Another potential exposure for insurance companies comes from business interruption coverage, which is typically included in property policies and indemnifies companies for loss of profits if the business is shut down for reasons specified in the contract. Typical all-risk commercial property policies insure against direct physical loss or damage to covered property resulting from any nonexcluded risk.
New Litigations to Address COVID-19
Generally, diseases such as COVID-19 are excluded as an insured peril (unless added by endorsement). Most policies exclude losses from viruses, bacteria, or other contaminants, which are usually not viewed as causing physical loss. However, there will be challenges and litigation addressing whether COVID-19 has caused direct physical loss at insured locations.
In the United States, case law differs by jurisdiction. Some courts have held that contamination by semitangible biological or chemical agents can constitute direct physical loss if the contamination impairs the function of the property, making it unusable for its intended function. In these cases, the presence of COVID-19 could be considered a direct physical loss. However, in other jurisdictions, there is a high bar to confirm the presence of a physical contaminant, and courts will be reluctant to view COVID-19 as the cause of direct physical loss.
Many traditional property insurance policies include civil authority coverage, which addresses loss of income due to government shutdowns that cause an inability to access insured premises. However, triggering this coverage also requires civil authority action to be attributed to direct physical loss. Currently many businesses are shut down as part of voluntary or government-mandated efforts to shelter in place and prevent the spread of contamination, not because of actual contamination. Policy wording would suggest there is no direct physical loss without actual physical contamination or a direct shutdown of adjacent property, and therefore coverage would not apply.
Regulators across several states have issued bulletins clarifying that pandemics are generally excluded. The Maryland Insurance Administration likened COVID-19 to nuclear war, which is an excluded loss under typical insurance policies, since “potential loss costs from such perils are so extreme that providing coverage would jeopardize the financial solvency of property insurers.”4 However, we are starting to see pressure from legislative bodies to take a more expansive view of coverage. For instance, a March 18 bipartisan statement by 18 members of the US Congress urged insurers to “recognize financial loss due to COVID-19 as part of policyholders’ business interruption coverage.”5 Similarly, legislation is being introduced in some states (as of this writing, Louisiana, Massachusetts, New Jersey, New York, and Ohio) to compel insurers to cover business interruption claims attributed to COVID-19. The UK Parliament has raised similar questions.6 The outcomes remain unclear. Even if legislation is successfully passed, this issue will be heavily litigated, raising constitutional-law issues.
Final outcome of Business Interruption Coverage during COVID-19
COVID-19’s impact on business interruption coverage remains highly uncertain—but it clearly represents a reputation risk for P&C insurers, and finding the right balance and approach across all stakeholders will be challenging. After the 2020 policy year resolves, the industry will look to innovate and explore the potential for expanded pandemic-related coverage. Some such products were introduced to the market before the current crisis. For example, the World Bank Pandemic Emergency Financing Facility has various instruments that will trigger based on a predefined number of deaths. Additionally, in private markets, Marsh, Munich Re, and Metabiota introduced a pandemic risk solution using a “pathogenic sentiment index” that triggers under certain thresholds during an epidemic or pandemic. These products, prior to the current crisis, had low adoption. Indeed, pandemic business interruption protection has proven to be a coverage need that was imagined but not appreciated until very recently.