Law360 (August 5, 2020, 2:56 PM EDT) -- Insurance companies are scrambling to figure out how and if they can offer real estate pandemic insurance while Congress is also looking into the question, and lawyers say coming up with such a product comes with major hurdles for the parties involved.
Chief among the challenges for insurance companies is trying to underwrite pandemic insurance.
But the federal government also would face a massive challenge in understanding the scope of a future pandemic were it to provide a backstop for such insurance, like Congress did for terrorism insurance following the Sept. 11 terrorist attacks.
Here, Law360 looks at three considerations to keep in mind as insurance companies and governments debate the merits and challenges of real estate pandemic insurance.
For Congress, the Challenge Is Markedly Different From the Terrorism Question
Congress in November of 2002 passed the Terrorism Risk Insurance Act, or TRIA, which created a federal backstop to help pay out terrorism insurance claims, and much comparison is being made now to the months after 9/11 as the question of pandemic insurance is surfacing.
Lawyers, though, believe it will be much more difficult this time around for Congress to provide a backstop for real estate pandemic insurance, given the wide scope of a pandemic.
"Insurers are saying, 'We don't even want to take the risk.' Unlike terrorism, which is typically limited to specific assets or areas, a pandemic shuts down everybody at the same time," said Alexandra Glickman, senior managing director and global real estate and hospitality practice leader at global consulting firm Gallagher. "I think that we would be incredibly optimistic to think that Congress will come up with a pandemic insurance solution anytime in the next 12 months. Even if they do, which would be a good idea, it will not be retroactive."
There is some movement in Congress, though.
U.S. Rep. Carolyn Maloney, D-N.Y., has introduced a bill, H.R. 7011, the Pandemic Risk Insurance Act, which would create a federal backstop to help insurance companies pay out claims in the event of a future pandemic. Maloney couldn't be immediately reached for comment.
Real estate lawyers, though, say it's unlikely the federal government will come up with that backstop.
"This would be a massive scale. It's hard to see how the government backs it," said Mike Liever, a partner at Orrick Herrington & Sutcliffe LLP.
While the federal government did back terrorism insurance after 9/11 and also backs a flood insurance program, the scope of a pandemic is far greater than that of floods terrorist attacks, so Congress faces far greater challenges on the pandemic question.
"Personally, I hope it happens yesterday," Glickman said. "TRIA [took] more than a year. You would have thought they would have moved more swiftly [after 9/11]. They didn't."
For Policyholders, Business Interruption Language Will Likely Become Clearer
While looking at the question purely from a pandemic point of view is one thing, parties are also now closely looking at the related question of government shutdowns, which this year have stemmed from the COVID-19 pandemic, and lawyers expect future policies to more clearly indicate what is and isn't covered on that front.
At present, there is ambiguity as to whether government shutdowns as a result of the pandemic have given policyholders a viable insurance claim.
And experts say future policies will likely provide clear language on where insurance companies stand on that issue.
"This is what will change in the future. The policies that are written in the future on this will make it clear whether a shutdown by the government is a covered risk," Liever said.
Liever said that while some policies now do have clear language that addresses what happens in the event of a virus, most don't have that clarity, which leads to disagreements between the parties, and sometimes litigation.
And he said it will take time for that clarity to come.
"What you'll see is it will be very hard to get any of type of insurance [that has clear coverage for government shutdowns] for some period of time," Liever said. "It's analogous to after 9/11 and after major earthquakes in California."
For Insurance Companies, Underwriting Is a Nightmare
Just as Congress faces the question of what its liability could be if it backed a future pandemic insurance program, insurers also are scrambling to figure out how to underwrite pandemic policies.
"First, you have to understand the magnitude of what you're underwriting. The risk assessment is so much greater in a pandemic than in a terrorism case," said Morris Missry, managing partner of Wachtel Missry LLP and the chair of the firm's real estate department. "In a terrorism case, you're talking about something that's finite. ... In a pandemic, it's not just one site or a few sites. In a pandemic, you're talking about cities, states. The magnitude of the loss is so much greater."
Of course, it's unknown was the costs or terms would be.
Liever said if a policy were to, say, offer $2 million in coverage but come with a $1 million deductible, that might not be terribly attractive to an owner. Insurance companies may also put time deductibles into plans, which could, for example, spell out that a particular event is not covered for the first six months, he said.
That's just one of many underwriting questions.
"How do you underwrite it? How did this [pandemic] turn out? How long did it last? How long were the shutdowns in place? How likely is it in the future?" Liever said. "The natural reaction by insurance companies is when they can't underwrite it, they don't want to write it."
Indeed, while it's likely some insurance product will come down the pike at some point, the underwriting question is likely to result in long delays.
"Actuarially, it is extremely difficult to underwrite," Glickman said.
--Editing by Rebecca Flanagan and Katherine Rautenberg.
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