Business interruption update

In the wake of the government lockdowns across the globe and as restrictions begin to be eased in some countries, RPC has accessed a number of pre-eminent insurance practices in the major claims centres to swap notes on some of the key legislative developments to date in their respective jurisdictions and any recent cases of interest.

Developments in Legislation

The COVID-19 pandemic has resulted in far-reaching government activity around the world on a scale usually only seen during wartime. In some countries, governments are even considering legislation which would allow the retrospective revision or rewriting of private sector contracts where the outcome of those contracts is deemed to be unfair or undesirable as a matter of public policy. One such area is insurance policies which provide cover for business interruption and property damage. We consider some of the recent developments in this area below.

In the days and weeks following the government quarantine/shut down orders executed in response to the COVID-19 pandemic, a flurry of bills was introduced in several U.S. states to retroactively create – by government fiat – business interruption coverage under property insurance policies where none had existed. Although some bills remain pending, they have not moved forward in the legislative process, and bills in Louisiana and Washington D.C., have been tabled. In California, however, a new bill was introduced that would shift the burden of proof from the policyholder to the insurer with regard to the requirements of direct physical loss or damage. The bill would impose a rebuttable presumption that “COVID-19 was present on the insured’s property and caused physical damage to that property which was the direct cause of the business interruption.” The presumption would apply only to claims under those commercial insurance policies that provide coverage for business interruption; and would also apply to the related coverages for extra expense, civil authority, and ingress and egress. The bill would not invalidate virus exclusions, but it would render pollution exclusions inapplicable to COVID-19. Like the problematic bills introduced in other states, the bill applies retroactively to commercial insurance policies with coverage for business interruption in effect on or after March 4, 2020.

Judith Selby, partner at Hinshaw & Culbertson LLP, considers that whilst cooler heads appear to be prevailing in some states, legislative overreach remains a looming threat for insurers. On the federal level, the Pandemic Risk Insurance Act Of 2020 (H.R. 7011) (PRIA) was introduced in the U.S. House of Representatives. It would establish a federal backstop for business interruption and event cancellation losses resulting from a future pandemic or public health emergency declared on or after January 1, 2021. The current version of the bill expands the definition of insurer to include captives and self-insurance arrangements, and the aggregate annual coverage cap was increased from USD500bn to USD750bn. The bill’s original language requiring the Department of Treasury to charge a premium to participating insurers was stricken, making it unclear now as to how the act would be funded. Finally, the federal pre-emption language was stricken. Insurer participation would still be voluntary.

The National Association of Mutual Insurance Companies (NAMIC), the American Property and Casualty Insurance Association (APCIA), and the Independent Insurance Agents & Brokers of America Inc. have come up with an alternative to the proposed federal PRIA legislation. The Business Continuity Protection Program (BCPP) would provide immediate revenue relief for payroll, employee benefits, and operating expenses, following a viral emergency declaration by the President. The program would be run by the Federal Emergency Management Agency (FEMA) and funded by taxpayer dollars. Businesses would purchase revenue replacement for three months’ relief–for up to 80% of payroll and other expenses—through insurers that voluntarily participate in the BCPP. Protection must be purchased at least 90 days before the presidential declaration, according to the proposal. Businesses would be required to certify that they would use any funds received for retaining employees and paying necessary operating expenses and that they would follow federal pandemic guidelines. “Pandemics simply are not insurable risks; they are too widespread, too severe, and too unpredictable for the insurance industry to underwrite... Pandemics are a national problem, and we need a national solution,” said Charles Chamness, President and CEO of the NAMIC.

On June 30, 2020, the Business Interruption Relief Act of 2020 was introduced in the U.S. House of Representatives. It would create a voluntary program where insurers purportedly could choose to pay out claims to businesses and be reimbursed by the federal government. Reportedly, eligible businesses would be limited to those with business interruption insurance that includes civil authority shutdowns but excludes virus-related damages.

Miller Thomson partner, Mark Frederick, has explained that the Canadian regulators appear to have little interest in forcing insurers to take any steps that would in any way mandate coverage not bargained to be provided in the insurance contract. Mindful of the relatively small size of the domestic market and its small potential for domestic capitalisation, Canadian regulators generally leave the market alone in the face of widespread and immediate change. Whether in the case of terrorism, as seen after 9/11, or the recent Covid-19 pandemic and its devastating impact upon Canadian commerce and society, regulators are reluctant to introduce any law to make insurers pay for something they have not agreed to cover or to force parties into lawsuits or test cases in order to have the courts determine remedy on broad issues.

Meanwhile, in France, HMN & Partners reports that a working group composed of the French Insurance Federation (FFA), brokers, the MEDEF (national confederation of French employers) and Parliament members was formed by the Finance Ministry to think about the creation of a specific “extraordinary catastrophe” regime to compensate business interruption losses. Multiple issues were raised including what type of losses would be covered, whether the regime will be optional or compulsory and whether the costs will be shared with the State or exclusively be borne by the private sector. The first reflections are expected in the next few weeks. In parallel, 11 legislative proposals were filed before the French Parliament.

Following the lockdown in the United Kingdom on 23 March 2020, the Government ruled out introducing legislation requiring insurers to pay for COVID-19 related BI losses that completely fall outside the scope of cover. In answering questions from the Budget Select Committee on the issue, the Chancellor clarified that insurers had written and rated risks on the basis of an agreed scope of cover and that requiring insurers to pay claims that were not within the scope of that cover could result in solvency issues for insurers.

Shortly after, on 31 March 2020, Lloyd’s of London issued guidance to the market on the payment of COVID-19 related claims and at the same time confirmed that all valid claims would be paid as quickly as possible. Lloyd’s urged insurers not to automatically cancel policies due to missed payments of premium, but rather to have regard to the suitability and fairness when applying such a provision in light of the economic climate. The theme of ‘flexibility’ echoed the sentiment of earlier guidance issued by the FCA on 19 March which also emphasised the importance of operational resilience and the need for firms to have in place business continuity plans to manage and mitigate the impact of the crisis.

The overarching theme of the guidance from the FCA and Lloyd’s was for firms to show flexibility, including when considering claims, offering renewals and suspending or terminating products. That flexibility has in large part been achieved despite the unprecedented circumstances, with the insurance market showing operational resilience and continuing to renew, transact and deal with claims. Following the April 2020 renewals, one major broking house commented on the “unbroken service” despite the disruption caused by the sector working-from-home.

The Government has subsequently followed its counterparts in Germany and France in announcing that it will provide reinsurance support to the UK trade credit insurance sector by way of a backstop in the amount of £10bn (USD12.4bn). The scheme will be backdated to cover losses from 1 April 2020 and will be available to UK insurers on a temporary basis until 31 December 2020. The scheme is aimed to support supply chains and help businesses trade during the pandemic with the knowledge that it will be protected if a customer defaults or delays on payment.

In addition to legislative reform, various stakeholders across the UK (re)insurance industry are working together with the Government to find solutions to the gap in cover for many policyholders through the creation of insurance vehicle “Pandemic Re”. On 17 April 2020, a steering group chaired by Stephen Catlin of Convex was convened to consider the idea of creating a public-private risk financing solution for future pandemics. The so called “Pandemic Re” would follow the template of the UK government backed terrorism mutual, Pool Re. The group has since gained widespread support from across the industry and has formed a project committee with six working groups.