Pandemic Protection and the Future of P&C Insurance

    The coronavirus pandemic raised a number of questions for property and casualty insurers and for their customers. Businesses and individuals sought help from their insurance companies, revealing unanticipated coverage gaps, unclear language and other issues.

    As the pandemic continues, insurance companies and customers continue to grapple with the question of whether, how and when different coverages ought to apply to COVID-19-related situations. In a post-COVID world, pandemic protection will likely look quite different than it did before COVID-19.

    COVID-19 Highlights Coverage Gaps

    As COVID-19 shut down businesses across the United States, those businesses turned to their property and casualty insurers for help. As they did, both businesses and their insurers discovered that many policies were written in a way that specifically excluded COVID-19 from coverage as a form of business interruption.

    That’s because most commercial policies’ business interruption coverage required some form of physical damage to occur in order for coverage to attach. While COVID-19 can infect surfaces for a short time, the virus then dies, leaving no physical damage to buildings or the property within them. The virus did indeed interrupt business’s operations, but not in the form of lasting physical harm to business property.

    Neither businesses nor their insurers were directly to blame. “It’s not that carriers conspired to exempt the cover or insureds overlooked it; it’s simply a risk that is daunting to underwrite based on the potential depth and breadth of an outbreak,” writes building and insurtech consultant Patrick Kelahan, noting that such claims could have exceeded $1 trillion globally if they had been covered.

    Even policies that allow for intangible forms of damage may nonetheless leave gaps when it comes to a viral epidemic. For example, following the 2002-2003 SARS epidemic, many policies were rewritten to specifically exclude coverage for viruses or bacteria or both.

    While some P&C insurers offered endorsements for viral or bacterial infections, few businesses chose to invest in them pre-pandemic, according to Lawrence A. Wilkinson and fellow contributors at S&P Global. When COVID-19 struck, many businesses were left without coverage that would help them address pandemic-related losses.

    Unanswered Questions About COVID-19 Coverage

    Insurance coverage questions are often answered in legal venues, including legislatures and courts. As with other questions about policy language, disputes regarding business interruption and other coverage for COVID-19 frequently land the parties to them in court. Courts and legislatures, meanwhile, can come to conflicting conclusions that raise more questions than they answer.

    COVID-19 Insurance Cases in the Courts

    Insurance coverage disputes with COVID-19 at their core have reached state and federal courts throughout the U.S., and more are expected to be filed. Many such cases deal with business interruption coverage language, exclusions for viruses or bacteria, or both.

    Insurers have already prevailed in courts on some of these claims. For instance, in July 2020, a Michigan trial court ruled that a Michigan restaurant’s business interruption coverage did not apply, because the property had to be tangibly affected in order to trigger coverage.

    Even if COVID-19 had left tangible damage, however, the court also held that the restaurant’s insurance policy would not have covered the restaurant’s claim, because the policy contained specific language excluding viral infections.

    That case, Gavrilides Management Co. et al. v. Michigan Insurance Co., has already been cited in at least one federal case involving business interruption insurance and virus exclusions. Courts in Florida and California have made similar rulings in similar cases as well, writes Gavin Souter at Business Insurance.

    Not all such cases are being decided in favor of insurance companies, however. In Studio 417, Inc. et al. v. The Cincinnati Ins. Comp., a federal district court judge for the Western District of Missouri rejected the insurance company’s motion to dismiss. The court found that the fact that COVID-19 was physically present at Studio 417, a hair salon, and that its physical presence disrupted the salon’s business, provided a sufficient basis for the case to proceed.

    “The court reasoned that the coverage trigger is physical loss or damage, and that it ‘must give meaning to both terms.’ To adopt Cincinnati’s argument, the court decided, would conflate physical loss with physical damage,” write David J. Marmins and Rebecca Lunceford Kolb of Atlanta law firm Arnall Golden Gregory.

    Even Gavrilides itself may not have the dispositive power insurers would wish for, warns Tom Baker, a professor at the University of Pennsylvania.

    “This complaint didn’t plead ‘physical loss of, or damage to,’ the building. They pled simply that it was shut down,” Baker notes, calling it a “defective pleading on the part of the plaintiffs.” Still, a ruling that a simple shutdown did not trigger coverage for loss or damage differs from a ruling that no loss or damage occurred, a fact that judges in future cases may use to distinguish the claim before them from the precedent set by Gavrilides.

    Legislative Responses to COVID-19 Coverage

    In the weeks immediately following initial outbreaks, several state legislatures entertained bills that would have required P&C insurers to pay business insurance claims related to COVID-19. Some of these bills even sought to require insurers to pay those claims retroactively.

    While several such bills died in the legislature, their drafting and introduction was enough to raise concerns for the P&C insurance industry. Lengthy stay-at-home orders drove additional claims, which risked reducing insurance industry reserves to dangerous levels just as the U.S. entered hurricane season, writes Robert Tomilson, an insurance attorney at Clark Hill.

    “It is easy to forget that insurance is a very complicated business. The industry calculates the future frequency of damage, destruction and loss of life for millions of people and businesses in thousands of occupations and industries against a backdrop of varying geography and disparate circumstances,” notes Tomilson. The complicated nature of insurance, combined with the fact that the pandemic is unfolding over months or years, leaves a number of questions unanswered.

    How Future Policies May Address Pandemics

    Few businesses had the foresight or caution to purchase additional coverage specifically for viral pandemics before COVID-19. Memory of the pandemic’s widespread disruption, however, will remain with us long after the virus itself is under control. And those memories will change insurance customers’ behavior.

    “We expect both the short-term and long-term behavioral and economic impact of the crisis to have diverse implications for the various P&C lines, which in aggregate will challenge the economics of the industry,” write Ari Chester and fellow researchers at McKinsey.

    Looking Forward, Looking Inward

    For insurers, COVID-19 disrupted not only insurance distribution and claims, but insurers’ entire chain of operations. Insurance companies thus find themselves addressing the pandemic in house as well as in their policy language.

    Both coverage and company functions require a response from P&C insurance leaders. For example, both situations may benefit from an enhanced focus on digital capabilities, innovation, operational efficiency and leveraging advanced data analysis tools like artificial intelligence, according to Paul Nelson and fellow researchers at Deloitte.

    Non-insurance businesses are adapting their continuity plans to address future pandemics as well. Insurers may take an interest in these business continuity plans, as both businesses and their commercial insurance companies seek to prepare for future disruptions like pandemics.

    Insurance companies continue to review policy language and applicability in pandemic-related situations. A number of lawsuits regarding P&C insurance coverage for COVID-19 claims are pending in various courts. Their results may shed further light on coverage questions.

    Despite all we’ve learned about COVID-19 this year, many questions remain unanswered. As scientific study provides more information and courts and legislatures address insurance concerns, a new approach to pandemic coverage will likely take shape. Post-pandemic protections will almost certainly differ from their predecessors.

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