COVID-19: Insurance Coverage and Legislative Risk Shifting

By Marc O. Dedman
Barton PLLC
Nashville, Tennessee

The impact on business caused by COVID-19 is beyond what any person could have expected as the United States entered 2020. In the span of a few months, more than 20 million people in the U.S. lost their jobs, erasing 10 years of job gains. Unemployment in the United States was 3.5% in February 2020. Two months later in April, it was 14.7%. In May, a surprise unemployment rate announcement of only 13.5% was celebrated (as opposed to what had been the expected rate of 19.0%). The U.S. Fed Balance Sheet increased from $4 trillion in 2019 to $7.1 trillion in May 2020. In just over a month, the stock market fell from its February 21st high of 29,551 to its March 23rd low of 18,591.

The impact on certain industries has been profound, affecting sectors such as entertainment and recreation, hospitality, and commercial airlines among many others. Real GDP dropped 3.9% between Q4 2019 and Q2 2020. Supply chains around the world were disrupted, creating additional negative results in the U.S. economy and business. The question is: Who should absorb this loss? Should it be business and the millions of employees that had nothing to do with either COVID-19 or the government shutdown orders who bear the brunt of the consequences? Should it be the insurance industry—which, like business, had nothing to do with either COVID-19 or the government shutdown orders—that bears the loss? Should it be someone else?

In an earlier Barton analysis involving COVID-19, we discussed insurance coverage for business interruption arising out of COVID-19. An import of that earlier discussion was that losses from a pandemic can potentially be covered by multiple types of insurance policies and by multiple coverage provisions within insurance policies. Having said this, as a general matter, insurance coverage for losses arising due to COVID-19 under existing laws may also be less likely than policyholders originally anticipated. To redress this result, legislators in several states including New York, New Jersey, Louisiana, Massachusetts, Pennsylvania, and Ohio are proposing changes in the law to shift more of the financial burden from injured policyholders to insurers.

Generally, insurance contracts are interpreted like other contracts.[1] Having said that, exceptions, exclusions, and limitations in insurance policies are typically construed against the insurer and in favor of the insured. The law in many states also holds that an insurance policy is a contract of adhesion drafted by the insurer and will be construed against the insurer and in favor of the insured as to coverage. From general statements such as these above, one seeking insurance coverage might believe that insurance coverage should be granted for business interruption arising from the impacts of COVID-19; however, that conclusion under existing state laws may be incorrect. To the contrary, it is because there may likely be no coverage under existing laws that some are seeking to change the law.

One concept implicated by a legislative mandate that certain exclusions for coverage be removed after the contract was negotiated is whether the law should allow contract terms to be changed after the fact versus, for example, recission of the contract itself. Insurers will argue that the insurance contract was entered into between it and its insured, a price was established and accepted, and that the agreed policy did not provide coverage for a COVID-19 loss; therefore, it should not be changed for circumstances that were not the insurer’s creation. Such argument by insurers may be even stronger when state-approved policy forms are involved. In other words, if the insurer issued policies of insurance approved by state insurance regulators, why should the policies be modified?

State regulators will likely contend that a pandemic like COVID-19 was unforeseeable and that, as between an insurer and insured, the insurer should bear the loss. Insurers will likely contend to the contrary, to wit: that the policies were not ambiguous and were approved by state insurance regulators for issuance with the exclusion plain to be seen. Insurers will likely also argue that there have been four (4) other pandemics since 2000 (MERS, SARS, Ebola, and Swine Flu); therefore, pandemics were foreseeable and state regulators did not prohibit such exclusions. Even if state legislatures approve a change in law creating insurance coverage when no coverage existed before, litigation will likely last longer than many impacted businesses are able to wait for relief. In short, the intended result, money flowing to impacted businesses, is uncertain and may not be quick enough.

Another argument implicated in the analysis of legislative risk-shifting is that the property and casualty insurance industry will take the position that insurers do not have enough in premiums and reserves to pay for the extent of business interruption losses sustained. Estimates are that premiums and reserves for the property and casualty industry total approximately $1.4 trillion. Estimates are that business interruption losses are in a range of $250-$350 billion per month. If those respective estimates are correct, available indemnity exists for only approximately four months; however, the property and casualty industry could also be bankrupted and, in addition, there would be no indemnity available for other losses including automobile coverage, workers’ compensation, insured business liabilities, property losses, etc.

Issues to be addressed are significant and the damage caused to U.S. business has been extraordinary. Similar to the impact on business, the impact on the insurance industry can be destabilizing through enactment of the wrong laws. For businesses that have coverage under existing policies, the benefit of their bargain with insurance carriers should be paid. For businesses, a review of existing policies should be made if it has not already taken place, particularly since there may be policy conditions requiring timely notice to be given.

Though some policies will clearly provide coverage and others will clearly exclude coverage, many other policies may not be as clear, for example, as in claims where denial is premised upon bases such as “lack of damage to property”. Considerations for businesses regarding whether to move forward to litigation for a COVID-19 related loss can be more substantive where coverage is possible as opposed to claims that are clearly not covered under existing policy language. Advice of legal counsel may be necessary in either scenario.

With respect to business losses for which there is no insurance coverage under existing policies of insurance in the absence of legislative change to existing law, government leadership at both state and federal levels should create a mechanism by which both business and the insurance industry can survive. After all, neither business nor the insurance industry created the pandemic or the government orders that resulted in the devastating financial losses that followed. Utilizing a model such as the Terrorism Risk Insurance Act (TRIA) is a very good place to start while using private insurance and governmental backstops in the interim to redress the impact of COVID-19 losses on business.

If you have any questions concerning insurance coverage as it relates to COVID-19, please contact Marc Dedman at mdedman@bartonesq.com or 615.340.6791.

[1] Laws addressing interpretation of insurance policies are typically those of the state in which the policy is issued. Because laws determining insurance coverage are usually state-specific, policy interpretation can vary in the 50 states, sometimes significantly for identical language. The discussion herein is not specific to any jurisdiction and is intended to give a broad context to the issues. Consultation with an attorney with knowledge of the laws of the jurisdiction which controls interpretation of the insurance policy is necessary to determine potential coverage under a specific policy.