Insurance Protection Selection Guide Under the Triple Risks of 2020

Most businesses wish 2020 could be redone. The COVID-19 pandemic brought economic activity to a sudden halt, and government stay-at-home orders and closures of non-essential businesses dealt a heavy blow to large and small enterprises alike. Many businesses that survived the pandemic and have just reopened now face new challenges from social unrest stemming from long-standing racial injustice. Now, a third threat looms: a hurricane season expected to bring multiple strong storms.

Fortunately, many businesses carry insurance for loss of income. This so-called business interruption coverage is designed to protect policyholders "against losses resulting from the inability to continue normal business operations, industry, or other commercial institution functions," a phrase from the 2013 case Northrop Grumman Corp. v. Factory Mut. Ins. Co.

Unfortunately, insurers are disputing business income claims related to COVID-19, and industry publications indicate that policyholders may face similar challenges in the future when filing business income claims related to looting or hurricanes.

What do you need to know from an insurance perspective when helping businesses navigate these risks?

COVID-19-Related Insurance

If your business has suffered lost income due to stay-at-home orders, several potential insurance coverages may be available, including business interruption, extra expense, civil authority, ingress/egress, and contingent business interruption (including dependent property) coverage.

Currently, there are nearly 800 lawsuits in the United States related to COVID-19 insurance coverage. Key issues include: whether class actions or multidistrict litigation may be available to provide relief; whether COVID-19 constitutes "direct physical loss of or damage to property"; whether virus or bacteria exclusions apply; and whether sublimits apply to the pandemic.

As these lawsuits proceed, federal and state governments are also considering legislation that could affect the course of litigation.

The two main federal proposals are the Pandemic Risk Insurance Act of 2020 (PRIA) and the Business Continuity Protection Program (BCPP).

PRIA, modeled after the Terrorism Risk Insurance Act (TRIA) enacted after 9/11, aims to create a public-private partnership to establish a market for private business interruption insurance. Under PRIA, the federal government, the insurance industry, and policyholders would share the risk of future pandemics after January 1, 2021. PRIA does not apply to COVID-19.

As an alternative, the insurance industry has proposed the BCPP, a program designed to establish federally funded insurance for future pandemics. The BCPP would shift the risk of future pandemics from the private insurance market to the federal government.

In New York State, for example, a bill was introduced in March to address business interruption claims. The bill has now been amended twice, with proposals including: any policy providing coverage for property loss or damage (including business interruption) should be construed to cover business interruption caused by COVID-19; and any clause allowing insurers to deny coverage on the grounds that viruses, bacteria, or other microorganisms cause illness, discomfort, or the potential for illness should be void. Other provisions set limits on timing and applicability. New Jersey and Massachusetts have also proposed similar legislation.

The challenge with these legislative solutions is that, even assuming one could provide current relief, insurers are likely to challenge the constitutionality of statutes requiring them to provide coverage. Furthermore, if insurers do not prevail, the passage of time will work against businesses in need.

Social Unrest-Related Insurance

Although most protests over the death of George Floyd have been peaceful, a small number of individuals used the protests as cover for looting and destruction, resulting in property damage or business interruption.

In terms of insurance coverage, vandalism and looting are typically covered under commercial insurance policies. Additionally, expenses incurred to mitigate losses and protect property—such as hiring security or boarding up windows—are also typically covered.

New York State issued an emergency amendment to Regulation 64, addressing unfair claims settlement practices and claim cost control measures. The amendment targets claims for real property losses, personal property losses, or bodily injury resulting from recent social unrest in New York after May 30, 2020, requiring insurers to handle them promptly.

The amendment focuses on three areas: 1) prompt adjustment and payment of claims; 2) the policyholder's right to immediately repair and provide reasonable proof of loss; and 3) mandatory mediation. Other states may have similar regulations aimed at assisting policyholders with such claims.

A potential challenge is that businesses that were closed or experienced reduced operations due to COVID-19 stay-at-home orders may face difficulties when filing business income claims after experiencing looting or destruction.

