COVID-19 Important Updates

COVID-19 and Business Interruption Insurance Coverage

Attempting to Revise Insurance Contracts Retroactively Is a Bad Idea

What Is Business Interruption Insurance Coverage and How Does it Work?

·         Business interruption insurance covers financial losses (e.g., continuing operating expenses, lost income) when a business cannot function because of physical damage to a commercial property due to a covered loss (e.g., a fire in a restaurant kitchen).

·         Only about 40% of commercial property insureds purchase this coverage, and it is purchased by an even smaller percentage (30%) of small businesses.

Is Business Interruption Coverage Available to Pay for COVID-19 Losses?

·         For nearly every commercial policy, the answer is no.  For the financial and practical reasons outlined below, there is no coverage for pandemic events of this nature available in the marketplace today. 

·         To recover under business interruption coverage, losses must be related to physical damage inflicted upon the insured’s property.  There is no physical damage predicate in the context of the COVID-19 pandemic.

·         In addition, almost every commercial policy with a business interruption component contains an explicit exclusion for any losses caused by any virus.  COVID-19 is the virus responsible for the current pandemic and the related business closures, and the exclusion precludes coverage.

Why Is There an Exclusion for Losses Caused by COVID-19?

·         Pandemics are uninsurable, and the losses associated with a pandemic are beyond what the existing insurance mechanism can afford to cover.

·         Insurance policies contain exclusions for losses caused by events like war, nuclear and radiation accidents, and pandemics because the potential losses are so extreme and widespread that providing such coverage would threaten insurer solvency and force companies to charge premiums that would be cost-prohibitive.

·         Exclusions for extreme perils of this nature are commonplace, and the policy terms are contained in filings routinely submitted to state insurance departments. 

Such Proposals Are Unconstitutional.

·         Legislatively rewriting existing insurance contracts by somehow nullifying the virus exclusion or the physical damage requirement would blatantly run afoul of the constitutional prohibition against the government impairing private contracts. 

·         Courts would almost certainly find such action unconstitutional.  This is not a close legal question.

 Mandating Retroactive Business Interruption Coverage for COVID-19 Losses Would Be Financially Catastrophic for the Property-Casualty Industry.

·         Insurers do not collect premiums for excluded risks of loss, and forcing insurance companies to pay for losses that were not accounted for and supported by premium will jeopardize the solvency of the insurance system.

·         The magnitude of these losses is enormous and will threaten the financial health of many insurers, quickly send some domestic companies into insolvency, and destabilize an otherwise healthy economic sector.  The insurance industry will be needed to support economic activity and help fuel our economic rebound when the restrictions are lifted, but it will not be positioned to do so if measures like this are enacted into law.

·         Such proposals would require insurers to utilize the premiums collected for other specified risks and set aside to pay claims, and the outlays this would mandate will almost certainly exceed the amount of premium collected for all commercial property insurance. 

·         Requiring insurers to compensate businesses with fewer than 100 employees for these excluded losses would cost the industry $220 billion to $383 billion per month.  That amount rises to $900 billion per month if the threshold is raised to 500 employees.  In contrast, the P&C industry’s total surplus – which exists to pay covered automobile, home, and business losses – is only $812.2 billion and would be wiped out quickly if such mandates ever took effect. 

State Regulators and Legislators Object to Retroactive Mandates.

·         The National Association of Insurance Commissioners (NAIC) – which is comprised of the regulators responsible for ensuring the solvency of the industry and protecting consumers – has cautioned against and expressed opposition to such proposals.  They have said requiring the payment of claims that were not covered “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.” 

Businesses Are Hurting.  What Can Be Done?

·         Proposals that attempt to revise insurance contracts and compel insurers to pay for losses that were clearly excluded are misleading and offer false hope to businesses that are struggling through the crisis.  These businesses need serious and realistic solutions.

·         We are in the midst of an unprecedented crisis, and the federal government is the only entity able to provide the type and magnitude of financial assistance required. 

·         The insurance industry is working closely with the business community on a proposal that would enable those in need to receive compensation from the federal government.  The federal fund that has been proposed would be open to all businesses adversely affected by the pandemic and not simply the small minority that bought business interruption coverage that excluded such risks. 

Direct payments: Americans who pay taxes will receive a one-time direct deposit of up to $1,200, and married couples will receive $2,400, plus an additional $500 per child. The payments will be available for incomes up to $75,000 for individuals and $150,000 for married couples.

Unemployment: The program provides $250 billion for an extended unemployment insurance program and expands eligibility and offers workers an additional $600 per week for four months, on top of what state programs pay. It also extends UI benefits through Dec. 31 for eligible workers. The deal applies to the self-employed, independent contractors and gig economy workers.

Payroll taxes: The measure allows employers to delay the payment of their portion of 2020 payroll taxes until 2021 and 2022.

Use of retirement funds: The bill waives the 10% early withdrawal penalty for distributions up to $100,000 for coronavirus-related purposes, retroactive to Jan. 1. Withdrawals are still taxed, but taxes are spread over three years, or the taxpayer has the three-year period to roll it back over.

Net Operating Losses: The Tax Cuts and Jobs Act (TCJA) net operating loss rules are modified. The 80% rule is lifted, and losses can now be carried back five years.

Interest Expense Limitation: The interest expense limitations are increased to 50% from 30% for tax years beginning in 2019 or 2020. Taxpayers can also elect to calculate the interest limitation for 2020 using their 2019 adjusted taxable income as the relevant base, which often will be significantly higher.

Excess Loss Limitations: The excess loss limitation (ELL) rules for pass-through entities are suspended.

Large corporations: $500 billion will be allotted to provide loans, loan guarantees, and other investments, these will be overseen by a Treasury Department inspector general. These loans will not exceed five years and cannot be forgiven. Airlineswill receive $50 billion (of the $500 billion) for passenger air carriers, and $8 billion for cargo air carriers.