Legal actions and efforts to enable businesses and also insurers to force through claims related to business interruption appear to be expanding, with potentially significant ramifications for some in the reinsurance and insurance-linked securities (ILS) market should any succeed.
It largely comes down to contract wording interpretation and the understandable desperation of business owners facing a significant financial hit, it seems.
These efforts tend to focus on attempts to prove that the ongoing Covid-19 coronavirus pandemic has caused some form of property damage, enabling claims on property insurance towers that include business interruption and even on property catastrophe reinsurance programs.
We understand that one of these efforts is ongoing and features a smaller Canadian primary insurer that is attempting to claim that it should be able to trigger its property catastrophe reinsurance as the Covid-19 outbreak has caused damage claims under property insurance covers it has underwritten.
That boils down to the same issue as has been raised in the New Jersey General Assembly, where a bill has been tabled that calls for all coronavirus business interruption related claims to be honoured.
This bill was first raised last week but has since been amended and was expected to go back to the court yesterday, but was never raised (possibly due to objection).
Analysts at Credit Suisse explained how they see this NJ business interruption related bill, “The updated bill requires all property insurance policies that legally provide coverage for the loss of use of property and for occupancy and business interruption to be interpreted as including business interruption coverage due to COVID-19. Under the bill, insurers paying out COVID-19 claims under the potential new law would be eligible to file for reimbursement/relief with the NJ state Commissioner of Banking and Insurance.
“The costs would then be passed on and shared among insurers operating in NJ in the form of the already established annual special purpose apportionment that insurers pay annually to fund the state’s Division of Insurance. The law would retroactively go into effect as of March 9th, 2020, and would apply to insured businesses with less than 100 employees working 25+ hour weeks.”
These legal attempts to force coronavirus business interruption claims through are expanding now, with action also being seen in Ohio and Massachusetts.
In Ohio, House Bill 589 would require business interruption policies to cover “business interruption due to global virus transmission or pandemic during the state of emergency,” analysts at Credit Suisse said.
Similarly to New Jersey, this Ohio bill would also require insurers to file for relief, but with those costs passed on and shared among insurers operating in Ohio in the form of an assessment, the analysts further explained.
A Massachusetts bill calls for similar, but also covers slightly larger employers with up to 150 employees, where as Ohio focuses on businesses with up to 100 staff.
There are other legal efforts on the go as well in cities.
The Credit Suisse analysts said that both New York Mayor Bill DeBlasio and New Orleans Mayor LaToya Cantrell have inserted language into their civil authority shutdown orders to state that the coronavirus outbreak is causing property damage.
Could that set some kind of precedent for an all important property damage (PD) trigger? It’s very uncertain at this time.
Property insurance policies in many cases cover business interruption losses only if caused by property damage, hence being able to classify the impacts of the virus pandemic as causing damage to properties could be key.
There has been a legal action in New Orleans where a restaurant has taken its insurer to court claiming that the pandemic has caused a “direct physical loss” to the business.
The restaurant has an all-risks insurance policy that was underwritten in the Lloyd’s market, it is reported.
Another case is also ongoing in Oklahoma, where the Chicksaw State Native American tribe and casino owners have filed a suit against certain Lloyd’s of London underwriters, including part of AIG and AXA XL, it has been reported.
The tribe is asking the court to declare that the financial losses of shutting down its casinos during the coronavirus pandemic should be covered under its insurance policy.
The case claims that the casinos have been “damaged” by the pandemic and so cannot be opened. Again, this is an all-risks property insurance policy underwritten in the Lloyd’s marketplace, we understand.
While these policies tend not to include pandemic coverage, sometimes they do not explicitly exclude it either.
Which opens up the interpretation of what is physical property damage and this is the angle most of these legal actions are taking.
A wave of litigation is expected on this subject, as business owners seek out some kind of financial compensation for shutting down their businesses as a result of the coronavirus pandemic.
Of course, the cost to the insurance and reinsurance industry of honouring BI claims in property and other policies is potentially enormous, of a size that could be fatal to many companies in the market.
Should BI insurance claims get honoured under property policies, the losses from this would normally be expected to flow to property reinsurance and also through quota share arrangements, putting some in the insurance-linked securities (ILS) market at potential risk.
Of course, property catastrophe reinsurance and most reinsurance and retrocession treaties were never drafted with the aim of covering business interruption from a pandemic outbreak.
So any leakage of claims to the ILS market could be harmful for investor confidence in the sector.
But, these are unprecedented times and in such times unprecedented action can be taken and unexpected things happen.
The investors backing the ILS market largely understand their exposure to be to natural catastrophe risk, not pandemic or other areas such as contingency related risks.
There are some areas of the ILS market where you would expect such claims leakage to land, ILS funds writing specialty treaties and other more specialised contracts.
But in the main, the ILS fund market should expect itself to be largely insulated from coronavirus related claims.
Pandemic related business interruption was never designed to have been included in the vast majority of property covers. But this could emerge as a silent exposure, akin to cyber risk when it flows into property related insurance towers.
Where it does emerge is more likely to be where contracts are drafted extremely loosely, putting the responsibility on those that crafted them.
Unless, of course, legal action at the state level forces claims down the throat of insurers and those claims are passed on through reinsurance.
But, if that happened (a big if as it will be strongly contested in the courts), the stability and solvency of the entire global re/insurance market could be at-risk, as the size of the financial impact of the coronavirus is so enormous.
As a result, it is unreasonable to expect the industry to just take the burden without some sort of government backstop.
While the states we mentioned above are largely suggesting some sort of sharing of the burden, the potential size of this silent pandemic BI exposure means what is really required is government support.
If lawmakers want to make the re/insurance industry responsible for helping businesses through this challenging time, then the government will need to provide the liquidity to enable re/insurers to foot the bill. It’s inappropriate to force claims into policies that were never designed to cover this risk otherwise.
There are congressional discussions regarding the establishment of a backstop of some sort to protect the insurance and reinsurance industry.
As we explained yesterday, a Pandemic Risk Insurance Act (PRIA) (similar to TRIA is for terror risk) has been discussed. So too has something similar to the 9/11 compensation fund.
These coronavirus related business interruption legal actions are likely to become increasingly prevalent. It’s a concern for the market, but equally a concern for the government’s of the world.
Nobody wants to come out the other side of the current crisis with a weaker, smaller and much less useful insurance and reinsurance industry. Therefore it’s vital claims are only honoured where coverage is relevant, unless the government supports re/insurers to pay claims that don’t match the policies they are being forced under.