Tag Archives: business interruption insurance

A ‘Touch and Go’ Moment for the Industry

Sean Kevelighan, CEO of the Insurance Information Institute, said there was a moment in 2020 that was “touch and go” for the industry, in the face of the pandemic.

He and I were talking in advance of Thursday’s Joint Industry Forum, the III conference that is the first big event of the year and that sets an agenda for the industry (more on the forum in a bit), when he described how close the industry had come to being whacked with potentially hundreds of billions of dollars of business interruption claims. BI claims were obviously a potentially big deal, even though it was clear early on that few policies in the U.S. covered them, and I have seen that the issue faded, but I didn’t realize quite what a close call the industry had.

“The industry collaborated more than I’ve ever seen us do,” Kevelighan said. “Everyone has shown that the industry can come together and lead in a very disruptive time.”

Kevelighan said plaintiffs attorneys saw an opportunity early and won sympathy with state legislators, eager to help their small-business constituents. Some celebrity chefs formed a group to make the case publicly that they would go out of business if insurers didn’t cover their pandemic-related losses. Something called the Business Interruption Group even got businesses in Times Square to shut off their lights for a minute in May to dramatize the threat.

III countered with a campaign that made two main points. First, that the policies didn’t provide business interruption coverage for a pandemic and that rewriting contracts after the fact was unfair. Second, that a pandemic isn’t an insurable event. Yes, the industry had $800 billion in surplus, but covering all the potential BI claims would cost the industry $400 billion a month – so those small businesses could only be covered briefly by insurers, and then the money would be gone. Legislators would then have to face constituents who were hit by hurricanes, wildfires and so on and who had valid claims – but whose insurers couldn’t pay.

III got the word out through hundreds of media interviews, through email blasts to anyone who was in a position of influence and through a website. Kevelighan said the industry more than did its part as good citizens: providing more than $14 billion in rebates just in auto premiums, making $300 million in charitable contributions, paying claims in new and innovative ways and committing to keeping employees on the payroll. He says all parts of the industry are now hiring.

The situation was still touch and go until a hearing before a House subcommittee on May 21. But at the hearing, conducted via WebEx, the main plaintiff attorney didn’t even advance the idea that contracts should be rewritten to make insurers liable. Instead, he suggested that insurers could voluntarily cover business interruption and then, he hoped, be reimbursed by the federal government – an idea that went nowhere.

“Congressmen were very aggressive about defending their constituents – if a hurricane or wildfire hits, there needs to be money there,” Kevelighan said. “We all empathized with the customer. Sure, customers should be scared. But the response to a pandemic has to come from the federal government.”

He added that the quick mobilization in the face of such a threat “shows how nimble the industry can be.”

Building on that experience, Kevelighan said, the first panel at the Joint Industry Forum will comprise CEOs who will discuss other industrywide issues, including what the effects of the new Biden administration will be.

“You’re certainly going to see some things that were started in the last Democratic administration that kind of went by the wayside but that may well resurface,” Kevelighan said.

He cited the Federal Insurance Office and Consumer Financial Protection Bureau as potential examples. He added that “it’s been said that every part of the Biden administration has a climate change piece to it.

Kevelighan said the insurance industry can play a leading role on climate risk – which is the subject of the next panel at the Joint Industry Forum. He cited, for instance, a III project called the Resilience Accelerator, which is trying to drive behavioral change to reduce risks such as those from wildfires and floods.

“Risk never really comes into play in the property-buying process at the moment,” he said. “You go into the beautiful forests in California and decide you want to build there, but nobody talks to you about the wildfire risk. We’re trying to change that.”

He’ll close the brief event with a fireside chat with Richard P. Creedon, chairman and CEO of Utica National Insurance Group, that will, among other things, cover that old favorite: regulatory issues.

I’ve found these events to be very useful in the past and hope you’ll join me at this virtual event, then hope we’ll all see each other at what III expects will be an in-person event in Washington, DC, in June.

Stay safe.

Paul

P.S. Here are the six articles I’d like to highlight from the past week:

20 Issues to Watch in 2021

Presumptions for COVID-19 show how the line between workers’ comp and group health continues to blur.

Crowdsourcing 6 Themes for 2021

Trust in insurance has been dealt a double blow in 2020 — and resolving that must be a priority in 2021.

