BLUE MOONS AND BAD BUGS
NAIC endorses a federal mechanism to provide pandemic business interruption coverage
“When the COVID-I9
pandemic began, many existing
business interruption (BI) policies had exclusions
for viruses or diseases and required physical
damage to trigger coverage.”
—NAIC Issue Brief
By Kevin P. Hennosy
Idioms announcing unlikely events add pepper to the world’s languages. Several tongues employ the phrase “When pigs fly.” The Fins say, “When the cows fly.” Serbs express doubt by saying “When grapes grow on a willow.” The always colorful Romanians expound “when poplars would grow pears and willows wallflowers.”
One should remember that the idiom, “Once in a blue moon” refers to a lunar event that occurs once every two or three years. Stranger things can happen! Submitted for your approval. On the following matter, I agree with a certain Kansas City-based association of insurance commissioners.
In April 2023, The National Association of Insurance Commissioners (NAIC) published an Issue Brief that endorsed the concept of “a federal mechanism to provide pandemic [business interruption insurance] coverage.”
The association’s endorsement of a policy in the public interest represents a rare and mystical action by the NAIC. A paragon of parochialism, the commissioners’ association supports economic policies aimed at channeling robber barons and echoing the atavistic business conditions replicated at Henry Ford’s Greenfield Village.
The Issue Brief begins with an observation: “The COVID-19 crisis exposed the challenge of insuring businesses against pandemics.” It explains: “When the COVID-19 pandemic began, many existing business interruption (BI) policies had exclusions for viruses or diseases and required physical damage to trigger coverage.”
Insurance history buffs reading this column will remember that the tying of physical damage to BI covered claims was not present at the creation of the product line. A governmental action that impeded normal business operations was enough to trigger the earliest BI policies.
The Conquest of Fire, a privately published history of the New York Underwriters Agency on its 50th anniversary in 1914, contains a claim that the agency created the product. The book included the example of a city closing a sidewalk for public works in front of a shop, thus causing an interruption, as a reason to buy the BI coverage.
The NAIC Issue Brief cites: “A 2020 nationwide data call by state insurance regulators [that] found that 83% of policies excluded viral contamination, virus, disease, or pandemic, and 98% required physical loss.”
This uniformity of product design came from recommendations made by the Insurance Services Office, Inc. (ISO). The recommendations followed publicly ordered quarantines in response to the SARS (Severe Acute Respiratory Syndrome) outbreak of 2002-2004. Around the same time, ISO recommended changes to BI products designed to temper claims arising from government-ordered evacuations following severe weather events such as Hurricane Katrina in 2005.
By 2019, insurers vaccinated BI coverage against claims triggered by government response to “bad bugs and bad weather.” The NAIC’s Issue Brief observed that “these policies were not intended to cover COVID-19 claims.”
In response to that challenge, the Issue Brief establishes: “The NAIC supports a forward-looking federal mechanism to help ensure widespread availability of business interruption insurance for pandemic risks without jeopardizing the financial condition of the insurance sector or undermining state insurance consumer protections.”
Let us break this policy statement into four parts.
The NAIC “supports a forward-looking federal mechanism,” which means that the commissioners do not envision a mechanism to make whole those who lost money during the COVID-19 quarantines. The phrase also recognizes that future pandemics could interrupt business operations on a large economic scale.
And this brings us to the phrase “widespread availability.” While the NAIC calls for a federal mechanism, the association did not use the word “national” or “universal.”
With the cautionary phrase “without jeopardizing the financial condition of the insurance sector,” the NAIC seems to warn federal policymakers against simply passing a law requiring insurers to offer or bind coverage for pandemic risk in business interruption products. The NAIC supports a federal mechanism and not a federal mandate.
The second part of that cautionary phrase nearly destroyed the wonder and beauty of this blue moon event. This stalwart critic of the NAIC had to ask whether the association was playing the old “bait and switch?”
