U.S. Treasury opposed to forcing of retroactive COVID-19 BI claims

The United States Treasury has shown in a letter that it is opposed to legislative moves that could force retroactive business interruption claims related to the Covid-19 pandemic onto the insurance and reinsurance industry.

The business interruption issues related to the Covid-19 coronavirus pandemic continue to gain air time, with uncertainty over the eventual influence legislative efforts and lawsuits could have on the ultimate flow of losses to insurance and reinsurance capital providers.

As we explained last week, any legislative moves to force retroactive business interruption claims into the insurance and reinsurance industry could cause significant damage. Rating agency A.M. Best estimated that saying that as much as 50% of re/insurer capital could be wiped out with just two months worth of claims being forced through.

It’s not just the volume of claims either, it’s the fact that forcing coverage of a risk that was never designed to be covered in the insurance product would go against contract law, potentially opening the floodgates for class actions in other lines of business.

Although, there are going to be insurance and reinsurance programs that do take losses and rightly so, if their wordings or contract terms and conditions were not suitably robust in defining where claims from a pandemic like Covid-19 would qualify.

It now seems the U.S. Treasury agrees, as in letters sent to lawmakers by Frederick W. Vaughan, Principal Deputy Assistant Secretary, Office of Legislative Affairs at the U.S. Department of the Treasury, the opposition to the wholesale forcing of claims is made clear.

The letter, which was leaked by Politico reporter Zachary Warmbrodt, states that the U.S. Treasury believes that moves to force business interruption claims into insurance and reinsurance markets “fundamentally conflict with the contractual nature of insurance obligations.”

Treasury is actively monitoring the various proposals that are being discussed on insurance and business interruption, the letter states and the Department is aware of a number of state legislative efforts to retroactively change the terms of insurance contracts and compel coverage of Covid-19 business interruption losses.

“While insurers should pay valid claims,” the letter continues, “these proposals fundamentally conflict with the contractual nature of insurance obligations and could introduce stability risks to the industry.”

The Treasury will seek to work with interested parties, states, stakeholders and associations to determine “how best to move forward in addressing losses attributable to the current and potential future pandemics,” the letter ends.

The letter makes it clear the Treasury’s opposition to retroactive forcing of business interruption claims, which should enable the insurance and reinsurance market to breathe a sign of relief that it may not be a political issue that it faces with Covid-19 and business interruption.

That’s not to say the issue won’t persist and continue to threaten and hang over the industry, as still there are private lawsuits to be answered and individual cases.

But, given the position of the U.S. Treasury Department, it seems unlikely any wholesale forcing of Covid-19 business interruption claims into the industry will be driven by political will, which ultimately reduces the scope of the threat this posed.

Judicial imposition could drive some losses, but likely where contractual wordings and terms are left too open for interpretation.

While the risk still persists for some insurers that have failed to make their wordings robust enough, as these companies could become the focus of judicial action and class actions, becoming sources of loss that could flow through to the reinsurance and ILS market in future.

Overall though, the fact the government appears to side with the industry, on contract law being key and not for reversing or bending, the overall risk of a flood of BI claims pouring into insurance and reinsurance markets does appear to be lessened somewhat, reducing the threat to ILS markets as well and perhaps also reducing the amount of collateral that ultimately could get trapped.