Few property insurance policies provide coverage for business interruption resulting from a pandemic. Looking forward, there are two recent developments in insurance coverage that agents and brokers can promote. Learn more.
DISRUPTION WITHOUT DAMAGE
The new frontier of risk and insurance
By Joseph S. Harrington, CPCU
How do you address the elephant in the room when everyone is tired of hearing about it?
Unless you’ve been hiking alone in a deep rain forest, you’ve probably heard more about the coronavirus in the past month than any topic in your life, with the possible exception of Islamist extremism in the wake of the Sept. 11th attacks.
A commentator is hard-pressed to say anything new or uniquely valuable about COVID-19, even regarding the more obscure (to the general public) questions of how its cascading effects will affect property/casualty insurers and insureds.
By now, readers of this blog are almost certainly aware that very few property insurance policies provide coverage for business interruption resulting from a pandemic. Whether and how liability policies will be triggered remains to be seen, and any speculation on that score would only compound the cacophony of chatter during this emergency.
[T]he enormous impact of coronavirus must and will open our eyes to approaches we never would have considered before.
Standard commercial property forms typically require physical damage at some location to trigger business income coverage, and they often include exclusions for losses arising from infectious diseases. Even when income coverage is triggered by action of civil authorities shutting down locations, that trigger is typically restricted to shutdowns resulting from losses caused by perils insured against under a policy.
A few farsighted companies may have thought to procure business interruption coverage for pandemic-type situations, if they could get it, but such examples are rare.
Awkward and onward
In this situation, agents and brokers may find themselves in the awkward position of being asked to be advocates for clients seeking coverage. Producers are certainly sensitive to that, but they also know that if they succeeded in finding an opening for coverage in common policy provisions, it could result in a tsunami of claims that would swamp their markets. Not fun.
It’s not yet clear how the coronavirus emergency will affect the P-C industry overall.
Like all investors, carriers are taking an immediate hit from a cratering stock market and near-zero interest rates. On the other hand, the decline in economic activity may lead to a reduction in claims, presuming that exposure to business interruption claims is not opened up by legal or regulatory action. In New Jersey, insurance trade groups are fighting a legislative proposal to expand business income coverage to coronavirus losses, and a lawsuit in Louisiana seeks the same.
Looking forward, there are two recent developments in insurance coverage that agents and brokers can promote in conjunction with their clients, carriers, and regulators. Leveraging these developments demands that we address some complex considerations, however.
The first development is non-damage business interruption insurance, which provides coverage for income lost due to an event, such as a mass shooting, that forces enterprises to suspend operations, even if there is little or no property damage as traditionally understood.
This is not simply a matter of extending traditional income coverage to interruptions due solely to human casualties or fear of casualties, however. The human element introduces subjective considerations of anxiety and trauma into the risk calculus. We can’t have public authorities shutting down commerce as a default impulse simply because they believe the losses will be insured.
Deductibles and limits will have to be restructured to ensure that policyholders and communities have sufficient incentives to implement loss mitigation measures and work energetically to get up and running again.
The second development is parametric insurance, which is well-developed for very large risks, such as national catastrophe funds in various nations, and for very small risks, such as flight cancellations. It is less well-established for standard personal and commercial risks in the United States, however.
Put simply, parametric insurance pays a sum when a certain type of event occurs, such as a hurricane of a certain force, an earthquake of certain magnitude, or storm surge of a certain height. These “parameters” indicate the occurrence of some event virtually certain to cause some kind of loss.
A key attribute of parametric insurance is that it can immediately put cash in the hands of those affected without (or before) requiring them to account for their losses. This is similar in some respects to the coverage available under cyber insurance policies that pay for certain forensic, notification, and credit monitoring costs even before there is clear evidence that anyone has actually suffered a loss.
We can see why parametric insurance is beneficial to countries seeking liquidity in the wake of a major disaster, and for individuals inconvenienced by a small personal loss. But parametric insurance challenges the insurance principle of indemnity, the principle that insurance must make someone whole after a loss, but not better off. Regulators will have to weigh in on its appropriate use.
Suppose, for example, that large numbers of commercial insureds in 2020 had parametric coverage for income losses in the event of the declaration of a national pandemic emergency.
Presuming insurers had set prudent limits and reserves for the contingency, then insureds, communities, and the economy would have benefitted from an influx of money to stem the decline in commerce. It’s impossible to imagine that all resulting losses would have been covered, but the economic blow would have been considerably softened.
However, given the amount of coverage and spread of risk needed to make a meaningful economic impact during the coronavirus emergency, it is almost certain that some insureds would receive more in parametric payouts than they incurred in losses. That would violate the principle of indemnity, but requiring insureds to demonstrate losses before receiving payouts would blunt the effect of parametric coverage.
A way would have to be found to cancel or limit the possibility that an insured could actually improve its condition through the operation of parametric coverage. Perhaps payments in excess of final losses would have to be refunded or counted as income and taxed accordingly.
Neither of those options would be easy or practical, but the enormous impact of coronavirus must and will open our eyes to approaches we never would have considered before.
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.