Litigation over business insurance claim denial is the proverbial 800-pound gorilla that carriers must address. As of this writing, lawsuits are beginning to proliferate (as Aite Group predicted in COVID-19: Challenges and Opportunities in Financial Services), and most of these lawsuits are centered on the policy limits or exclusions related to business interruption.
Most business insurance policies are clear that interruptions caused by global events such as war or pandemic are not covered. Carriers’ unwillingness to pay out these claims is completely defensible. In the instance of a hurricane or tornado, the reach of a storm’s impact is limited to a geographic area. Whatever impacts Florida might feel from a hurricane are not going to be felt in Arizona. With a pandemic like COVID-19, there is no such limit. As we are witnessing, any business in any location can be forced to cease operations due to government mandate. It is not a stretch to say that no carrier is prepared for a scenario in which nearly all the businesses they insure suffer a loss at the same time. Paying out those losses would be difficult from a logistics perspective but more critically would bring about unprecedented reserve pressures that carriers might not be able to withstand well.
Unsurprisingly, some business owners contend that any pandemic exclusion language contained in a policy is ambiguous and that, in many instances, the exclusion does not specifically name government action related to a pandemic. These business owners state that since government fiat caused the business interruption, rather than the virus, they are entitled to a claim payout.
These diverging views serve as seeds for legal action. However, lawsuits will cost both business owners and carriers time and money, so what can carriers do to potentially hold off litigation and ensure that the needs of their insureds are met?
In the short term, carriers must offer something tangible and meaningful to their insured business owners. Many business owners are having trouble accessing government relief, so carriers could provide resources to help these business owners access the relief that is supposed to be going to them. These resources could range from helping businesses navigate the relief process to working with governments to direct funds to their insureds.
Once any relief decision is made, carriers should work with business owners to assess how whole they were made by this relief and if any gap exists. If business owners do have a gap, then carriers have a decision to make. They can stand firm to any exclusion language and pay nothing, or they can work with business owners to pay them something as a goodwill gesture, even if the business owners are not made 100% whole. At a time when so many people are suffering losses, a 70% solution might not look so bad.
For something to consider over the longer term, carriers should take this opportunity to recognize the enormity and gravity of a pandemic and work with business owners to determine an alternative insurance plan for business interruption coverage. Any alternative plan should include some form of public or private collaboration among carriers, business owners, and governments. The great thing is that this blueprint already exists in the form of the National Flood Insurance Program, which is designed to mitigate the impact of a disaster that could be broad rather than localized.
Taking these three actions is, of course, not a guarantee to prevent any litigation. But carriers should think deeply about each of these and determine which ones make the most sense to bolster their insureds as well as protect their own financial positions.
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