While Fitch Ratings worries that litigation over COVID-19-related business-interruption claims is creating uncertain risk for property and casualty insurers, an economist who once served as a chief advisor to the industry said he doubts there will be a widespread impact.
Robert Hartwig, an associate professor at the Risk and Uncertainty Management Center at the University of South Carolina, said COVID-19 has remarkably left insurers’ combined ratios largely unscathed.
“Amazingly there was virtually no change in the industry’s underwriting performance 2020 v. 2019,” Hartwig said this week during a podcast hosted by the National Association of Mutual Insurance Companies.
Hartwig was president of the Insurance Information Institute up until 2016 and continues to speak at industry events. He said he did a retrospective analysis of “doom and gloom predictions” made last spring that COVID-19 will generate billions of dollars in workers’ compensation, general liability and business-interruption claim losses.
He said preliminary data indicates the property and casualty industry’s loss ratio will remain about 99 percent for 2020, even though insures grappled with a record 5 million catastrophe claims.
“When you look back at those data 10 years from now, people will wonder and scratch their heads, ‘why isn’t there more evidence of what happened in a really tumultuous year in the actual annual results that are being reported by the industry?'”
Hartwig said many of the costs created by COVID-19, such as event cancellations, were offset by “countervailing factors.” For example, while there was a surge in workers’ compensation claims, that was offset by a reduction in claims for other types of workplace injuries. He said insurers have lost some COVID-19 business-interruption lawsuits, but they’ve won most cases.
“Despite what I think has been very vigorous forum shopping by trail lawyers today, I think that we have gotten to the point here in the United States that the risk of these business-interruption claims has gone from what some people estimated to be tens of billions of dollars to be isolated to peculiarities in policy language associated with a number of carriers,” Hartwig said.
He said the insurance industry did a “reasonably good job” in getting ahead of the business-interruption issue by presenting facts that demonstrated the industry never intended to make insurance available for business income losses caused by a pandemic. He said most state insurance commissioners, well aware that they would have egg on their faces if their decisions led to insurer insolvencies, did not “got on their soapboxes” to demand that such claims be covered.
“There was clearly never any intent to provide coverage of this nature given the massive potential exposure to the industry, which was many times orders of magnitude larger than the entire capital base of the property casualty industry, even exceeding any potential reinsurance that would come into play here,” he said.
Fitch struck a more cautious tone in an advisory posted on Tuesday. The ratings house said a group of 50 North American publicly traded insurers reported more than $9 billion in coronavirus-related losses in 2020, while Lloyds of London and major global insurers and reinsurers reported $30 billion in losses. The majority of losses were related to event cancellations and travel insurance.
“A substantial volume of litigation remains unresolved, creating vulnerability to adverse judicial actions in BI and other segments,” Fitch said. “Class action filings may still emerge in BI and other liability coverages (D&O, E&O, EPLI), the extent of which may depend on strength of the economic recovery.”
While most BI cases resolved so far have come out in favor of insurers, that winning streak is stronger in federal courts than in state courts, Fitch noted.
“Federal courts have largely accepted BI policy language specifying physical damage to property,” Fitch said. “In addition, federal courts have upheld exclusions for viruses in the contract language of insurers’ BI policies.”
However, Fitch said the “judicial interpretation risk” facing insurers was illustrated by a Jan. 19 ruling by U.S. District Judge Dan Aaron Polster. In Henderson Road Restaurant Services, Inc. v. Zurich American Insurance Co., he decided the government shutdown response to coronavirus caused the business-interruption loss rather than the virus itself.
“Questions remain as to whether any individual plaintiff victory with a particular vein of argument in a given jurisdiction will lead to a slew of larger insurer losses in similar cases,” Fitch said.
A litigation tracker maintained by the University of Pennsylvania’s Carey Law School shows that in federal courts, insurers have won dismissals with prejudice in 75% of the cases heard so far. In state court, they have won only 42% of cases.
About the photo: Shoppers pass a theater closed due to the COVID-19 outbreak, Wednesday, March 3, 2021, in San Antonio. Gov. Greg Abbott says Texas is lifting a mask mandate and lifting business capacity limits next week. (AP Photo/Eric Gay)
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