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As we approach the one-year mark on the start of this seemingly relentless pandemic in the United States, business owners and executives are considering the insurance industry’s likely response to this time of economic turmoil.
It is now common knowledge in the business community that virtually all claims submitted for the loss of business or forced closures due to the pandemic have been denied. There are many lawsuits pending around the country regarding this, but at this time a new precedent has not been set, nor is one expected. Likewise, although there has been considerable noise coming from various legislative bodies across the nation regarding these claims not being covered and possible government solutions, no changes have been proposed.
It is likely this is the result of the unpopular fact that if the insurance industry were compelled to make good on these claims, the country’s entire insurance safety net might not survive.
The reasons for this are relatively simple: insurance companies charge premiums that enable them to provide protection for their customers and, at the same time, allow for reasonable profits. Rates are determined by calculating degrees of risk and the potential loss payout in the event of claims. An incident like a global pandemic started by a new virus was never identified in the risk profile, thus it was not included in the rates being charged. Therefore, the payout that would take place if insurance companies were required to pay these claims would more than likely deplete their reserves and impede their ability to make good on the claims that were contemplated.
The last time the nation faced a similarly unprecedented situation was after the 9/11 attacks. Unlike our current circumstance where most policies exclude claims arising from the pandemic and the virus causing it, coverage issues regarding 9/11 were far murkier. Terrorism was not mentioned in policies during that time; the industry was left to decide if terrorist acts fell under the war exclusion or if they were an entirely different clause. The ambiguity became rather moot after a famous statement by then Chubb CEO Dean O’Hare. He confirmed Chubb would pay the 9/11 claims, and much of the industry fell in line. It was viewed as a patriotic position at the time, and it still is to this day. The difference between then and now is while COVID-19 is undeniably a significant claim event, 9/11 was limited in scope and did not affect nearly every business in the country.
While it is doubtful there will be a wholesale change for insurance coverage in this current pandemic, it is possible, and even likely, insurance coverage will be offered for this type of loss in the future. Something similar happened after 9/11 when the government backed insurers in providing separate terrorist coverage for businesses.
After the terrorist attacks, insurers began to look closely at the policy language and make changes so ‘terrorism’ would be clearly excluded in the future. At the beginning of 2002, 45 states approved the new exclusions specifically geared toward terrorism claims, as confirmed by the Insurance Information Institute. Not only did the problem lie with primary insurers, most reinsurers were also reluctant to provide the terrorism coverage in either their treaties or facultative placements; urban areas were the most susceptible. The business community was clamoring for the coverage and pressed the government to act.
Ohio Republican Mike Oxley (of Sarbanes-Oxley fame), chairman of the House Financial Services Committee at the time, was instrumental in the creation of the Terrorism Risk Insurance Act of 2002 (TRIA). The act was signed into law in November by President George W. Bush, a little over a year after the 9/11 attacks. In essence, TRIA provided government-sponsored reinsurance to allow insurance companies to offer terrorism coverage. While the original TRIA provisions expired some time ago, amendments are still in place for insurers to continue offering this facility.
The TRIA model illustrates a roadmap for pandemic coverage. It’s likely the insurance and reinsurance industry will want to exclude or restrict coverage even more specifically after witnessing the effects of the COVID-19 pandemic. Without a doubt, businesses will be seeking this coverage in the future and the pressure will be severe. With the amount of money the government has spent so far in response to the pandemic, one must wonder how much of an appetite Congress will have to take on this challenge. Only time will tell.
Wynne Nowland is the Chairwoman and Chief Executive Officer of Bradley & Parker.