Take cover

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Chris Alviggi, an environmental liability broker at NFP in New Jersey, began receiving calls from concerned clients in late April, as the daily coronavirus death toll in the state breached the 350 mark. 

“They wanted to know how exposed they would be to liability lawsuits, and how they might need to adjust their coverage,” he tells Insider Quarterly. “They were really nervous about the legislation being proposed by state officials.” 

New Jersey was the first US state to introduce business interruption (BI) legislation for consideration by the state’s assembly. The proposed law, Bill 3844, has since been withdrawn, but if passed it would have retrospectively compelled insurers to pay all claims arising from the virus – even where a policy contains pandemic exclusions. 

Some policyholders, notably small business owners whose livelihoods have been destroyed by the pandemic, regard such legislation as a potential saving grace. Others are frustrated because it will take time for state legislation to pass, and funds are needed right now.  

BI insurance – and the question of whether or not such cover is explicitly excluded from all-risks property policies – has received widespread attention from the mainstream American media, spurred by support from celebrities including triple-Michelin-starred chef Thomas Keller, of the French Laundry fame, and highlighting the desperate plight of small businesses across the United States. 

Museums, charities and arts organisations are among the entities fighting for survival as the real economic fallout of the pandemic becomes apparent. New projections from the US Congressional Budget Office in early June suggest Covid-19 will reduce economic input across the country by 3 percent through to 2030, which equates to a loss of about $7.9tn. 

The insurance industry is caught in a double bind; it’s in a difficult spot that has strained relationships with a range of stakeholders. Either markets pay up and pay now – and face the shareholder wrath that will accompany a sudden, titanic hit to the balance sheet – or they will have to challenge lawmakers head-on and, in doing so, face the potentially disastrous public policy consequences. 

It is generally the impulse of the (re)insurer to offer support from behind the scenes. But as the events of this year have unfolded, the market finds itself at the center of a conflict that strikes at the heart of the American political project. 

The Thompson bill 

On 14 March, politicians in Washington DC introduced legislation in the House of Representatives, Bill 6494, which if passed would compel (re)insurance companies to retrospectively rewrite pandemic exclusion within in-force policies, to ensure that they pay out. 

The bill, sponsored by Mike Thompson, a Democrat from California, has been assigned to the US House Committee on Financial Services, where sources tell Insider Quarterly it is likely to remain. 

“It is essentially dead,” a Washington source tells this publication. 

The legislative proposal did, however, spark a debate about whether or not such a move would violate the US Constitution, and also spurred the insurance industry into action.  

One after another, senior executives lined up to challenge the legitimacy of such a bill and to defend the industry. 

In a statement at the time, five US insurance trade bodies, including the American Property and Casualty Insurance Association and the National Association of Mutual Insurance Companies, slammed the proposed bill as “unconstitutional”. 

The bipartisan bill 

Subsequently, in late April, a bipartisan BI bill was introduced in Congress that has a higher likelihood of passing into law. 

The legislation, which is known as the Never Again Small Business Protection Act 2020, was introduced by Republican Congressman Brian Fitzpatrick of Pennsylvania, and has since been referred to the Committee on Financial Services for consideration. 

If passed, it would mandate insurers to provide BI cover for businesses and nonprofits for future losses arising from any federal, state, or local government-ordered shutdown during a national emergency. It would also require the government to establish a backstop scheme that has since been formally proposed as the Pandemic Risk Insurance Act (Pria). 

In an attempt at compromise, the Fitzpatrick bill stops short of requiring coverage of historic losses, but would effectively neuter the ability of insurers to deny claims unless they have a written statement from a policyholder that authorises the exclusion of national emergencies. Insurers would also be able to avert a payout if an insured stops paying premiums. 

It will be several months before a decision becomes clear on whether the bill will be taken forward – or if it will be left to gather dust at the committee stage. In the meantime, industry representatives on Capitol Hill work around the clock, lobbying for the introduction of amendments that would water down the bill and reduce current demands. 

As the devastating economic effects of Covid-19 have unfurled amid rising BI claims, the concerns of the insurance industry have become inextricably intertwined with the response of lawmakers to the pandemic. 

State legislature scramble  

While the fight between the industry and lawmakers has so far been most pronounced at the federal level, insurers face an increasingly torrid fight outside the confines of the Washington DC policymaking bubble.  

Nine states have so far proposed their own measures to curtail the ability of insurers to adjudicate claims arising from the pandemic. 

A common refrain among coverage lawyers working to defend the industry in BI cases is that such laws “will never survive the Supreme Court”. 

However, if, or when, such legislation does pass and a case is filed at the Supreme Court, the judicial decision-making process is more complex, and it is as yet impossible to determine what conclusion will be reached. 

As well as navigating a strong legislative response to Covid-19 claims at the federal level, insurers have been forced to confront BI legislation proposed in states – leading the market into new territory.  

New Jersey was the first to put forward such a bill, on 16 March, followed by Louisiana, Massachusetts, New York, Ohio, Pennsylvania, South Carolina, Michigan and Rhode Island. 

The bill filed in New Jersey has since been withdrawn. However, legislation continues to progress in the eight remaining states. 

