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The Rough Notes Company Inc.



April 29
12:25 2020

Given what it takes to deal with the current pandemic, it may seem premature to be planning how to deal with the next. But that’s happening. Pay attention and weigh in.


Reactions to the pandemic will drive what covers agents and brokers will sell going forward

By Joseph S. Harrington, CPCU

Never before, not following the worst disasters or even during world wars, have insurance producers all across the country simultaneously faced the prospect that large numbers of their clients would not recover.

Never before have producers all across the country simultaneously faced such a bewildering series of pressing questions.

Among other things, these questions concern:

  • The application of cyber coverage to unplanned work-at-home arrangements,
  • Workers compensation coverage for workers infected by Covid-19,
  • Management liability coverage for directors and officers accused of not planning for a pandemic, and
  • Medical professional liability coverage for health care practitioners and facilities that have expanded legal immunity during this time, but who find themselves in legal battles with each other.

The most common and painful topic is business interruption coverage, and the general lack thereof for involuntary closures during pandemics. The topic is especially painful because agents and brokers who did their job to remind buyers of the need for income coverage (and would have faced E&O exposure if they hadn’t) have to explain why it generally does not apply in the current economic paralysis.

Faced with this deluge of questions, agents and brokers must rely on authoritative information from their carriers, first of all, and then from resources of legislative and regulatory information provided on the websites of the NAIC, IIABA, PIA, PLUS, and other insurance trade associations.

The band plays on

Given what it takes to deal with the current crisis, and that we won’t know the final lessons for months or years, it may seem premature to be planning how to deal with the next pandemic. But that’s what’s happening, and producers are advised to pay attention and weigh in when they can.

Initial reactions to the September 11th attacks played a role in shaping in the final structure of the federal terrorism reinsurance backstop, and today’s reactions to the COVID-19 pandemic will help determine the type of coverage agents and brokers will be selling in the future.

Given the widespread nature of pandemics, it’s hard to see how the organizations most in need of coverage could control their own exposure and recovery, short of taking measures that severely constrain their operations.

The federal terrorism backstop is seen by many as a model for how the federal government should respond to pandemics, and there are proposals under review by Congress to either create a separate pandemic backstop or to expand the terrorism backstop to address pandemic losses.

Before comparing and contrasting proposals, it’s important to address a fundamental distinction between insurance for terrorism losses and those that result from a pandemic.

In a practical sense, insurers don’t really sell “terrorism insurance,” even though there are monoline policies available for insuring terrorism losses. For the most part, terrorism insurance involves retaining coverage that’s already place, particularly for fires and explosions, when those perils are triggered by intentional acts of political violence.

It follows that loss control and loss mitigation measures taken to limit losses from accidental fires and explosions are helpful in addressing terrorism losses, and so the public sector has an interest in supporting those private sector efforts.

Importantly, the requirement that insurers make federally-backed terrorism coverage available applies only to perils insured against under an applicable property policy. Insurers are not required to offer coverage for biological, chemical, nuclear, or radiological attacks—hazards most insurers have no experience in addressing.

Nor does the federal backstop respond to human casualties unconnected to property loss, unless they are subject to covered liability claims. A special victims’ fund was established after the September 11th attacks to deal with those.

Something new

At its core, a pandemic reinsurance backstop would institute something entirely new in property insurance: coverage for income losses arising from natural processes that do not cause physical damage to property and which have not been covered previously, except in rare cases.

Given the widespread nature of pandemics, it’s hard to see how the organizations most in need of coverage could control their own exposure and recovery, short of taking measures that severely constrain their operations.

Inaction is not an option, however. No one wants to see pandemic shutdowns morph into escalating liability claims, or see $2 trillion emergency appropriations by voice vote become a habit.

Among the proposals under consideration is one from Zachary Finn, a professor and risk manager at Butler University in Indiana, who has gained prominence for his expert advocacy during this time. Finn has presented Congress with a draft “Terrorism, Pandemic Risk Insurance Act” (TP-RIA) that would, among other things:<begin bullets>

  • Expand the terrorism reinsurance backstop to cover losses arising from pandemics, viruses, communicable diseases, quarantines, border closings and government-ordered repatriations;
  • Backdate the coverage to include business interruption losses from the 2020 Covid-19 pandemic; and
  • Allow policyholders who earlier declined coverage under the terrorism backstop to purchase coverage retroactively at three times the applicable premium rate. <end bullets>

Another draft proposal is being circulated in Congress as a separate “Pandemic Risk Insurance Act” (PRIA) to parallel the “Terrorism Risk Insurance Act” (TRIA).

Like TRIA, PRIA would establish layers of liability and co-payments for pandemic losses, with the U.S. Treasury providing liquidity above a certain level of losses. Unlike TRIA, however, PRIA, as currently envisioned, would apply only to business interruption coverage and insurer participation would be strictly voluntary; to date, there is no “make available” requirement.

Wait and see?

Since these proposals have yet to be introduced as bills, insurance trade associations representing agents, brokers, carriers, and reinsurers have not yet weighed in on them in an official capacity. Those groups have maintained a united front in resisting legislative attempts at the state and federal levels to force insurers to cover pandemic income losses retroactively or in the future.

For now, the trade groups are concentrating on educating legislators about the uninsurability of pandemic losses, while working with associations from other sectors to promote the creation of an independent federal recovery program.

For independent agents and brokers, the COVID-19 emergency will result in more complex choices for clients regarding risk management, insurance, and the best allocation of their premium dollars—with or without a pandemic backstop. After this deluge will come a renewed appreciation for committed, knowledgeable risk counselors.

The author

Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.

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