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Law360 (June 5, 2020, 6:23 PM EDT) --
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| Caroline Meneau |
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| Hope Tone |
Business interruption coverage in commercial all risk property insurance policies (and, in some cases, in other specialized insurance products) may provide coverage to policyholders when a business is forced to close or operations are limited. However, insurers have aggressively denied claims for COVID-19-related losses under a variety of theories.
While disputes over COVID-19-related losses play out, legislators, insurers and policyholders are also considering legislative solutions that may offer relief from pandemic-related losses in the future. Ultimately, a federal pandemic insurance program, similar to existing federal programs that provide coverage in the event of widespread disasters like floods and terrorism, may bring stability to the industry and give policyholders greater confidence that their losses will be covered in the event of a future pandemic.
This article discusses the proposed Pandemic Risk Reinsurance Act of 2020.
Congress Addressed Terrorism Risks in 2002
The COVID-19 pandemic is not the first time in recent history that Congress considered legislating an answer to widespread disasters that are difficult to insure in the conventional marketplace. For example, in 1968, Congress passed the National Flood Insurance Act to guarantee access to flood insurance, particularly those with structures already built in floodplains.[1] After the Sept. 11 terrorist attacks, Congress reacted to the demand for widely available terrorism insurance coverage by passing the Terrorism Risk Insurance Act.
The Sept. 11 terrorist attacks produced insured losses of $39.5 billion, much of which was spent on rebuilding lower Manhattan. Sept. 11 became one of the top 10 most costly catastrophes for insurers in the U.S., and insurers adopted new policy exclusions designed to avoid liability in the event of future terrorism.
At the same time, businesses were acutely aware of the risk that terrorist attacks posed. Entire industries, including transportation, construction and utilities, tried to plan for their unique vulnerability to terrorist attacks.
In response, in 2002, Congress passed the TRIA.[2] The TRIA required commercial insurers to offer terrorism coverage, but provided a government reinsurance backstop in case of large-scale terrorist attacks. The TRIA has a triggering event threshold, which as of 2020 was a $200 million insurance industry loss from a certified act of terrorism.
In the TRIA itself, Congress outlined several purposes for the TRIA. The growth of the economy depended on reasonable and predictable insurance prices, but at the current prices, insurers would not be able to cover all of the losses. These risks would lead to widespread market uncertainty and insurers would be forced to either deny coverage related to terrorist attacks or drastically increasing prices for policyholders. The TRIA was drafted to provide protection to both the insurers and policyholders in the case of another large-scale terrorist attack.
The TRIA provided a workable solution for both the insurers and the insured and can provide a legislative model for responding to the unique insurance coverage issues caused by the COVID-19 pandemic.
The Proposed Pandemic Risk Insurance Act
On May 26, 2020, Rep. Carolyn Maloney, D-N.Y., officially introduced to Pandemic Risk Insurance Act, or H.R. 7011, to the U.S. House of Representatives.[3]
The PRIA would provide a federal backstop when the aggregate industry insured losses from a public health emergency exceeds $250 billion. The covered health emergency must be declared on or after Jan. 1, 2021. The bill would not affect any policy for business interruption insurance in force on the date of the enactment, however, it would nullify any pandemic-related exclusions in contracts of participating insurers.
The bill defines business interruption insurance as commercial lines of property and casualty insurance coverage, including event cancellation insurance or other nonproperty contingent business interruption insurance.
Participation in PRIA is voluntary, but participating insurers would be required to provide coverage for pandemics in all of their business interruption insurance policies. The federal share of the compensation is 95% of the portion of the amount that exceeds the insurer deductible, up to the $750 billion cap. The remaining 5% of the payments would be covered by the participating insurers. If losses exceed the $750 billion cap, the treasury secretary would determine a pro rata share of compensation beyond that cap.
Like the TRIA, the PRIA would provide a backstop to insurers and encourage them to provide coverage for substantial and unexpected risks. Although the U.S. experienced terrorist attacks before Sept. 11 and pandemics before COVID-19, the two are similar in both their unexpectedness and the scope of potential loss.
Key differences between the Sept. 11 terrorist attacks and the COVID-19 crisis may affect whether a similar solution is feasible.
First, terrorism does not typically have the widespread geographic impact of a pandemic. The physical damage from the Sept. 11 attacks was concentrated in New York, Pennsylvania and Washington, D.C. And in terms of future attacks, businesses in urban areas generally see themselves more at risk for terrorist attacks.
In contrast, COVID-19 is a threat in all geographic areas. State stay-at-home orders have closed many businesses, regardless of location. Mandated closures have not thus far distinguished between businesses in high and low risk areas. This will likely change going forward, as many governors, such as Illinois Gov. J.B. Pritzker, have categorized reopening plans for states into regions to allow for different parts of the state to recover on different timelines.
However, all businesses are newly focused on the risks of pandemics and future shutdowns, even those in less populated areas. This means that more businesses are likely to try and opt in for business interruption policies that include pandemic coverage than would try to opt in for terrorism coverage.
Second, a different set of industries are particularly at risk. The Sept. 11 terrorist attacks left industries such as construction, utilities and transportation particularly vulnerable. In contrast, the retail, hospitality and travel industries have shouldered much of the burden of state stay-at-home orders. These industries are not at risk for short term disruptions, rather prolonged closures to prevent the spread of a pandemic.
Third, most businesses that now benefit from insurance coverage under the TRIA have not experienced losses as a result of terrorism. By contrast, it is difficult to imagine a business or industry that has not been affected by COVID-19. Temporary business closures due to COVID-19 are greater in number and length of time than those required by the Sept. 11 terrorist attacks.
Providing a backstop for business interruption insurers is as important for policyholders as it is for the insurers, as a means to stabilize premiums and provide coverage for in the event of potential future largescale losses. And given the current public health crisis, it seems likely that even more businesses will attempt to acquire some form of business interruption insurance.
Other Legislative Options
While the PRIA addresses coverage for future pandemic events, other bills attempt to address coverage for the current coronavirus-related losses. The Business Interruption Insurance Coverage Act, or H.R. 6494, introduced April 14, would require insurers to provide coverage for losses resulting from any viral pandemic, state or federal shutdowns of businesses, or loss of power.[4]
The proposed bill would apply even if an insurance policy purports to exclude viral pandemics or government mandated closures. While this bill would provide coverage for COVID-19 related loses in the short term, it does not address the long term stability of the commercial insurance market, and does not provide federal funding to support insurers' coverage obligations. Several state legislators have introduced similar bills compelling coverage for COVID-19-related losses.
Ultimately, providing policyholders with coverage without legislating a backstop for insurers may be a short-term solution, given the catastrophic economic effects of the COVID-19 crisis and the number of claims that have arisen due to state mandated business closures. In the long term, policyholders may benefit from a stabilized market supported by federal funding.
Caroline Meneau is a partner and Hope Tone is an associate at Jenner & Block LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] The National Flood Insurance Act, 42 USC § 4001.
[2] Terrorism Risk Insurance Act, 116 Stat. 2322 (Nov. 26, 2002).
[3] Pandemic Risk Insurance Act, H.R. 5889, 116th Cong. (2020).
[4] The Potential Business Interruption Insurance Coverage Act, H.R. 6494, 116th Cong (2020).
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