Risk Managers’ Forum
By Paul W. Burkett, JD, CPCU, CIC, CRM, ARM, ALCM
Should risk managers believe they’ll have coverage for COVID-I9 under standard business income and extra expense coverage forms?
Risk managers across the country are concerned regarding coverage for income lost because of the COVID-19 pandemic under standard business income and extra expense forms. The situation has been widely discussed in insurance trade journals, and many opinions are currently circulating among individuals both within and without the insurance community and risk management world.
Pandemics and epidemics are certainly not new to us; we have experienced many in recorded human history.
Pandemics are generally considered to be worldwide while epidemics are more regional in nature. The 1997 avian flu infected poultry in several regions of the world and spread to humans. While the COVID-19 pandemic is not the first encountered by humans, the economic effects have been unprecedented and have generated questions regarding business income.
With contracts of insurance, wishing or assuming an exposure to be covered when the insurance contract language clearly states it is not covered does not work.
The genesis of the economic effects was from the response to the COVID-19 pandemic; there was no vaccine available and normal processes employed by the medical community to treat similar pathogens were not available or effective in stemming the virus. Therefore, the world employed the same response as China did—shutting down to avoid the transmission of the virus. Using the same model, the United States and other countries shut down their economies to reduce the virus transmission; businesses were forced to close, and incomes plummeted as people were told to avoid contact with others and to shelter in place.
While populations were locked down in the United States and other countries, medical professionals studied the COVID-19 virus, thought to have originated in Wuhan, China, and found what appear to be different strains of the virus that may attack different parts of the human body. Some may also more severely impact people of different ages, particularly individuals with certain medical conditions that place them at great risk. At the same time, governmental and medical entities, through the media, instructed people how they should protect themselves by social distancing, staying in their homes, and wearing protective devices like face masks. Countries closed borders and restricted travel. Medical professionals worked and continue to work diligently to help those who contracted the virus to recover.
Few people doubt that the human population of the world will continue to have epidemics and pandemics; we are susceptible to such viruses. As a result, risk managers will need to continue not only to identify potential virus exposures but also react with well-developed analysis and control as they establish risk management plans for now and in the future.
Understanding and acting
Risk managers and their insurance agents or brokers need to become more familiar with the language of the standardized coverage forms. The definition of virus falls into broad categories, but the definition basically goes back to the definition of a pollutant used across practically every coverage form, including property. In the past, a pollutant has not referenced mold, fungus, virus, bacteria and other microbiological life forms or materials. Therefore, we need to focus on the specific definition of a pollutant.
In addition to reviewing the definition of pollutant, there are two major elements to consider. The first element is what the coverage form states about reporting, and the second is what does the agency or wholesaler contract state regarding claims reporting. These two elements are the overlays that dictate how insurance agents and brokers will handle any claims, and particularly claims regarding viruses as reported by risk managers.
Typically, insurance agents and brokers have the authority to respond to claims and submit them to the carrier in a timely manner. If a risk manager asks his or her agent or broker to file a claim, then the agent or broker will respond. At the same time, the risk manager cannot expect the agent or broker to render a judgment or opinion as to the existing coverage. The only coverage judgment or opinion having authority is from the insurance company. The risk manager’s agent or broker only has the responsibility to forward the claim.
It’s important for a risk manager to be aware he or she is required to respond to the conditions of the insurance contract; they must report claims in a timely manner, whether they are related to property, third-party casualty, workers compensation or some other form of coverage. As is the case with all claims, any claim believed to be related to COVID-19 events must be reported in a timely manner. Risk managers understand the contract of insurance is between their organization and the insurance company. The insurance agent or broker is not a party to the contract and has no duty to do claims investigation.
Claim denials likely
The glut of claims during the COVID-19 pandemic is going to continue; insurance companies are required to do an adequate investigation to see if there is coverage or not. It is likely that claim denials will continue to come from insurance companies stating a pollution exclusion, virus exclusion, an exclusion for ordinance or law, or an exclusion for pandemic. The agent or broker is not responsible for the standardized insurance contract language.
There are also regulatory issues to be examined. A key pandemic concern of insurance commissioners is insurance company solvency. They also are concerned about legitimate claims outside of the COVID-19 pandemic being set aside while the majority of adjusting resources are consumed by pandemic claims.
Risk managers are largely concerned about what they identify as business interruption coverage claims, but in actuality these are business income claims. Since 2006 the insurance industry has had virus exclusions, communicable disease exclusions, pollution exclusions, and ordinance and law exclusions that insurance company claim representatives are going to evaluate and adjust according to the contract language. The claim representative will pay legitimately covered claims and deny other claims.
In response to the pandemic, some state legislators want to pass legislation that would require business income coverage to apply retroactively, no matter what the exclusions, limitations, and conditions that the insurance contract clearly states. This would circumvent Article 1 of the United States Constitution, which states the right to construct private contracts, and there cannot be legislation to interfere with that right. Indeed, this has added complexity to the adjustment of business income claims.
There is a difference between business income and business interruption that risk managers, agents, and brokers need to consider. In the plaintiff view of the world, everything is business interruption, even though the standardized coverage forms clearly state business income or time element. Business interruption implies broader coverage, but business income implies a set of definitions and a specific methodology for calculation.
We can anticipate coverage arguments going on for years revolving around language ambiguity and reason-able expectation of coverage, to name only two.
Undoubtedly there will be arguments under the causes of loss form for concurrent causation as well as governmental action under civil authority, and other arguments under civil commotion. However, bear in mind these are standardized coverage forms which typically speak for themselves and will likely be interpreted that way by the insurance companies and the courts.
As risk managers look to the future and put risk management programs in place, they should work with their agents and brokers to understand the standardized business income coverage forms being presented by the insurance company. Remember, all insurance contacts have what is called a condition precedent, which means that certain elements must be in place to provide coverage. One main element with business income is the requirement for a direct physical loss. This depends on the phrasing and the historical precedent of what is a direct physical loss. There must be demonstrable physical alteration to the property.
The fear of loss because of potential contamination is not sufficient; covered damage to property is the key to coverage under business income, and there must be a covered cause of loss without an exclusion. Physical damage to tangible property also impacts the limited time-period coverage provided under the additional coverage, civil authority, for most standardized coverage forms.
It is likely that in coming months or years, there will be federal action in the creation of a pandemic endorsement to act as a backstop for businesses. It is important as a risk manager or agent or broker to understand that a reasonable expectation of coverage does not typically work. The misconception can revolve around the names of coverage—business interruption versus business income with extra expense.
Insurance companies may offer limited pandemic coverage in the future or modified civil authority coverage that must be carefully reviewed. The pollution exclusion definition may go through further modification with the addition of fungi, mold, bacteria, viruses, and/or microbial matter to clarify that coverage does not apply.
As with many areas of risk management, the transfer of an exposure must be carefully considered. I can’t stress enough the need for risk managers to have a complete understanding of the risk transfer initiatives they put in place. With contracts of insurance, wishing or assuming an exposure to be covered when the insurance contract language clearly states it is not covered does not work.
Our world is always changing, but viruses have been with us since the beginning of time and will continue to be with us.
Paul W. Burkett, JD, CPCU, CIC, CRM, ARM, ALCM, is president and CEO of Snoaspen Insurance Group, Inc., which specializes in risk management consulting, insurance teaching, and expert witness services for insurance bad faith and agents’ errors and omissions cases. He is a national faculty member of The National Alliance, which coordinates this column, and has served on the Board of Governors of the Society of Certified Insurance Counselors.