Democrats consider a fourth economic rescue package. “America’s consumers, small businesses and vulnerable populations are suffering. It is time for a policy and fiscal response to address their needs.”
House Republican leaders are hesitant. They say it’s more important to deliver aid to businesses and workers from the just-approved $2.2 trillion “phase three” rescue plan.
“We aren’t involved in any talks along those lines and wouldn’t support retroactively amending [insurance] contracts like some are suggesting,” said a House Republican leadership aide. “We are focused on getting firms support through the mechanisms established in the CARES Act.”
President Trump, asked last week whether insurance companies would be compensated for “extraordinary expenses” incurred during the pandemic, said the administration is talking with insurers. He noted that two major health care insurers have agreed to waive patient co-pays for treatment of COVID-19.
“That’s a lot of money they gave up,” Mr. Trump said. “But we’re discussing that with the insurance companies.”
A coalition of 36 insurance and business trade groups called on the administration and Congress last week to create a recovery fund to supplement the $2.2 trillion economic rescue package, which is providing aid to distressed companies and laid-off workers.
“Without broad-based and expeditious federal action, long-term damage to the financial markets, rampant unemployment, and irreparable harm to communities are almost certain,” the groups wrote. “Although the loan programs instituted by the CARES Act provide a down payment on economic support for Main Street businesses, additional liquidity will be required for impaired industries and businesses to avoid an unprecedented systemic, economic crisis.”
They are proposing another program “funded by the federal government and under the authority of a special federal administrator with the ability to enter into contracts with interested businesses to administer the ‘Recovery Fund’ and facilitate the distribution of federal funds and liquidity to impacted businesses and their employees.”
John Q. Doyle, president and CEO of the global insurance and risk management firm Marsh & McLennan, wrote to congressional leaders, Treasury Secretary Steven T. Mnuchin and White House economic adviser Larry Kudlow last week to propose a “pandemic risk insurance program” to accelerate the recovery and protect against another pandemic.
“The stakes for businesses, their employees and the economy are simply too high to defer action in addressing pandemic risk exposure,” Mr. Doyle wrote. “The time is now to structure a public-private partnership with input from policyholders, insurers and the federal government.”
Under his proposed plan, “policyholders would absorb initial losses up to specified deductibles.”
“Insurers would then provide business interruption coverage between that threshold and a higher limit,” Mr. Doyle wrote. “The federal government would then backstop the overall program by bearing a portion of the damages above a certain level. Naturally, the precise contours of the program, including trigger points and limits, will need to be developed in close collaboration with these stakeholders and the federal government.”
He said the insurance industry can’t cover the massive crisis on its own.
“Given the magnitude of the COVID-19 exposure and current capital levels in the industry, the private insurance sector does not have the risk bearing capacity alone to manage this peril across the U.S. economy,” Mr. Doyle said. “There are certain risks, like terrorism, that require the full weight of the United States government to manage in partnership with the insurance industry.”
Insurers are fighting the House proposal. The vast majority of property and casualty insurance policies don’t cover losses caused by contagion or losses stemming from government orders for business shutdowns.
“Business income loss from a virus, bacterium or other micro-organism is generally not covered,” said Patrick Shea, co-founder of Tower Program Insurance in Austin, Texas. “If the government shuts your business down, most policies don’t cover it. I don’t see Zurich and AIG and Lexington and all those big carriers saying that they have some vulnerability to pay some of these claims on these big casinos and hotels.”
Lawsuits against insurers already have been filed. The Oceana Grill restaurant in New Orleans filed the first lawsuit late last month over business interruption coverage. It asked a state court to rule that its all-risks policy from Lloyd’s of London should cover its losses if local authorities shut down the establishment.
The New Jersey General Assembly late last month was advancing a measure to authorize coverage retroactively in insurance policies for businesses with fewer than 100 employees. Legislators tabled the proposal after insurance trade groups agreed to devise a voluntary approach to help small-business policyholders cover their losses.
A bipartisan group of 18 House lawmakers asked four major insurance trade associations on March 18 to retroactively recognize financial losses for policyholders relating to COVID-19 under commercial business interruption coverage. The group comprised six Republicans and 12 Democrats.
“During times of crisis, we must all work together,” the lawmakers wrote. They said civil authorities’ shelter-in-place orders should enable businesses to receive compensation from insurers.
“In many commercial property insurance policies, business interruption coverage is triggered when the policyholder sustains ‘direct physical loss of or damage to’ insured property,” their letter stated. “In addition, many commercial property insurance policies provide coverage for business income losses sustained when a civil authority prohibits or impairs access to the policyholder’s premises.”
The insurance trade groups rejected the lawmakers’ request in a letter to Rep. Nydia Velazquez, New York Democrat and chairwoman of the House Small Business Committee.
“Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19,” wrote David Sampson, president and CEO of the American Property Casualty Insurance Association; Charles Chamness, president and CEO of the National Association of Mutual Insurance Companies; Bob Rusbuldt, president and CEO of the Independent Insurance Agents & Brokers of America, and Ken Crerar, president and CEO of the Council of Insurance Agents & Brokers.
They said the U.S. insurance industry “remains committed to our consumers and will ensure that prompt payments are made in instances where coverage exists.”
“We recognize the extraordinary challenges our country is facing — our member businesses, our employees, and our families are confronting the same trials,” the trade groups’ letter said. “The U.S. is in the midst of a national crisis that will require federal assistance that provides funding directly to those American individuals and businesses most in need. Our organizations stand ready to work with Congress on solutions that provide the necessary relief as soon as possible.”
But the Risk and Insurance Management Society of New York said it was encouraged by what it called growing momentum for a federal backstop.
“It is encouraging to hear that the federal government recognizes the important role insurance and risk management can have in assisting the countless businesses that have been affected by COVID-19,” Whitney Craig, the group’s director of government affairs, told the publication Business Insurance. “RIMS has already reached out to congressional leaders, offering our support as they attempt to develop a strategy to address the impact of this global pandemic.”
Mr. Finn said he has been working with Ms. Craig to advance his proposal in Congress, and he thinks it will be approved.
“The program would pay exactly as it would have paid if terrorism was the cause,” Mr. Finn said in an interview. “That gives certainty to the market because [the Terrorism Risk Insurance Act is] already there, so it’s stood the test of time politically. I would argue it will save more money in litigation than [insurance companies] would pay, and I would also argue that this is good for their business in the long term.”