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Insurers face impossible dilemma on virus-related business interruption claims

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Insurers face impossible dilemma on virus-related business interruption claims

Insurers are unlikely to bow to pressure to pay new coronavirus-related business interruption claims where they are excluded, according to legal and claims specialists.

Although the industry may face reputation damage for sticking to policy wordings while businesses struggle under government-imposed lockdowns, they risk insolvency if they do otherwise.

U.S. insurers have already faced political pressure to look beyond their policy wordings. Eighteen members of Congress wrote to U.S. insurer and broker trade associations March 18, urging them to work with their members to "recognize financial loss due to COVID-19 as part of policyholders' business interruption coverage" despite the exclusions in place.

It is unclear whether other countries' insurers have faced similar pressure, but Simon Brooks, co-head of global insurance at law firm Eversheds Sutherland, said in an interview that it is "not in [individual insurers'] gift to start paying claims that are not covered," because of their obligations to other policyholders and regulators to remain solvent, and to their reinsurers to ensure only valid claims are paid.

Wide variety

There is much confusion about what business interruption insurance will cover following the outbreak and global spread of the new coronavirus.

Standard business interruption cover, if bought at all, is typically only triggered if there has been property damage. Businesses can buy extensions to this cover, and payouts could be available under either denial of access or notifiable disease extensions. But much depends on the individual policy wording. For example, some denial of access extensions exclude disease, and some notifiable disease extensions do not pay out if the specific disease is not named, or if it becomes a pandemic, Brooks said.

Even if business interruption for the virus is covered under one of the extensions, there are usually sub-limits that would mean a smaller payout for notifiable disease than the policy would allow for damage-related business interruption, Brooks said.

Damian Glynn, head of financial risks at loss adjuster Sedgwick in the U.K., said, "One insurer might have several dozen policy wordings, so it isn't realistic or even desirable to expect them all to necessarily behave in the same way."

In the U.K., the government and the Association of British Insurers, for example, have both warned that business interruption policies will not typically pay out. Senior executives from global insurance and reinsurance firms, including Hannover Re, Zurich Insurance Group AG and Aviva PLC, have said publicly that they expect business interruption claims and nonlife claims, in general, to be limited because of the various exclusions and conditions.

Expectations meet reality

But there appears to be a wide gap between insurers' and policyholders' expectations of how business interruption policies will respond to coronavirus claims. A survey on the business impact of the virus conducted between March 10 and March 19 by 451 Research found that 63.9% of respondents either strongly agreed or somewhat agreed that their companies had adequate insurance to protect against business interruption from the outbreak.

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Some believe this mismatch will harm the insurance industry's image. Dominic Simpson, senior credit officer at rating agency Moody's, said in a March 19 report that the industry as a whole "faces the risk of reputational damage" if there is widespread denial of business interruption claims, "as some policyholders may not be aware that infectious diseases were excluded."

Glynn said insurers have been known to make concessions on exclusions in specific cases where the number and type of affected companies is known. However, he said, "it is a completely different matter when we are talking about the whole of the U.K., and what would be the point in offering a concession if, in fact, you ultimately can't afford it?"

"It is the devil's own job to scope what the impact will be," he added, noting that there could be knock-on effects to other companies from a firm suffering business interruption.

Bruce Hepburn, CEO of claims resolution firm Mactavish, said in an interview that nonpayment of excluded claims "will have a very big reputational impact on the insurance sector" but that there was little the industry could do about it. The solution would be to pay the claims, but the number of claimants would make this unworkable.

"Imagine how you open up the floodgates when you start to pay one or two," he said, adding that there is "absolutely no prospect" of the U.K. government requiring insurers to pay up, because companies had not paid the premium for it, and "it is not in the government's interests to have an insolvent insurance sector."

Insurance regulators in the U.S. are taking a similar approach. In a March 25 statement, the National Association of Insurance Commissioners, which brings together state-level regulators, urged members of Congress not to move toward forcing the retroactive payment of unfunded claims.

"Insurance works well and remains affordable when a relatively small number of claims are spread across a broader group, and therefore it is not typically well-suited for a global pandemic where virtually every policyholder suffers significant losses at the same time for an extended period," the NAIC said. Forcing the coverage of claims "would create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing."

While government orders to pay up are unlikely, there are some signs of insurers and governments talking about relaxing exclusions. A spokesperson for pan-European trade body Insurance Europe said via email that the association is aware that "in some cases, discussions are taking place at a national level between policymakers and insurers about what insurers are and can do beyond what is prescribed by their contracts," but that such discussions "can only happen at a national level."

The spokesperson also said that while Europe's industry "has a long and proud history of supporting society when it matters the most," this "cannot be done in a way that would endanger the stability of our vital sector."

Scope for disputes

If government intervention remains an unlikely prospect, mismatches between policyholders' and insurers' expectations can lead to legal battles over coverage. In the U.S., New Orleans restaurant Oceana Grill is suing its insurers, arguing that its policy covers it for business interruption relating to the pandemic.

However, Brooks said that while he can see the scope for coverage disputes over coronavirus exclusions, "I wouldn't talk it up," adding that "a lot of the covers I have seen are very clear."

Hepburn said, "I think in many cases, the exclusions will just bite."

Additional insights from the 451 coronavirus flash survey:

Gaming industry to play on despite COVID-19 impact

Perceptions of business interruption coverage at odds with reality, survey finds

US consumers put away their wallets as coronavirus spreads, survey says

451 Research is an offering of S&P Global Market Intelligence.