The NAIC’s use of the term “consumer protection” is often just a talisman—a symbol of something positive or magic, something dusted off for inclusion in congressional testimony or news releases to call attention away from “some malicious stuff about to go down in a dark alley of Mr. Commissioner’s Neighborhood.”
In this case, the NAIC called for a national solution to a national problem with one breath and then in the next breath doomed the solution to the 50 parochial petri dishes of American democracy—the state governments.
However, after some consideration, the NAIC does have a point. For example, a growing number of retiree groups receive Medicare Advantage Plans (MAPs) as a benefit to replace Medicare Supplement Plans. As a retirement benefit, these group products fall under the federal jurisdiction of the Employee Retirement Income Security Act (ERISA).
So, Mr. or Mrs. Retiree may call the State Health Insurance Assistance Programs (SHIPs) with a question, only to hear the state program does not answer questions about MAPs governed by federal law.
Public Interest
This brings us to another 109-year-old publication, the Supreme Court decision in German Alliance Ins. Co. v. Lewis, 233 U.S. 389 (1914).
In the German Alliance decision, the court ruled that “the business of insurance” is a private asset that serves a public use or is “clothed with a public interest.” The German Alliance case is rarely discussed today presumably because it pre-dates the court’s finding three decades later that insurance is interstate commerce. Nevertheless, the opinion’s logic remains informative.
Writing for the court, Associate Justice McKenna explained why state jurisdictions could exert regulation over insurance contracts. For example:
The effect of insurance—indeed, it has been said to be its fundamental object—is to distribute the loss over as wide an area as possible. In other words, the loss is spread over the country, the disaster to an individual is shared by many, the disaster to a community shared by other communities; great catastrophes are thereby lessened, and, it may be, repaired.
So, the individual contracts in insurance concern many people and corporations who are not party to the transaction. Public regulation represents those remote or indirect parties.
Also, McKenna describes insurance as a form of taxation to fund recovery from catastrophe, which is a concept revived in the court’s decision upholding the Affordable Care Act. In the German Alliance opinion, McKenna wrote:
In assimilation of insurance to a tax, the companies have been said to be the mere machinery by which the inevitable losses by fire are distributed so as to fall as lightly as possible on the public at large, the body of the insured, not the companies, paying the tax. Their efficiency, therefore, and solvency, are of great concern.
McKenna briefly touches upon the importance of insurance protecting “a large part of the country’s wealth” from the “uncertainty of loss through fire.” This and other benefits of insurance led McKenna to observe, “We can see, therefore, how it has come to be considered a matter of public concern to regulate it, and governmental insurance has its advocates and even examples.” (emphasis added)
Mechanism
This brings us back to the NAIC’s support for a federal mechanism to provide pandemic BI coverage. The association’s Issue Brief states: “Because insurers are largely unable or unwilling to insure such pandemic risks, there is an enormous coverage gap for businesses.”
The NAIC does not propose a design for the federal mechanism except for suggesting that “Congress should consider forward-looking proposals to limit taxpayer exposure to the next pandemic and ensure adequate take-up rates without endangering the insurance industry’s solvency.”
Unlike the NAIC, this observer has believed for decades that American insurance would benefit from a “reinsurer of last resort,” just as the national banking system benefits from the Federal Reserve System as “lender of last resort.”
Such a reinsurance mechanism could provide interstate, regional, and national insurers with liquidity, harmonious rules, and regulation. Like “The Fed,” it would be a human endeavor so “FedRe” would be imperfect—we understand that. Yet, such a national mechanism could step in when “insurers are largely unable or unwilling” to write business. But I am not here to do the work of Congress and the patchwork of state insurance regulation.
Also, this agreement with the NAIC unnerves me. Hopefully, this horrid condition will pass on its own. Until then, in the words of Dr. Hunter S. Thompson, “We can’t stop here! This is bat country!” n
The author
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.
