OUTBREAK:PROGRAM PROS ON COVID-19
Target Markets panel tackles issues, shares insight, offers solutions
By Elisabeth Boone, CPCU
As the COVID-19 pandemic continues its deadly march, life as we knew it is becoming a distant memory. Every aspect of our existence is experiencing the impact of a crisis for which most of us find ourselves ill prepared. Every trade, every profession, every industry is struggling to find a measure of stability in rapidly shifting sands.
Like others, our industry confronts challenges on myriad fronts, and each day brings fresh concerns.
Early last month, the Target Markets Program Administrators Association (TMPAA) held a town hall webinar titled “COVID-19 Issues, Impacts, and Solutions.” Panelists discussed everything from grace periods and cancellation moratoriums to business income exposures, workers comp and more. Following are edited excerpts from the wide-ranging discussion.
Grace periods, moratoriums, and more
Discussing issues related to client business changes, panelist Heidi Strommen, president of restaurant insurance provider ProHost USA, a division of Distinguished Programs, said, “[T]he overarching issue we need to recognize is the heightened credit risk we’re facing during this crisis. … [M]any of the businesses we insure are experiencing cash flow issues that range from mild to severe. It’s unclear when the situation will improve, which compounds the problem. …
“We’re trying to figure out the best way to minimize the risk and share in it equitably. We want to be good corporate citizens during this crisis,” she added.
The challenge of keeping up with disparate and changing state regulations designed to control the virus’s spread is real. “The more states you do business in, the more regulations you’re trying to monitor,” Strommen said, adding that “being up to date today doesn’t mean you’ll be up to date tomorrow.”
Her advice: Ask how to plug into carrier partner resources to stay up to date. “That’s especially important if you don’t have your own compliance department,” she said. Second, work with carrier partners to develop a strategy relative to cancellation notices and payment grace periods that meet guidelines or mandates for most states where you do business. “And agree to follow that strategy voluntarily—even in states [with] lesser requirements,” she added.
Finally, negotiate terms of your payments to your carriers so that your terms are aligned with that compliance strategy. Strommen said one approach used after Superstorm Sandy was to have program administrators continue to submit monthly bordereaux (a report that provides premium or loss data with respect to a specific risk) but to remit only collected premium for a period of time.
Panel moderator Chris Pesce, TMPAA president and national director of One80 Intermediaries, observed that “cancellation notices are being postponed [during the pandemic], but that doesn’t mean the premiums are being forgiven. When all the state regulations are lifted, who is going to bear the burden of collecting the premiums? What about the earned premium? Is the insurers’ expectation that this is an accruing balance? Fast forward 60 days; if all of these accrued balances come due at the same time, the collection effort is going to be tremendous.”
Panelist David Jordan, president and CEO of Breckenridge Insurance Group, offered ideas to minimize collection exposures. A first step, he said, is to review agreements with carrier partners, specifically portions dealing with account current and collections, and fiduciary responsibility for earned premiums. “That should give you a thorough understanding of what your obligations are,” he said.
Second, don’t wait. “If you’re going to be negotiating modifications … it’s best to start the conversation now, before the next account current comes due,” he said, stressing the importance of getting results of such negotiations in writing, “whether they are specific to your firm or more broadly applied by the carrier to all firms.”
Third is to take a hard look at the potential impact that will be on your finance and accounting staff. “You have to assume there’s going to be a significant increase in disputed items, delinquent items, items that have to go to collection, and items that you’ll have to notify your carrier about,” Jordan said. “How is your staff going to handle this?”
He said to consider training and technology issues, and recommended having “a robust and ongoing dialogue with your internal collections staff, externally with third-party collection firms, and with the carrier.” Each must be prepared to handle an increased workload, given that the pandemic could be an ongoing problem for some time.
Jordan encouraged program administrators to be proactive. “Go through your account listing and your accounts current for 90 to 120 days and identify large transactions—maybe $50,000 of premium due to the carrier,” he advised. “Take that list and go to the retail agent to get a read on what’s happening with the insureds’ operations. Are they still open? What’s their cash flow? What’s the likelihood that the premium is going to be paid?”
He said that carriers would appreciate having this information earlier rather than later, “and it may help you in your discussions with them about modification of payment terms, increased use of collection services, and potentially having the carrier step into your shoes from a collection standpoint.”
The two key points to remember, Jordan declared, are: “Document, document, document, and keep the lines of communication open with your carriers. Now is not the time to be assuming anything.”
Responding to an audience question about whether program administrators would be on the hook for uncollected premiums during the pandemic, Pesce said, “Absent any agreement to the contrary, the answer is yes—and subsequently the retailers with whom they have agreements will be on the hook. This is the challenge in letting these unpaid balances accrue.”
John Colis, president and CEO of Euclid Insurance Services, said part of the risk that program administrators have is because “retail brokers, particularly smaller ones, will be caught in a very difficult situation and will be reluctant to cancel clients they’ve had for five, ten, or fifteen years—many of whom are good friends. PAs need to keep a focused eye on the solvency of their brokers because if the insured pays the broker and the broker doesn’t pay us, we can’t cancel the insured and we’re on the hook to the carrier.”
