Virus Fight Insurers Thought They’d Dodged Is Looming Anyway

By Katherine Chiglinsky | March 24, 2020

For years, property-casualty insurers have sought to protect their business from the ripple effects of a pandemic. The spread of the coronavirus is showing it may not be easy.

At issue are business-interruption policies, which tend to pay out only when a property has suffered damage. Some insurers tightened language after the 2003 SARS scare, adding exclusions for outbreaks of infectious disease. Still, growing scrutiny of civil authority clauses and what constitutes property damage means the industry is likely to face more pushback.

“There still has to be physical loss or damage,” said attorney Alexandra Roje, a partner in Lathrop GPM’s insurance-recovery practice. “However, what ‘physical loss or damage’ means is not necessarily clear.”

Oceana Grill in New Orleans, which lacked a virus exclusion, last week asked for a declaratory judgment about its all-risk insurance policy from underwriters at Lloyd’s of London, citing a civil authority order by Louisiana’s governor and actions by the city’s mayor to restrict gatherings at restaurants.

Attorney John Houghtaling, who’s representing the restaurant, said he’s seeking to make it clear that virus-related mandatory shutdowns should trigger a civil authority clause for business-interruption policies. “The purpose of the Oceana action was to bring awareness,” Houghtaling said in a phone interview.

A Lloyd’s of London representative declined to comment on the litigation.

Some law firms have been analyzing whether older cases including a battle between Gregory Packaging Inc. and Travelers Cos. would support an argument. And in New Jersey there is proposed legislation, currently on hold, that would overturn some virus exclusions in certain policies. Investors can expect more losses, according to Meyer Shields, an analyst at Keefe, Bruyette & Woods.

“The initial reaction (which was ours as well) assuming modest business-interruption losses without an actual, covered property loss now appears too optimistic,” Shields said Wednesday in a note to clients.

Insurers said they’re working with consumers during this tumultuous period, according to the American Property Casualty Insurance Association. The industry group supports a national solution on managing pandemic risk and says insurers will help propose solutions.

“However, if policy makers force insurers to pay for losses that are not covered under existing insurance policies, the stability of the sector could be impacted,” David Sampson, president and chief executive officer of the APCIA, said in an emailed statement. “Insurance stability is especially important in a time of increased natural catastrophes.”

Companies such as Hartford Financial Services Group Inc. and Travelers often insure small- to medium-sized businesses, according to Bloomberg Intelligence analysts. Morgan Stanley analysts said in a note Friday that they expect losses for property-casualty insurers to be “immaterial” because of the property-damage requirement and the difficulty of proving contamination.

The coronavirus has spread to more than 349,200 people, with deaths topping 15,300. Whole industries have ground to a halt and offices of functioning businesses are shut as employees work from home. Bars, restaurants and retailers have been curtailed or ordered closed as millions of people are urged to stay indoors.

Regulators have sought to give some guidance about business-interruption insurance. New York’s financial watchdog cautioned that coverage is typically triggered by property loss. But industry watchers said lawmakers or regulators will inevitably be forced to intervene.

“This will soon be calling out for a national solution,” said Eric Dinallo, a former New York state regulator and chair of the insurance regulatory practice at Debevoise & Plimpton LLP.

Butler University’s Zachary Finn, a professor of risk management at the Lacy School of Business, has argued for a solution similar to the Terrorism Risk Insurance Act. That government program, a response to the 9/11 attacks, provided a backstop for losses from terrorism.

The National Association of Insurance Commissioners, a group of state regulators, said it’s aware of several federal proposals in the works, including a TRIA-like mechanism. It declined to take a position on them, according to an emailed statement.

Janice Ochenkowski, a former president of RIMS, a risk-management organization, and a former executive vice president at Jones Lang LaSalle, said that any solution would have to incorporate the unique aspects of pandemic risk, which can affect businesses globally.

“There clearly needs to be a very robust discussion about what role insurance and government are going to play in an event such as this,” she said. “But this is a totally new event we’re faced with and, in my opinion, it’s going to call for crafting a new and different solution.”

–With assistance from Lucca de Paoli.

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