Despite COVID, Tech Investment Continues

Interest remains high in technologies like artificial intelligence and big data.

Did Biden Just Kill Wellness Programs?

Advisers need to be aware that many if not most clinical wellness programs now expose clients to employee EEOC actions.

What 2020 Taught Us on Selling Insurance

Insurance policies that are sold online need to be packaged and priced differently than those that rely on face-to-face sales.

Home Insurance for Those Needing It Most

Sugar, a startup in South Africa, provides home insurance even for shacks costing a few hundred dollars, and without a street address.

The Case for Paying COVID BII Claims

The property insurance industry has been steadfast in its position that COVID-19 does not constitute a “risk of direct physical loss,” the coverage trigger for business interruption (BII) coverage under the Insurance Services Office (ISO) “Special Causes of Loss” property form. 

However, this position raises the question: If a virus does not pose a “risk of direct physical loss,” why did the ISO (the same group that drafted this insuring agreement) feel a need to develop form CP 01 40 07 06 titled “Exclusion of Loss Due to Virus or Bacteria,” which specifically excludes coverage for “loss or damage caused by or resulting from any virus”

This ISO coverage trigger provides broad coverage that, once triggered, is only modified by policy exclusions or limitations. That is, once there is a “risk of direct physical loss” to covered property, unless that cause of loss is excluded, it’s covered. While there have been numerous court decisions discussing this language, each with twists and turns due to the specific fact patterns of each case, the consensus is that, if the interruption of business is caused by some physical problem with the covered property, coverage is triggered. Then, barring any exclusion or limitation removing or otherwise limiting coverage, the claim should be paid.

The insurance industry standard practice is to “read in” coverage wherever possible. That is, if there is a reasonable way to evaluate the policy language that triggers coverage, the insured is entitled to receive the benefit of the policy. Or, as stated in a well-respected industry text used to educate adjusters: “Therefore, the claim representative’s chief task is to seek and find coverage, not to seek and find coverage controversies or to deny or dispute claims.” “The insurance company should not place its interests above the insured’s.” “The claim professional handling claims should honor the company’s obligations under the implied covenant of good faith and fair dealings.”

While the industry argues that the drafters never intended to cover catastrophic economic loss caused by a pandemic, this argument falls flat and appears to be merely an attempt to prevent payment for otherwise covered claims. While most policies do in fact exclude “loss or damage caused by or resulting from any virus,” some do not. In fact, policies without a virus exclusion might have been purchased based solely on the lack of that or similar exclusionary endorsements. In short, not including a virus exclusion on these policies gave these insurers a competitive advantage by providing, or through a perception that they were providing, superior coverage.

The insurance industry seems to be grasping at straws by relying on court decisions that are not exactly on point. For example, one ruling used to argue against coverage is that dirt (which can be easily cleaned) does not constitute direct physical loss or damage. Of course, dirt is not inherently dangerous, usually does not result from a fortuitous event and does not usually cause harm. The same can’t be said of COVID-19. I have also seen an unpublished Sixth Circuit Court of Appeals opinion that addressed mold damage to a landlord’s property, distinct from the named insured “covered property,” argued as a case that somehow supports the position that a virus is not direct damage.

While there are indeed many commercial property insurance policies that do not provide coverage for COVID-19 BII claims due to virus or other similar exclusionary language, the courts will no doubt eventually find coverage under policies without such limitations or exclusions, or under policies with exclusionary language that is not on point, or that is poorly drafted.

Part of the problem is that the phrase “direct physical loss” is not defined in these policies, and even industry experts agree that “when the intent is for the policy to be triggered only by direct physical loss or damage, the language may need to be clearer. To say that a policy covers direct physical loss or damage to covered property from “risks of direct physical loss or damage” may be ambiguous.” And “whether the policy grants coverage for “all risk,” “all risks” or “risks” of direct physical loss, this language is intended to mean that coverage is provided for direct physical loss or damage from all perils or causes of loss, unless the peril or cause of loss is specifically excluded or limited in the policy. However, when applied to property loss exposures, the phrase “risks of direct physical loss” could be interpreted to mean the chance or possibility of direct physical loss or damage, whether any property damage ever occurs or not.” 

Consider this International Risk Management Institute (IRMI) definition: 

Direct Damage — physical damage to property, as distinguished from time element loss, such as business interruption or extra expense, that results from the inability to use the damaged property. 

