The COVID-19 pandemic has created a public health and
economic crisis of unprecedented magnitude. In the coming weeks and months, it
will also lead to insurers, regulators and policyholders clashing over claims
issues including which coronavirus-related business losses are and are not
covered by commercial insurance policies. Risk management professionals must be
prepared to navigate these uncertain waters or risk substantial financial
damage to their companies.
New Claims Issues
Today’s most urgent battle lines are drawn around business
interruption claims, which many will seek to file in connection with
disruptions like office closures caused by the outbreak and subsequent civil
authority orders. For policyholders, the principal challenge in establishing
coverage for such claims will revolve around satisfying physical damage or loss
requirements and contending with existing exclusions. While policyholders and
their advocates strongly believe that COVID-19-related business interruption
losses already satisfy these requirements, it is a virtual certainty that
insurance carriers and their advocates will disagree.
Regulators and government officials can intervene, and some
have. In March, New York City Mayor Bill de Blasio declared that “the virus
physically is causing property loss and damage.” Since then, several state and
local governments have issued similar declarations and orders, and state
legislatures have begun taking action. New Jersey introduced a bill that would
retroactively modify policies to “read out” physical damage requirements and
bar enforcement of certain exclusions. though it remains a work in progress.
Lawmakers from Ohio, New York, Louisiana and Massachusetts also introduced bills
of their own, and other states are likely to follow suit.
At the same time, while insurers are saying they will not
pay out business interruption claims due to lack of physical damage and
existing exclusions, they are also preparing to develop new coronavirus and/or
much broader pandemic exclusions in future policies, with no premium
These are not the only claims issues risk management
professionals will have to confront. They should expect significant premium
increases and more restrictive terms across the board. In the D&O market,
for instance, underwriters are already signaling premium increases in the 30%
to 50% range. Claims and litigation against corporate leadership may arise from
COVID-19-related disclosures, as in the case of two securities class actions
filed in mid-March against Norwegian Cruise Lines and Inovio Pharmaceuticals.
The wave of anticipated bankruptcy filings may also spawn claims and
litigation, with creditors alleging mismanagement and other breach of fiduciary
How To Prepare
To head off these new claims issues, risk management
professionals can take the following actions:
Be proactive as early as possible in the renewal process.
As insurers brace for the worst, they will be more selective about underwriting
new and even renewal business. Risk management professionals should reach out
to their brokers and underwriters now to understand how their coverage terms,
conditions and premiums may change as a result of this exposure. They should
also work with coverage counsel to evaluate their potential claims and new
policy forms on renewal, and push back against unfair and over-reaching changes
to their coverage programs.
Be on the lookout for new exclusions.New
policy exclusions likely will not be specific to COVID-19, but broader in
scope. As a result, negotiations on wording and pricing will be necessary.
Engage trade associations and lobbying power. Risk
professionals should urge their trade associations and industry lobbyists to
pressure legislators to act on insurance coverage issues before it is too late.
After all, state regulators have the power to review and accept or reject
proposed new exclusions. They can compel insurers to recognize that emergency
orders mandating company shutdowns satisfied the physical damage requirement
under the civil authority coverage of their policies, or to expect a detailed
regulatory review process for any new exclusions, especially if those
exclusions do not come with substantial premium reductions. It is crucial that
regulators send a clear message on this issue now, while businesses are facing
the crisis, not after it passes.
Consider filing a Notice of Circumstances, especially if
a renewal is fast-approaching. Such notices, which alert the insurer to
circumstances that may produce future claims, can help lock in broader and more
favorable coverage terms for current policies. However, companies should
consult with their coverage counsel to determine whether and how to provide
such a notice to ensure that coverage will be locked in.
The COVID-19 pandemic will continue to cause significant
disruption for every industry. Like all business, insurers will do everything
they can to protect their own balance sheets in response to pandemic-related
uncertainty. This makes it vital that risk managers prepare for the new claims
battles, and the difficult renewal conversations that will undoubtedly emerge
over the coming year.