The COVID-19 pandemic has created a public health and economic crisis of unprecedented magnitude. In the coming weeks and months, it will also lead to insurers, regulators and policyholders clashing over claims issues including which coronavirus-related business losses are and are not covered by commercial insurance policies. Risk management professionals must be prepared to navigate these uncertain waters or risk substantial financial damage to their companies.
New Claims Issues
Today’s most urgent battle lines are drawn around business interruption claims, which many will seek to file in connection with disruptions like office closures caused by the outbreak and subsequent civil authority orders. For policyholders, the principal challenge in establishing coverage for such claims will revolve around satisfying physical damage or loss requirements and contending with existing exclusions. While policyholders and their advocates strongly believe that COVID-19-related business interruption losses already satisfy these requirements, it is a virtual certainty that insurance carriers and their advocates will disagree.
Regulators and government officials can intervene, and some have. In March, New York City Mayor Bill de Blasio declared that “the virus physically is causing property loss and damage.” Since then, several state and local governments have issued similar declarations and orders, and state legislatures have begun taking action. New Jersey introduced a bill that would retroactively modify policies to “read out” physical damage requirements and bar enforcement of certain exclusions. though it remains a work in progress. Lawmakers from Ohio, New York, Louisiana and Massachusetts also introduced bills of their own, and other states are likely to follow suit.
At the same time, while insurers are saying they will not pay out business interruption claims due to lack of physical damage and existing exclusions, they are also preparing to develop new coronavirus and/or much broader pandemic exclusions in future policies, with no premium reductions.
These are not the only claims issues risk management professionals will have to confront. They should expect significant premium increases and more restrictive terms across the board. In the D&O market, for instance, underwriters are already signaling premium increases in the 30% to 50% range. Claims and litigation against corporate leadership may arise from COVID-19-related disclosures, as in the case of two securities class actions filed in mid-March against Norwegian Cruise Lines and Inovio Pharmaceuticals. The wave of anticipated bankruptcy filings may also spawn claims and litigation, with creditors alleging mismanagement and other breach of fiduciary duties.
How To Prepare
To head off these new claims issues, risk management professionals can take the following actions:
Be proactive as early as possible in the renewal process. As insurers brace for the worst, they will be more selective about underwriting new and even renewal business. Risk management professionals should reach out to their brokers and underwriters now to understand how their coverage terms, conditions and premiums may change as a result of this exposure. They should also work with coverage counsel to evaluate their potential claims and new policy forms on renewal, and push back against unfair and over-reaching changes to their coverage programs.
Be on the lookout for new exclusions.New policy exclusions likely will not be specific to COVID-19, but broader in scope. As a result, negotiations on wording and pricing will be necessary.
Engage trade associations and lobbying power. Risk professionals should urge their trade associations and industry lobbyists to pressure legislators to act on insurance coverage issues before it is too late. After all, state regulators have the power to review and accept or reject proposed new exclusions. They can compel insurers to recognize that emergency orders mandating company shutdowns satisfied the physical damage requirement under the civil authority coverage of their policies, or to expect a detailed regulatory review process for any new exclusions, especially if those exclusions do not come with substantial premium reductions. It is crucial that regulators send a clear message on this issue now, while businesses are facing the crisis, not after it passes.
Consider filing a Notice of Circumstances, especially if a renewal is fast-approaching. Such notices, which alert the insurer to circumstances that may produce future claims, can help lock in broader and more favorable coverage terms for current policies. However, companies should consult with their coverage counsel to determine whether and how to provide such a notice to ensure that coverage will be locked in.
The COVID-19 pandemic will continue to cause significant disruption for every industry. Like all business, insurers will do everything they can to protect their own balance sheets in response to pandemic-related uncertainty. This makes it vital that risk managers prepare for the new claims battles, and the difficult renewal conversations that will undoubtedly emerge over the coming year.