Jordan agreed, adding, “Often retail agents have streamlined producer agreements on their brokerage business that require them to pay only the cash they’ve collected. They may not understand the additional burden on program administrators, which is typically to pay the premiums that have been booked and billed, regardless of whether they’ve been collected.”
Business income exposures
The topic of legislative intervention made the panel agenda. “We’re hearing a lot from state legislators about draft bills that would create coverage for business income losses that result from the COVID-19 disruption,” Pesce said. “These bills basically come in three different flavors.” First, some legislators want to pass laws requiring insurers to cover business income losses related to the coronavirus, regardless of policy wording.
Second, some lawmakers won’t throw out policy wording but are crafting language to help promote coverage. “An example would be that they deem a virus in the workplace to be considered property damage, thus creating a path for coverage under most policies,” Pesce explained.
Third, he noted, are states like Massachusetts that want carriers to pay business income losses resulting from the disruption and seek state reimbursement for losses paid.
Asked about the likelihood of any of these becoming law, Paul White, a partner at law firm Wilson Elser, said, “In some ways we’re in brand new territory. There have been instances in the past where state legislators have been able to enact laws to aid citizens in times of crisis. In this instance, however, the three [proposals] … do more than that. They seek to actually change the terms of the insurance contract.”
He explained that a standard commercial property form with business interruption coverage has a condition precedent to coverage that there be a direct physical loss to property. In response to the pandemic, he noted, many jurisdictions are preventing restaurants from serving customers inside the premises, but are allowing restaurants to engage in ongoing operations, including pick-up, delivery, and curbside service. “The building itself has not incurred a direct physical loss,” White noted. Rather, business slowed because governments are looking to slow the spread of the virus due to human-to-human transmission.
In 2006, he said, ISO created an exclusion specifically precluding coverage for “loss or damage caused by or resulting from any virus that induces or is capable of inducing physical distress, illness, or disease.” White said the circular that ISO provided state regulators when filing the exclusion, “specifically identified pandemic events as exactly what it was trying to exclude coverage for. It specifically identified SARS, and the virus that causes COVID-19 is SARS- CoV-2.”
As of early April, he pointed out, five states had proposed bills providing relief to small businesses—usually employers with 150 employees or less—by requiring insurers to cover losses resulting from the COVID-19pandemic. “If a small business has business interruption coverage, the legislation effectively removes the direct physical property loss requirement,” White explained. “Some of the proposed bills would expressly override any exclusion for losses that arise out of the spread of the virus.” Similar actions are being taken in other countries.
In essence, White said, these jurisdictions are “unilaterally trying to change the terms of private contracts and … shift the financial responsibility to insurers for the economic disruption this pandemic has brought about.” If passed, the bills would impose on insurers “obligations that they never bargained for, took into consideration in the underwriting process, or received premiums for.”
He pointed out the U.S. Constitution says that no state shall pass any law impairing the obligations of contracts. “I don’t think there is any question that a law that forces insurers to pay for losses that are not covered in their contracts is a substantial impairment of the contract,” White asserted.
Noting that some markets offer business income coverage specifically for losses arising from a pandemic, Pesce observed that, in COVID-19’s wake, a surge in demand for such coverage can be expected. Therein lies a potential E&O exposure for retailers, he cautioned. “Some insureds will allege that their agent never offered them pandemic insurance; they’ll say: ‘If I’d known it was available, I would have bought it.’ I think this is a line of litigation that we’ll likely see.”
General liability and workers comp
Pesce said market professionals anticipate “a flood of requests for midterm decreases of revenue for GL and payroll for work comp.” He asked panelists how they’d handle such requests, absent state requirements or guidance on the topic. Colis responded, “In most cases we’re not obligated to do anything, but if a business is shut down and has no exposures, can you really say ‘no’ to them?” He said it’s a time for collaboration with carriers to come up with solutions “so you’re not doing it on your own.”
On the flipside, Colis observed, “As we renew business, say on an insured whose revenue has dropped 80% in two months, ideally we’ll have the reverse situation when their revenue grows higher toward the end of the year. This issue goes both ways, and we may have to invent an approach that applies to both situations.”
Jordan shared excerpts of a carrier communication his firm received. It said the carrier would consider midterm changes based on verified sales information, and changes will be considered only after governmental restrictions have been lifted and normal operations are resumed. “We thought this bulletin was especially thoughtful and showed a willingness to be flexible,” he noted.
Regarding liability, panelists addressed questions about negligence claims that might be filed against nursing homes and prisons where people died of COVID-19. These venues are considered hot spots for outbreaks because of difficulties maintaining social distance and because many residents have underlying health issues. “The state of Washington has issued fines against managed care facilities for omissions in their treatment and handling of patients with COVID-19,” one panelist observed. “It would not be surprising to see liability claims start to pop up in circumstances like that.”
In the midst of a worldwide pandemic, almost nothing would be surprising. As the situation evolves, new challenges follow. Target Markets town hall panelists took a significant step toward finding solutions by sharing valuable experiences and information. View the entire presentation at: www.targetmkts.com.