As policymakers in Washington and in state capitals wrestle with the economic devastation brought by COVID-19, some are seeking to put the cost of business losses on insurance companies. Lawmakers in some states have introduced legislation that would retroactively change insurance contracts and require insurers to cover COVID-19 losses, despite the fact that standard business interruption, or BI, insurance policies do not cover viruses or pandemics.
As a former insurance regulator and state legislator steeped in insurance issues, I am alarmed at the prospect of retroactively rewriting insurance contracts. If such drastic measures are taken, businesses and consumers will pay the price and the sanctity of legal contracts will be undermined. This would be bad public policy and devastating for our economic recovery.
Business interruption insurance covers financial losses such as lost income or operating expenses when a business cannot function because of physical damage to a commercial property. Covered perils typically include fire, hurricanes, tornadoes or damage caused by civil unrest. Every year, the insurance industry pays BI claims to rebuild American businesses destroyed by a wide array of disasters, amounting to billions in claims payments. Insurance works by spreading risk across a wide array of policyholders, which is possible because damages from covered perils, such as natural disasters, are typically limited to a specific location and have a finite duration.
The coronavirus pandemic is different. Its scale is global, and it will not end until we develop and administer a vaccine. The sheer costs of such events are too unknowable to price and too great for the private sector to shoulder. And on top of losses due to COVID-19, plaintiffs’ lawyers have seized on BI insurance litigation as a historic opportunity for personal financial gain, further increasing the cost of this crisis.
But the damage caused by retroactive BI legislation and legal profiteering does not stop with the insurance industry. Undermining insurance contracts would also undermine covered claims such as hurricanes. And with hurricane season now underway, many policyholders could endure significant hardship.
Insurers pay billions in covered claims every year and claims paid for natural disasters are particularly important, as unforeseen natural events can severely impact the physical and financial health of a business.
In a high-cost year, several storms can combine to inflict an immense financial toll, like in 2017, when Hurricanes Harvey, Maria and Irma, along with other storms, cost an estimated $306.2 billion.
As American businesses struggle to reopen and many prepare for another hurricane season, preserving BI claims for what is rightly covered under contract is paramount, lest the insurance industry experience a solvency event and be unable to pay any covered claims at all.
In Congress and within the insurance industry, an important discussion is underway about the role of government and industry in pandemic response.
In response to COVID-19, the insurance industry has united around a proposal called the Business Continuity Protection Program, which would provide immediate relief to businesses in the form of revenue replacement assistance for payroll, employee benefits and operating expenses, in the event of a pandemic.
Lawmakers should seriously and urgently consider this proposal. The COVID-19 crisis is so damaging largely because of the uncertainty of when it will end, and Washington has a responsibility to engage with the industry on what role the federal government will play in insuring pandemic risk. Answering the question of whether businesses can count on the government to support them through a second wave of COVID-19 or another pandemic will help reduce uncertainty and allow for a more immediate return to normal economic activity.
We are in an unprecedented time, rife with uninsurable losses and financial hardship as a result. The federal government must step up to restore business and consumer confidence, and to ensure the sanctity of legal contracts so that the insurance industry can fulfill the claims it is paid premiums to cover.
Howard Mills is a former superintendent of insurance for the state of New York and served three terms in the New York State Assembly. He is currently an independent senior advisor at the Deloitte Center for Regulatory Strategies where he advises clients on risk management and compliance. The views expressed above are his own.