The Limits of Pandemic Insurance and Why a Government-Backed Insurance Program is Needed to Prepare for Future Outbreaks
Introduction
For over a month now, the Coronavirus pandemic has caused a cascade of business closures and event cancellations across the United States. Affected businesses are scrambling to find ways to stay afloat, most notably by applying for relief through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Aside from the expected bureaucratic hurdles and delays in getting relief under the CARES Act, it appears to have a wide reach for small businesses, and many small business owners we have spoken with have successfully applied.
Relying on emergency government aid is not an ideal option for businesses. Particularly after the 2008 recession and growing criticism against large corporate bailouts, many business leaders are not factoring a stimulus into their risk analysis of when things go south. As I discussed in a prior article, many are relying on industry-specific foundations and nonprofits to support struggling businesses. These include Southern Smoke Foundation, a Houston-based organization that supported workers affected by Hurricane Harvey and is once again stepping up to support the restaurant industry as the ban on in-person dining leaves many employees out of work.
Private insurance that specifically covers pandemics may be the most viable option for businesses to prepare for current crises. The insurance broker Marsh unveiled PathogenRX in 2018, largely in response to the growing frequency of global pandemics like SARS, Zika, and Ebola. Wimbledon made headlines last week as it is set to receive a $141 million insurance payout for the cancellation of this year’s tournament (which covers half of what it expects to lose).
Unfortunately, the most existing commercial insurance policies either expressly exclude coverage for pandemics or severely limit it in ways that will not help most businesses. This article discusses pandemic coverage generally and the main hurdles most businesses will face in getting coverage under typical commercial policies. Ultimately, the huge risk presented by global pandemics may limit insurers’ willingness and ability to provide universal coverage on their own. This may require a federally-backed guarantee program similar to the National Flood Insurance Program or the similar government-backed program to subsidize coverage for acts of terrorism.
An Introduction to Pandemic Insurance and its Limitations
Most businesses carry some kind of commercial insurance. This generally includes commercial general liability (“CGL”) coverage (e.g. to pay for a lawsuit brought by somebody who claims they slipped and fell on the premises) and property casualty insurance (e.g. to pay for events like fires or hurricanes). The approximately one-third of U.S. businesses that have “business interruption” insurance are protected from events that force companies to suspend or stop operations. Many policies also have “civil authority” clauses that cover losses when a governmental agency stops a business from operating. As discussed further below, these types of coverage generally require interruption caused by actual physical damage to the property, such as when a fire forces a restaurant to temporarily cease operations.
Desperate for relief from the unprecedented pandemic damage, many businesses are already looking to their policies for possible coverage. Two prominent restaurants—New Orleans based Oceana Grill and Napa Valley based French Laundry—have already filed suit for a judicial finding of insurance coverage. “We’re going to see a tidal wave of litigation over the business interruption,” said Ross Angus Williams, an attorney with the Bell Nunnally & Martin firm in Dallas. “It’s really a Wild West situation for a lot of businesses as to whether they’ll have coverage.”
Unfortunately, many of these businesses are already facing pushback or outright denials from their insurance companies. This is because of widespread policy changes made after the 2002-2003 SARS outbreak, which infected 8,000 people and led to millions of dollars in business-interruption insurance claims and payouts. These included a $16 million payout to one hotel chain, Mandarin Oriental International. Although the SARS pandemic was mostly limited to Asia, it foreshadowed larger pandemics ahead and caused insurers to begin limiting their risk by excluding coverage.
The recent lawsuit filed by Oceana Grill illustrates how typical policies would handle losses from pandemics. In its lawsuit, Oceana Grill argues that it purchased an “all risk” policy from Lloyd’s of London. Policies such as those designated as “all risk” will generally cover property damage caused by any source unless specifically excluded. The policy may also include an endorsement for business-interruption losses. In the lawsuit, Oceana argues that its Lloyd’s policy specifically includes coverage for business closure due to an order by a Civil Authority (e.g. mandatory shelter-in-place orders). Oceana also argues that its “all risk” coverage does not exclude pandemics, adding that the only exclusion for contamination by biological pathogens is if this is caused by an act of terrorism or biological warfare. This latter type of exclusion was another change made after another crisis, the 9/11 attacks, after which many insurers began addressing terrorism coverage in their policies.
