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COVID-19 BI legislation an “existential threat” to insurers, warns Stonybrook

2nd April 2020 - Author: Luke Gallin

Proposed business interruption legislation designed to force P&C insurers to retroactively cover unfunded claims driven by the COVID-19 pandemic, poses an existential threat to the insurance industry, warns re/insurance-focused merchant banking group, Stonybrook Capital.

insurance lawFirst introduced in New Jersey, bills aimed at forcing insurance companies of certain businesses to cover business interruption claims driven by the pandemic, irrespective of any virus exclusions within policies, are now being proposed in other parts of the U.S.

Typically, business interruption policies require physical damage, such as from a fire or a hurricane, to cause the loss of business, and, most standard policies also include specific exclusions related to virus outbreaks. While some would have purchased additional protection that extends to pandemics like the coronavirus, it’s expected the overall, business interruption losses will be limited as a result of the virus exclusion.

However, in places like New Jersey, New York, Massachusetts, and Ohio, legislation has been proposed to reverse this and require insurers to cover losses that were not underwritten and for which they haven’t received any premium.

“If insurers are required to cover these losses, then this will create substantial solvency risks for the industry,” says Stonybrook. Later concluding that, “the proposed business interruption legislation presents an existential threat to the insurance industry.”

Concerns around the new laws seeking to be implemented in parts of the U.S. have been raised a number of times since it was revealed such a bill was being proposed to the New Jersey Assembly.

“Depending on the direction of these conversations in the coming months and the precedent that is ultimately set, this could drastically change business interruption insurance policies in the future and how pandemic-related risks are viewed by insurance companies,” continues Stonybrook.

The firm adds that were insurers forced to pay for these losses, then it would ultimately impact their ability to pay other claims, something that would worsen the already “dire financial and economic reality” facing the U.S. Furthermore, it would set a dangerous precedent to contract law and insurers in the country.

Some industry commentary around this issue has highlighted the fact that similar legislation was proposed in the aftermath of Hurricane Katrina. This legislation ultimately failed to pass as it was challenged strongly in the courts by insurers, which is exactly what some analysts expect to happen with any proposed COVID-19 business interruption legislation.

As business interruption legal action expands, businesses are also taking insurers to court over their refusal to cover certain losses, including a number of restaurants and casinos. Other legislation is also being considered, including the proposal of a pandemic reinsurance program to provide a federal backstop, explains Stonybrook.

In New Jersey, the legislation failed to pass but it’s expected that a revised version of the bill will be put forward, while other states are thought to be moving forward with their efforts.

In New York, notes Stonybrook, legislation has been proposed designed to mandate the pooling of business interruption claims in the state so that local insurers would pay for COVID-19 driven claims, and other states are looking at a similar approach.

“Several P&C insurers have performed well under the present situation, with numerous others performing better than the market as a whole and their peers. This may be due to their diversification in other lines of business or geographies, that has somewhat mitigated against or lessened the impact of any drop in sales since the epidemic began over a month ago.

“The industry as a whole has performed better relative to the rest of the market which may point towards the somewhat less sensitive nature of the insurance industry to economic cycles,” concludes Stonybrook.

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