While procedural details – and the scope of legislation – differ between the bills, they broadly replicate the effects of federal legislation, compelling insurers to pay all pandemic BI claims, regardless of whether or not insurance contracts specifically exclude the peril. 

In addition, the proposed bills give insurance regulators sweeping new powers that would allow them to impose an additional levy on carriers operating within their jurisdiction and redistribute funds collected to pay claims. 

Multiple legal sources speaking to Insider Quarterly raised concerns about the implementation of such a scheme, warning that it could seriously distort the market. 

“If you are a life insurer, for example, with no exposure to BI claims, it’s possible to imagine a situation where you’re being forced to contribute to claims that you didn’t write,” says one source. 

Sources described this as particularly problematic for US auto insurers, which could be compelled to contribute to property and casualty claims – classes of business they have never intended to write. 

The risk of moral hazard in this scenario seems high, because a company with a poorly underwritten BI portfolio could stand to benefit from contributions made by other carriers. 

(Re)insurance resistance 

(Re)insurers have pushed back hard in response, but it remains uncertain, if a law passes in one state, whether a verdict from the US Supreme Court would be likely to overturn it. 

Industry leaders, notably Chubb CEO Evan Greenberg, have been clear that the industry must resist attempts to push through state legislation wholesale, which would essentially rewrite contracts. 

Carriers have the US Constitution on their side – specifically, Article I, Section 10, which makes it very clear that no state should be able to pass a law that impairs contractual obligations between two parties. 

“No state shall enter into any treaty, alliance, or confederation…[or] pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts,” the Constitution states. 

However, any such legislation would undoubtedly be challenged by insurers in the US Supreme Court, and according to constitutional law experts, the outcome is far from certain. 

Speaking to Insider Quarterly, Daniel Schwarcz, a professor of constitutional law at the University of Minnesota, says any such decision to reverse this protection would involve a high degree of nuance, and involve a three-pronged test previously established in a 1983 case – Energy Reserves Group, Inc v Kansas Power & Light Co. 

“The Supreme Court has adopted a broad-ranging test, which will seek to determine whether or not state law has substantially impaired a commercial relationship, but also whether or not the law is supported by a public purpose,” Schwarcz says. 

In assessing the legality of such laws, judges will make an assessment of three elements. Firstly, whether the state legislation has substantially impaired a contractual relationship. Secondly, whether the law is supported by a “significant and legitimate public purpose”. And finally, whether the adjustment of the rights and responsibilities of contracting parties is based upon reasonable conditions and is of a character appropriate to the public purpose justifying its adoption. 

Industry executives like Greenberg are right to highlight the challenges such laws pose to the sanctity of commercial contracts enshrined in the Constitution, but this also discounts the public policy concerns that judges and legal scholars will weigh as they reach a verdict on such measures. 

Insurers are in the unusual position of relying on the American Constitution to protect the enforceability of contracts. 

Pria: A necessary compromise 

In early April, US lawmakers began to circulate legislative proposals for a pandemic risk backstop scheme that would function akin to the Terrorism Risk Insurance Act (Tria). 

Marsh CEO John Doyle sent a letter to congressional leaders and the Trump administration in support of the legislation, which has divided opinion in the market. 

In early June, CEO of The Hartford, Christopher Swift, said plans to force the insurance market to accept pandemic risk “wouldn’t be prudent in any way, shape or form”. 

Speaking alongside him on a panel, Rob Berkley, president and CEO of WR Berkley, agreed, saying: “It would be acting in an unjustifiable way if we were to take a risk that would be unquantifiable.” 

The proposal, which was introduced on 26 May by Representative Carolyn Maloney, is a partisan bill. It has been supported by over 30 companies and trade organisations from across different sectors of the US economy.   

The Pandemic Risk Insurance Act is controversial because it would have a significant impact on the private market for pandemic risk – incentivising carriers to write policies for risks that were previously deemed to be uninsurable. 

The current structure of the bill would create a federal backstop with a trigger of $250mn and an annual cap of $750bn. 

Following this, three industry trade groups have put forward an alternative proposal in the form of the Business Continuity Protection Program – essentially a government stimulus scheme that would create a legal requirement for federal government to replace companies’ revenue for three months, with up to 80 percent of payroll, benefits and expenses. 

Chubb is understood also to have put forward a third proposal, which would provide a “middle ground” alternative to the two schemes. 

However, Pria has served a dual purpose in also giving the insurance industry access to the ears of the political establishment – to show it can and will work closely with governments in a time of international crisis. 

Marsh & McLennan Companies CEO Dan Glaser and Amerisure CEO Greg Crabb have established a workstream to examine how public-private partnerships like Pria could be used to close the protection gap. Working with the US Treasury, this will generate goodwill on behalf of the industry and demonstrate it is serious about contributing to a response to the economic crisis that has accompanied Covid-19. 

It remains uncertain whether or not Pria will be implemented, but in getting there it represents an opportunity for the industry to boost its political capital. 

The industry has made significant progress in making its voice heard as governments respond to Covid-19 – ensuring it walks the tightrope between inspiring loyalty from policyholders and paying only the claims for which it is liable. 

There remains, however, a long road ahead, and more than ever the fortunes of (re)insurers are yoked to the fast-changing US political landscape. 

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