To be entitled to coverage, business interruptions must generally be caused by actual physical damage. For example, if a fire causes a business to close for several days or weeks to repair, business-interruption coverage would apply to the resulting economic losses to the business. In its lawsuit, Oceana argues that this requirement is triggered because the virus’s contamination of its surfaces constitutes physical damage requiring remediation to remove the contamination.
In response to Oceana’s lawsuit, Lloyd’s attorneys at the Zelle law firm outlined various ways that pandemic coverage will be limited or excluded altogether. The following are some of the main hurdles businesses will face:
Actual Physical Damage. Oceana’s lawsuit cites cases that have found actual physical damage when there is contamination by lead or gaseous substances. Contamination by mold may also qualify as actual physical damage. Zelle questions whether Coronavirus contamination would apply because of the temporary nature of the contamination, citing available scientific evidence does not indicate that the virus services on surfaces for more than a few days.
Casually Connected to Property Damage. If an insured seeks business interruption coverage due to “damage” to its property arising from coronavirus, the insured’s loss of business must still be causally connected to the physical loss or damage. For example, an insured’s business may sustain losses due to causes other than insured physical loss or damage to property, such as a lack of workers, a decline in tourism, or a reduction in aggregate demand for goods and services as people stay home and businesses close. This requirement may make it difficult for a business to tie a generalized drop in business to uncertain virus contamination. An example of how this limitation works in practice was how courts treated airport shutdowns after the 9/11 attacks. Even though there was a “Civil Authority” coverage, one court determined the government’s order to shut down all air traffic was not the direct result of property damage, but rather was “based on the fear of future attacks.”
Coverage Limited to Cost of Remediation. An insurer is typically only liable for the cost to repair or replace the lost or damaged property. Thus, even if a business could prove there is coverage for pandemic losses, the policy might limit the amount of coverage to the time it takes to remove the loss-causing damage. If removing Coronavirus contamination requires only a few hours of de-sanitation, this would provide little relief to businesses who are shut down for weeks.
Number of Occurrences. Most policies tie deductibles to the number of occurrences (e.g. one fire or one automobile collision). In the case of virus contamination, is it an occurrence each time an infected person sneezes on the property? What if different people contaminate the business on different, nonconsecutive dates that all occur during the same outbreak? To a person who is not an insurance lawyer, these distinctions may seem nitpicky, but they can have significant consequences. In the case of the 9/11 Attacks, the owners of the twin towers fought with their insurers about whether the attacks constituted one occurrence or two (one per tower). This was the difference between a $3.5 and $7 billion payout.
Period of Restoration. Some policies also require a restoration waiting period, such as 72 hours, before coverage begins. This period lasts only as long as it should take to repair the physical loss or damage using reasonable diligence. Again, if virus contamination can be eliminated before the restoration period lapses, this could effectively eliminate any coverage.
Specific Exclusions. As discussed above, many policies issued post-SARS have express exclusions for damages arising from pandemics. Many such policies include the words or phrases “bacteria”, “virus”, or “communicable diseases” in those provisions. If the policy explicitly excludes viruses, no “damage” arising from the virus is covered.
Given these common policy exclusions, most businesses may not realistically have much relief through their existing policies. Wimbledon’s $141 million insurance payment appears to be a rare instance of an insurer accepting a pandemic insurance claim, and this was because the organization affirmatively purchased pandemic coverage. Still, there are many forms of policies out there, so if you think you may be entitled to at some relief, some minimum requirements to look for are (1) business-interruption coverage; (2) civil authority coverage; and (3) the absence of any exclusions for damages caused by virus or bacteria infections or pandemics.
Many leaders and authorities are already anticipating widespread rejections of business-interruption claims from Coronavirus. Because we can expect insurers to tighten their general policies even further after the current pandemic, some type of public-private partnership will likely be needed to protect businesses from future pandemics.