Additionally, some businesses that were just approved by the government to reopen have been ordered to close again due to curfews imposed to curb violence and property damage.

Hurricane Season Risks

Many businesses have weathered the storms of the pandemic and social unrest, and now face a hurricane season expected to be above average. A severe storm could be the last straw for businesses already financially battered by months of pandemic-related closures and a surge in new cases.

The two main North Atlantic hurricane season forecasts—NOAA's 2020 Atlantic Hurricane Season Outlook and Colorado State University's June 2020 updated outlook—both predict above-average storm activity.

2020 Atlantic Hurricane Season Forecasts

NOAA predicts a 60% chance of an above-normal Atlantic hurricane season, a 10% chance of below-normal, and a 30% chance of near-normal. Colorado State University predicts 19 named storms, of which 9 will develop into hurricanes (sustained winds exceeding 74 mph), and 4 will reach Category 3 or higher (sustained winds exceeding 111 mph). Consequently, risk managers and their organizations may pay increased attention to business interruption claims and hurricane preparedness.

Although many businesses typically delegate insurance-related matters to risk management teams, chief financial officers and other financial leaders are playing an increasingly important role in business interruption claims, especially amid the ongoing impact of COVID-19. Claims often represent significant financial transactions with far-reaching implications for cash flow and strategy, requiring broader management involvement.

Insurance Recovery Strategies

Given the level of risk, CFOs should closely monitor developments and take steps to protect their rights to recovery under insurance policies and maximize recovery amounts. Here are some recommendations:

Identify and review policies.In insurance, the devil is in the details. In a famous 1970s case, Universal Underwriters Ins. Co. v. Travelers Ins. Co., the court referred to most insurance policies as "nearly impenetrable thickets of obscurity and verbosity." Policyholders should carefully review all potentially relevant insurance policies, and may be dealing with claims spanning multiple years due to different policy inception dates. The review should also include limits, sublimits, exclusions, and deductibles for each available coverage.

Provide timely notice.Policies sometimes contain contractual suit limitation clauses that shorten the policyholder's statute of limitations to one or two years after the loss occurs. While written tolling agreements can extend these deadlines, policyholders need to be careful not to lose their right to sue. Additionally, policies may contain other time-based requirements, such as proof of loss or repair deadlines, which should be reviewed and documented.

Quantify the loss.Business interruption claims are often difficult to calculate and document, especially for policyholders with fewer losses and less familiarity with the claims process. The triple threat of COVID-19, social unrest, and hurricanes—if a business suffers from these impacts—will make loss adjustment even more difficult. The surge in COVID-19 cases in July and government orders to re-close businesses that had reopened will also complicate business interruption calculations.

Policyholders should first gain a high-level estimate of their claim by calculating the income lost and expenses saved as a result of each risk.

Additionally, they should calculate extra expenses they were forced to incur as a result of the risk. For COVID-19-related claims, these may include atypical extra expenses such as additional cleaning costs, personal protective equipment, safety modifications to common areas, sanitizing stations/supplies, signage, UV lighting, upgraded HVAC/HEPA systems, new technologies (e.g., touchless elevator buttons, automatic doors), increased marketing, additional security, and specialized training.

Attributing losses to each risk will be complex. For example, losses from a hurricane may be higher than expected due to supply chain issues already worsened by the pandemic. Additionally, due to pandemic-related building material shortages and extended repair times, the indemnity period for repairing hurricane damage may be longer than anticipated.

Once a high-level loss estimate is completed, insurance legal counsel can assist in categorizing losses and matching them to specific policies and coverage provisions, placing the policyholder in the position it would have been in had the risk not occurred. The resulting analysis of amounts and coverage classifications can be used by management to guide the best path forward and develop strategies to achieve appropriate recovery.

Push insurers for prompt payment

In the current environment, where insurers and their adjusters are inundated with claims, policyholders need to push insurers, adjusters, and other agents to promptly adjust and pay claims.