In other words, loss of use caused by some physical problem with the covered property constitutes direct physical loss or damage.

See also: How Startups Will Save Insurance  

Also consider the industry definition of property damage from the standard Commercial General Liability coverage form (in pertinent part):

  1. “Property damage” means:
    1. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
    2. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

So, the analysis, when evaluating this coverage trigger should be: Did COVID-19 cause some physical problem that interrupted the business? 

This can be an even easier analysis when evaluating coverage for Civil Authority or Ingress Egress, as many times these insuring agreements do not require “direct physical loss or damage,” only “damage.”

Clearly, mold constitutes physical loss, and courts have regularly held that “direct physical loss can exist without actual destruction of property or structural damage to property; it is sufficient to show that the property is injured in some way.”

Some courts have ruled that the term “physical damage” includes “loss of access, loss of use and loss of functionality,” and one court even ruled that government regulations rendering cereal unfit for sale was “an impairment of function and value,” constituting “direct physical loss or damage” since even “without the actual destruction of property or structural damage to property it is sufficient to show that the property is injured in some way.” 

In recent decisions arising from COVID-19, courts have already ruled that COVID-19 qualifies as a “natural disaster,” just like any “hurricane, tornado, … or other catastrophe which results in substantial damage to property, hardship, suffering or possible loss of life,” and since “the risk is, essentially, everywhere,” any “order to implement social distancing aimed at reducing this risk, policyholders have suffered a ‘direct physical loss’ of their property.”

The outcry from business owners is understandable because their livelihoods are at stake, but I fail to understand the insurance industry’s solidarity and forceful rejection of these claims when some insurers made the conscious decision not to include virus exclusion on their policies, giving them a competitive advantage.

In an early sign of what I predict is coming, a French court recently found coverage for BII under AXA property policies for COVID-19. Reportedly, “Although AXA first signaled that it would appeal the ruling, it now has agreed to pay the claims involved in the lawsuit as well as other coronavirus claims involving similar policies, acknowledging that the insurance policy wording at issue is ambiguous. AXA’s admission that its policy is ambiguous is important as ambiguous policy language is generally construed in favor of coverage; AXA’s decision to pay is the correct one.” 

If one merely steps back and asks: Is it reasonable for a business to assume that it has coverage for its COVID-19-related BII claim when its property insurance policy does not contain a virus exclusion? The answer has to be, yes. While an insured has an obligation to read the policy, if after reading it and not finding a virus exclusion shouldn’t the insured be able to have an “objectively reasonable expectation” of coverage? “Although all-risk policies do generally extend to all fortuitous losses, this is true only to the extent that the policy does not expressly exclude the loss from coverage. . . .

For example, courts “have consistently held that the presence of a dangerous substance in a property constitutes ‘physical loss or damage,’” and at least one court found that an odor constitutes physical loss even without any “apparent” property damage. Interestingly, in that decision, the court ruled that while “the mere adherence of molecules to porous surfaces, without more, does not equate to physical loss or damage,” coverage would be triggered “if the molecules on porous surfaces are accompanied by a pervasive, persistent, or noxious odor.” From a coverage evaluation standpoint, there is really little difference between an odor stemming from molecules on porous surfaces and a virus on surfaces causing loss of use due to its harmful nature. 

The bottom line is that if an insurance company truly intended to exclude coverage for virus-related BII, Civil Authority and Ingress/Egress claims, there were ISO forms or language readily available for use that could have been placed on the policy.

See also: ML for Commercial Property Insurers  

Where a policy has a valid and well-written virus exclusion, the insurer should feel free to deny coverage after conducting some minimal investigation to confirm that COVID-19 is the efficient proximate cause of loss, but insurers should think twice before denying coverage under policies without such exclusions and keep in mind that industry standards require that insurers never place their own interests ahead of the insureds’. 

Underwriting departments make informed business decisions when evaluating what endorsements to include or not to include on polices. Because a policy lacking a virus exclusion may be viewed by a risk manager as one of the factors leading to a determination that a particular policy provides superior coverage, insurers not using virus (or similarly effective) exclusions need to honor the terms of the insurance contract, and the insurance industry needs to recognize the important distinction between policies that include virus exclusions and those that do not.