Finding the Right Public Solution
In response to the growing insurance denials, many politicians are proposing measures that would essentially mandate pandemic coverage even when it is excluded from a policy. This includes Massachusetts State Senator James Eldridge, who has already introduced a bill that would require insurers to pay these business-interruption claims.
“If we don’t find a way to get some financial relief to the restaurant industry, many of these restaurants won’t come back, and that is bad not only for restaurant owners and their employees but the insurance industry as well,” Mr. Eldridge said.
Similar legislation also emerged in Ohio and New Jersey, the latter of which tabled the proposed legislation when it became apparent that litigation was inevitable.
Many officials proposing this legislation argue that insurers should tap into their surplus to honor pandemic claims. As of September 30, 2019, U.S. property-casualty insurers had $812.2 billion in surplus assets, according to the Insurance Information Institute.
Many insurance leaders argue that such measures are not only unconstitutional but would essentially bankrupt many insurers because of the universal and unprecedented scope of pandemic loss across the globe. In a recent interview, Chubb’s Chief Executive Officer Evan Greenberg explained that “[p]andemics, unlike other catastrophes such as a hurricane or an earthquake, are not limited by geography or time.” He added that “[t]he loss potential from a pandemic, in practical terms, is infinite, and insurance companies have only finite balance sheets.”
Instead of legislation to retroactively modify policies, Greenberg suggested that Congress should grant businesses limited immunity from litigation that arises from coronavirus-related issues. “There are things that we can and should do to provide a greater degree of certainty, and relieve the economy and business of unnecessary financial burden in the short and medium term,” Greenberg said. “I’m not talking about giving immunity to insurance companies. I’m talking about business and corporate America and nonprofits.”
Even though insurers will be heavily pushing back on pandemic claims, certain insurers are taking modest measures to accommodate policyholders. These include Allstate Corp., Berkshire Hathaway Inc.'s Geico, Hartford Financial Services Group Inc., Liberty Mutual Insurance, Progressive Corp., Travelers Cos., each of which have extended deadlines and waived fees to avoid outright cancellation of coverage. Some also are approving the use of personal vehicles for food and other essential deliveries. Allstate recently announced it was returning $600 million in auto premiums because of the drop in cars on the highway.
These measures are limited, and a viable long-term solution will require an ambitious public-private partnership. Insurance broker Marsh, the same that began offering pandemic policies 2 years ago, strongly supports a public-private “pandemic risk insurance program” for future business-interruption coverage in a March 30 letter to Congress and the Trump administration. This is similar to the federal backstop program created for terrorism coverage after the 9/11 attacks, under which insurers pay up to a maximum limit of claims before taxpayer money kicks in to cove the tail end of claims.
In the meantime, Marsh said it is experiencing a surge in inquiries for PathogenRX, a product it launched in 2018 to provide financial protection to companies hit by an infectious disease outbreak in the United States and Asia. The product includes a policy underwritten by Munich Re, one of the world's largest insurers.
The following is an excerpt from the PathogenRX fact sheet for the restaurant, retail, and hospitality industry:
To meet the growing concerns and risks surrounding outbreaks, epidemics, and pandemics, in 2018 Marsh partnered with Munich Re and Metabiota to create PathogenRX, an integrated pandemic risk quantification and insurance solution that provides financial protection to businesses and their global operations
Using straightforward triggers such as mortality or infections in a defined area, the policy provides indemnity protection that can make an insured whole in the event of a demonstrable loss. The policy can be tailored to the individual client to provide coverage for specific expenses, geographies, types of disease, or portions of a calendar year.
Conclusion
The severe scope of the pandemic requires politicians and business leaders to finally get serious about the threat of pandemics and take proactive steps to prepare for the future. A vigorous public-private insurance program is an essential part of this necessary future preparation, because this will certainly not be the last similar pandemic event the world experiences. I am preparing to forward this article to my own Congresswoman to express my support for Congress to formulate a comprehensive and sensible safety net. I encourage you to do the same. In the meantime, if you are a business owner, it wouldn't hurt to dust off that insurance policy to browse for some of the language we cite above. If you have any doubts, please contact an attorney with experience in insurance coverage to see if your policy offers any relief.