Bordonaro: Federal gov’t must fill business interruption insurance gap

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Two of Hartford’s largest employers — The Hartford and Travelers Cos. — are facing a barrage of lawsuits from policyholders, including popular restaurants and other small employers, who say their business interruption insurance claims filed in the wake of COVID-19 government shutdowns were wrongly denied.

In response, at least eight states — not including Connecticut — are considering bills that would force insurers to cover coronavirus-related business interruptions, even if the policies specifically excluded pandemics from the coverage.

At stake is the insurance industry’s future solvency and potentially thousands of jobs in Hartford. The American Property Casualty Insurance Association (APCIA) estimates that coronavirus claims from small businesses alone (with fewer than 100 workers) could total up to $431 billion a month.

Insurers can’t withstand that type of claims activity. In fact, insurance ratings agency A.M. Best recently said attempts to retroactively require insurers to cover COVID-19-related business interruption losses “would have grave impacts for the industry.”

Such legislation is wrong-minded and most likely unconstitutional, and attempts to pass it should be stopped in their tracks. We don’t need to artificially create another financial crisis — by upending the insurance industry — when plenty of economic uncertainty already exists.

Instead, the situation requires a federal government solution. Just as Congress created a public-private terrorism risk insurance program in the wake of the Sept. 11 terrorist attacks, federal lawmakers should establish a pandemic risk insurance program.

Such legislation is already being considered as pandemics — according to the APCIA — are largely uninsurable events because they are too widespread, severe and unpredictable to underwrite, meaning policies would be unaffordable, particularly to small businesses.

Meantime, insurers have thrown their support behind creation of a federal Business Continuity Protection Program that would provide revenue replacement assistance for payroll, employee benefits, and operating expenses following a presidential viral emergency declaration.

That may not help companies right now, but there are other federal aid programs — including the Payroll Protection Program — to help get employers through the current crisis.

That being said, the economic harm small businesses have felt in recent months can’t be understated and many employers likely won’t recover from it.

Words matter

In its most basic form, business interruption insurance covers financial losses caused by physical damage to a commercial property, such as a fire.

Since 2006, following the SARS outbreak, most business interruption policies began to exclude viruses, bacteria and contaminations, according to APCIA.

Government-ordered business shutdowns to stop the spread of COVID-19 have caused widespread economic harm, leading some companies with business interruption insurance to assume they are covered. Many are finding they aren’t. Some, including restaurants, law firms, retailers and small physician practices, are responding by suing their insurer for wrongly denying their claims.

Others are lobbying their state legislatures and even President Trump to force insurers to cover COVID-19-related business interruptions.

The issue is not black and white because not all business interruption insurance policies are written the same.

Many clearly exclude pandemic events, while others leave room for interpretation, said Wethersfield attorney Michael McCormack, who is a shareholder at law firm O’Sullivan McCormack Jensen & Bliss PC.

“It all comes down to what the language in a particular policy says,” said McCormack, who represents business interruption insurance policyholders. “Some policies can differ by just a few words and those few words can make a big difference.”

One gray area is insurance policies that don’t have a pandemic exclusion and promise to cover physical damage or physical loss. The definition of “physical loss” isn’t 100% clear, McCormack said.

“If a business has lost the use of its property as a result of a government shutdown, does that constitute physical loss?” McCormack asked.

The courts may have to sort that question out, but it’s a separate issue from policies that clearly exclude pandemics. States ought not try to change the terms of those contracts after the fact.

And it’s an issue that has the attention of insurance regulators.

“Business interruption is a huge issue and a potential liability if contracts are changed retroactively,” said Connecticut Insurance Commissioner Andrew Mais. “I’m not sure there is enough capital in the insurance industry to cover it for more than two or three months.”

Mais said his agency received a slew of questions related to business interruption policies when the pandemic first hit, but they’ve tailed off since then.

He wouldn’t comment about states’ attempts to interfere with such insurance contracts, but the National Association of Insurance Commissioners, of which he is a member, recently said it opposes any proposals requiring retroactive coverage of business interruption claims based on COVID-19.

“I think in general this is one of those risks that is so big that we need the federal government to step in and help, if small businesses are to be protected like they should be,” Mais said.

Meantime, insurance executives, who are typically conservative in their public statements, particularly around legal matters, haven’t been shy about voicing their concerns.

Christopher Swift, Chairman and CEO, The Hartford

“Any effort to retroactively rewrite these contracts, presume coverage, or remove exclusions would threaten the very foundation of the insurance industry, the sanctity of contracts under our Constitution, and the principles of a free market economy,” said The Hartford’s Chairman and CEO Chris Swift during a recent earnings call with investors. “Doing so would threaten the ability of carriers to pay losses rising out of everyday covered perils our customers will inevitably face in the months and years ahead.”

He continued: “We understand that policymakers and regulators are under extraordinary pressure to provide even more assistance to businesses they represent, but unlawfully and unconstitutionally shifting those losses from one industry to another is not the answer. The industry has an obligation to vigorously defend the terms and conditions of its insurance contracts and preserve the principle that premiums are paid for specific risks covered by the insurance policy.”

Listen, I’m no big defender of the insurance industry. Insurers have made plenty of money over the years and aren’t viewed favorably by the general public, particularly homeowners in eastern Connecticut snake-bitten by the crumbling foundations crisis.

But we can’t upend an industry simply because there’s popular sentiment to do so. Only the federal government can address the financial risks that arise from a global pandemic.