The Messaging Battle on COVID-19: Are Insurers Losing?

Many insurers have made grand, public gestures, returning some $10 billion of premiums to customers whose lives and businesses have been put on hold by the coronavirus, but I’m not sure customers have really noticed. I worry that the insurance industry is losing the messaging battle at a crucial time. We risk being relegated to the traditional role of the bad guy, hiding behind lawyers to deny any and all claims, at a time when we need to be helping customers as much as possible–and need to be seen doing that good work.

Already, some politicians are trying to turn coronavirus into a sort of asbestos, making the insurance industry cover risks that it never signed up for. Yes, with SARS serving as a warning in the early 2000s, the insurance industry wrote policies in recent years that excluded pandemics, in a way that the industry never explicitly excluded asbestos, but public opinion is a funny thing: Groundswells can develop if they aren’t headed off at the beginning. And politicians respond to groundswells. After all, it’s people who vote, not corporations.

To try to figure out whether the industry had already lost the battle for public opinion, and what more the industry could be doing, I called an old colleague who has been doing PR for major insurance clients for decades. (We’ll just call him Sam, because he wants his clients, not him, to be the story.) The good news is that he said the battle isn’t lost yet. The bad news is that Sam thinks the industry needs to do a lot more to get the message out that it’s living up to its responsibilities while helping clients however possible.

“A lot of people hate the insurance industry,” Sam said. “Here’s how they see us: Clients pay us a bunch of money, then they have an issue, file a claim, and the insurance company hires a lawyer to fight them–over a product they bought but never received.”

He said it’s crucial to keep hammering away at the message that insurance companies are in the business of paying claims. They wouldn’t have any customers if they didn’t pay claims.

“That message gets tricky, of course,” Sam said, “because the customer hears, You pay lots of claims, just not mine…?”

Some industry leaders–including Evan Greenberg, CEO of Chubb, and John Neal, CEO of Lloyd’s–have seemed to make headway with repeated assertions that the industry can’t be saddled with risks it wasn’t paid to take on and, in particular, that it simply isn’t practical or fair to expect insurers to cover what amounts to the cost of a war.

Hitting those themes, a Washington Post columnist wrote, “While the businesses that are currently shuttered didn’t do anything wrong, neither did their insurers…. Since everyone is getting the benefit [from the shutdown], everyone should pay for it: through borrowing now and taxes later. Think of it as Americans belonging to one of the largest mutual insurers in the world: the United States of America, Ltd.”

Sam said the industry doesn’t do itself any favors with legislators or customers by referring to its capital as surplus or reserves. “Reserves? Surplus? Come and get it!” he said.

But he said the argument against raiding reserves is pretty straightforward: Claims for business interruption would be some $300 billion a month, for an industry with $800 billion in reserves–and, oh, by the way, that money isn’t just sitting there; it’s set aside to pay other claims that insurers already face. The industry wouldn’t last long in the face of such claims.

Neal has said that just paying legitimate claims will already make COVID-19 the most expensive event in the history of insurance.

The fact that Marsh offered a pandemic policy two years ago and got no takers seems to resonate in conversations I have with folks outside the industry: It hardly seems fair to make insurers pay on policies that customers declined to buy.

But Sam said insurers need to get beyond the defensive. “Nobody reads the fine print until something goes wrong,” Sam said, “and if you’re spending all your time defending the exclusions in the fine print, then you won’t be able to get the stink off you.”

Going on offense means working–as publicly as possible–with governments to prepare for the next pandemic. contributing as much wisdom, technique and discipline as possible. That sort of work has already begun in the U.S., with what’s being referred as PRIA (a pandemic version of the Terrorism Risk Insurance Act, or TRIA), and in Europe, with what’s being called Pan Re.

Sam said that, while insurers need to stick with a hard no on business interruption claims under policies that were never designed to cover pandemics, they need to say yes in every possible way on service to customers in these difficult times.

“We have to cushion the blow as much as possible,” Sam said.

When the industry does good things–and I see many–it also needs to toot its own horn more. Maybe the messages are getting lost in the shuffle because of everything else going on, but it seems to me that the industry could do a lot more to dramatize how it’s helping clients. The world is hungry for good-news, human-interest stories these days. Yet a friend of mine told me that his auto insurer, one of the top five, didn’t even notify him of a rebate on his premium.

