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Business Interruption Insurance and COVID-19: A Congressional Response Update
By Greg Mollett
In prior posts there has been discussion of potential ways in which the United States may respond to insurance coverage concerns relating to commercial business interruption coverage. As of this writing, nothing has been decided but new information is available with regard to business interruption coverage via government reinsurance. At least one House bill in draft discussion form is being circulated.
The path from a draft document for discussion only and a passed law is long. Likely there will be many changes to substance, form and language along the way. However, some important themes are present in the current draft and they merit attention and justify following going forward.
Proposed Pandemic Risk Reinsurance Program
There is a proposal to create what would be known as the Pandemic Risk Reinsurance Program (the “Program”). If created in its proposed form it would offer existing insurers an opportunity to off-load a portion of “covered” business interruption losses to the United States. A high level outline of the proposed terms and some general commentary on those terms are offered below.
Stated Purpose
The stated purpose of the bill is to establish a Federal program that provides for a transparent system of shared public and private compensation for business interruption losses resulting from a pandemic or communicable disease.
The language currently being used is broad and appears to be designed to deal with COVID-19 implications, but also other similar circumstances in the future. In addition to creating a mechanism to get funds into the hands of businesses that have already been affected, the draft is aimed at heading off the potential withdrawal of insurers from the marketplace. Depending on how COVID-19 business losses are handled, private insurers without the option of reinsuring their losses may discontinue providing business interruption coverage or do so only at rates that price the coverage out of reach of certain market segments.
Creation of Coverage
All participating insurers would be required to extend business interruption coverage in their policies to cover losses resulting from a “covered public health emergency,” which is defined to mean an outbreak of infectious disease or pandemic which the Secretary of the Treasury (the “Secretary”) certifies as a public health emergency.
All policies subject to the Program would have to handle reported claims under the definition of “covered public health emergency” set forth in the draft act (the “Bill”). The Bill appears to attempt to insert a new insuring agreement trigger into existing business interruption policies.
The Bill would invalidate any exclusion in the contract of participating insurers that excludes losses for pandemic or virus related business interruption losses. The insurer could seek to reintroduce the exclusion or a different version of the exclusion if individual insured companies agree in writing to the placement of the exclusion back into a policy. The insurer could raise rates to accommodate for the expanded coverage. The participating insurer must compute the increased premium attributable to the removal of the exclusion and provide that information to the insured businesses. A business that chooses not to pay the increased premium associated with the removal of the exclusion will have any reported loss treated as if the exclusion had not been removed.
To be clear, the Bill would not invalidate all exclusions in all policies. It would involve participating insurers agreeing to the invalidation of existing exclusions in exchange for the benefits of participating in the Program.
Creation of Exclusive Cause of Action and Remedy
If the Secretary determines that there has been a public health emergency, all claims for property damage, personal injury or death arising from the emergency shall be brought exclusively as a “Federal cause of action” and all otherwise existing or potentially applicable “State causes of action of any kind” would be preempted. To handle the management of the new exclusive federal cause of action, the Judicial Panel on Multidistrict Litigation would designate one or more district courts to have original and exclusive jurisdiction over all actions. The United States would have the right of subrogation with respect to any claim paid by the United States under the exclusive federal cause of action.
Administration of the Program
If enacted as proposed, the Program would be established in the Department of the Treasury. The Secretary would administer the Program and pay the Federal share of compensation for insured losses.
The bill would create a Pandemic Risk Reinsurance Fund with the Treasury. All reinsurance premiums paid by participating insurers would be deposited into the fund and the fund would be used to pay the federal portion of covered claims.
Voluntary Participation
Every “Insurer”, as defined in the Bill, may participate in the Program and can enter or leave the Program on a calendar year basis. During each year of participation, the insurers would be required to provide information to the Secretary concerning which products offered for sale provide pandemic coverage, how premiums are calculated, how many businesses are buying the coverage and any other information that would be useful in tracking whether the Program is being used and is working for its intended purposes.
Cost to Participating Insurers
The Secretary would calculate premiums that would be charged to participating insurers. The Secretary shall base the premium calculation on the actuarial cost of providing the reinsurance coverage, including the costs of administering the Program.
Notice
Insurers would be required to notify policyholders that the insurer is participating in the Program, disclose the upper limit of the Program for covering reinsured losses, and identify the premiums charged for losses covered by the Program, including the Federal premium charge to the insurer (that presumptively will be built into the premium the insurer charges the customer).
Claim Handling
The system would be true reinsurance. The underlying insurer would create and manage the relationship with the insured businesses. The business would make claims to the insurance company, not the Secretary. After handling the loss with the insured, the insurance company would make a claim to the Secretary.
Federal Share of the Risk
The Program would have an annual cap, currently proposed at $500 billion. If total insured losses exceed the cap, participating insurers would be authorized to pro-rata reduce claim payments to insured businesses. For this to work, the Secretary would estimate the expected payouts and compare it to the cap. The Secretary could instruct the insurers not to pay claims until it is clear whether the aggregate losses will be below the cap and/or the Secretary can implement a mechanism to seek reimbursement from insurers or reimburse insurers.
Each participating insurer would have a deductible, so that it maintains the initial portion of the risk. After the deductible is met, the Program would reimburse participating insurers 95% of the payments made on eligible covered claims.
Overall federal participation might be conditioned on the size of the emergency. The draft proposes that no federal payments would be made until the aggregate insured industry losses reach a certain threshold.
Insurer Eligibility
To participate, an insurer must make pandemic coverage a covered cause of loss in policies it issues and cover other more traditionally recognized business interruption losses as well.
Insurer Policing
Participating insurers would have to submit to potential fines and penalties if it is determined that the insurer: (a) provided false information; (b) submitted fraudulent claims; failed to make the required disclosures; or (d) otherwise failed to comply with validly issued implementing regulations.
Other Provisions
The Secretary would issue regulations that apply the Program to other entities, captive insurers and risk sharing and/or risk transfer organizations. An ongoing working group would yearly assess whether the private insurance markets have made and are making coverage available and whether the reinsurance program continues to be needed to make that market function.
A government backed reinsurance program is just one of many potential actions that could be taken to expand the availability of business interruption protection for businesses closed or otherwise negative affected by COVID-19. Follow up information will be posted as more information becomes available.
Recommendations for Next Steps
In the meantime, businesses can and should plan for all contingencies. That starts by addressing where they stand under current laws. Businesses would be well served to assess the viability of making business interruption claims under their existing policies. Because there is a possibility that existing policy coverage might be legislatively expanded, businesses should consult with counsel to stay abreast of coverage litigation outcomes. Finally, businesses should ensure that they timely bring suits so as not to lose rights under insurance policy language and applicable statutes of limitations.
Greg Mollett is a Greensfelder officer whose practice focuses on commercial, real estate and environmental litigation. As a former insurance professional, Greg has extensive professional experience in insurance coverage, fraud, bad faith and vexatious refusal matters. He has represented insurance carriers, insured parties, agents and brokers and has handled fraud, negligent misrepresentation, breach of contract and negligence cases.