“I saw the news about premium rebates, so I called my company,” my friend said. “They told me, yes, we’re rebating X dollars. I said, “That’s great, but was I just supposed to notice on my statement, or were you ever going to tell me?'”

I suggest we tell people as often as they can stand to hear. So far, insurance commissioners seem to be siding with the carriers on business interruption policies, but lots of other forces are aligning against the industry. Consumer groups are complaining, and politicians are listening. Some civil authorities are using language in shutdown orders designed to trigger insurance coverage, and legislators in several states are considering forcing insurers to cover business interruption claims on the pandemic. Even the president said two weeks ago that insurers should cover many claims. The plaintiffs bar is, of course, ready, willing and able to help with such claims.

If Sam is right–and he’s more optimistic than I am–then the industry has time to stand up for itself. But time is running short. If the tide turns, it will likely turn for good.

Stay safe.

Paul Carroll

Editor-in-Chief

How to Lose $7 Billion a Year

It is estimated that commercial property writers lose out on more than $7 billion annually in business interruption insurance, a line that could deliver increased and sustainable earnings upside annually but has often struggled to do so. This loss represents not only undervalued policies, but also income lost because of premium calculations that are not commensurate with risk.

As with other property business, the No. 1 culprit is the decades-old difficulty that insurance companies’ face establishing adequate coverage limits for property lines — and business interruption insurance (BII) often has worse results than insurance on buildings and contents.

For the past 10 years especially, the property insurance industry worldwide has been buzzing with concerns about coverage adequacy for BII. The problem affects both business owners policies (BOPs) and the larger package policies (CPP/SMPs).

Caroline Woolley, senior vice president at Marsh’s Business Interruption Center, wrote a comprehensive report in 2015 summarizing the challenges the industry faces making BII coverage profitable. Woolley lays out five major obstacles that agents, companies and brokers face when underwriting this coverage line. Woolley says the No. 1 problem is simply “getting the values right” when policies are first written and again at time of renewal.

The valuation concern stems from the fact that there has been no standardized, simple-to- learn-and-use insurance-to-value (ITV) system for BII coverages similar to what is done today for buildings and contents.

No. 1: Getting the values right

According to a survey conducted by the Chartered Institute of Loss Adjusters in 2012 ((and quoting from PMWBG)), 40% of declarations were deemed too low by about 45%. More recently, PMWBG research shows as much as 58% of BII coverages are undervalued by 48%, suggesting the problem is getting worse at a time when demand for property insurance is in decline and competition is fierce.

Inadequate coverage disenfranchises consumers, and improper valuation undermines providers. In a very competitive marketplace, where too much supply is chasing dwindling demand, carriers losing on the valuation front lose reputation, financial advantage and long-term revenue.

From the inception of BII coverage in the 1930s, calculating risk-specific BII limits has not been easy. The BII coverage addresses shortfalls in the margins corporations face when loss occurs, so underwriters, brokers and agents should understand key variables in the insured’s financials. Unfortunately, not enough industry professionals are proficient in this area, leading to costly exposure errors, pricing mistakes and the age-old dilemma of undervaluation.

As important is the fact that, unlike with other lines, there has been very little third-party data to aid insurers with BII calculations. 

When losses occur, it’s too late in the game to correct undervaluation problems. The impact, especially in today’s economy, where wildfires, storms and other disasters routinely happen, has caused companies like Marsh to look again at the coverage line, suggesting the need for industry-standard ITV calculation tools.

 

Now, modern web-enabled technology offers both substantive raw data on businesses that actuaries will want to work with to improve pricing models, at the same time carriers will use the program’s web-based ITV system to calculate detailed BII coverage reports for the majority of businesses found anywhere in the U.S. Virtually any enterprise can be valued, with complex insurance specific data sets searched automatically on behalf of the user to both pre-fill input and create BII reports.

First Step to Success

Vast amounts of insight about corporations and their supply chains can be aggregated on to estimate BII limits in seconds, accessible anywhere from the Internet.

In the case of the BOP sector, actuaries and pricing managers have instant access to large amounts of aggregated data for the various sizes and types of business insured, to develop more representative and localized pricing models. Users can also adjust models automatically for the business opportunity rather than offer one-size-fits-all pricing. Additionally, because core data changes annually, savvy users can also upgrade model variables.