Business Insurance & Coronavirus
By Ali Ansari, Director, Advisory Services
When we slowly emerge from our COVID-19 quarantine and get back to business, risk management experts will look at 9/11 as a potential roadmap towards an orderly recovery of the economy. When business came to a standstill during and immediately following the 9/11 terrorist attacks, it is estimated that New York suffered an economic loss of $24 billion. Additionally, as a result of the terrorist acts, a considerable number of lawsuits were filed against the Port Authority of New York and New Jersey, City of New York, airlines, and even the federal government. It took the courts almost four years to sort and settle the hundreds of lawsuits related to loss of Business Income, Extra Expenses and related issues.
Again, we see New York as a crisis epicenter, with a COVID-19 death toll of in excess of 12,000 and counting. Nationwide, we have seen business come to a standstill. What will be the litigation landscape this time?
In the midst of current chaos, businesses are and should closely scrutinize their insurance policies to identify any potential relief. One estimate by the American Property Casualty Insurance Association found that potential losses to small businesses could total between $220 billion and $383 billion per month. It is estimated that U.S. insurers maintain a surplus of $800 billion, which could be quickly consumed by claims (assuming they qualify for coverage) and likely drive some insurers into receivership.
For context, consider that the 9/11 terrorist attacks resulted in insurance payouts of approximately $40 billion. As a result, the federal government passed the Terrorism Risk Insurance Act, which was intended to distribute losses between the government and the insurance industry. This legislation became necessary as premiums were becoming cost prohibitive or simply unavailable due to perceptions of increased risk. Similarly, with COVID-19, the insurance industry is looking to Congress to create a similar backstop for the lawsuits and claims that are inevitable.
What are some elements of insurance policies businesses should review today?
In pursuing a claim, businesses need to understand the policies they have, starting with their business interruption policy.
- Scope of business interruption coverage.
- Requirements and interpretations of direct physical losses.
- Virus,bacteria, and pollution exclusions.
- Unfavorable business condition exclusions.
- Civil Authority exclusions.
- Loss of market share exclusions.
In addition to these factors, businesses should review other policies they might hold potential for coverage or relief. These could include contingent business interruption policies, civil liberty coverage as well as trade disruption and supply chain risk insurance.
What should businesses do today to prepare for these insurance related discussions?
Different businesses and industries have unique considerations, such as the need for restaurants and others in the hospitality and entertainment industry —likely one of the sectors to see the greatest number of lawsuits—to record quantities and costs associated with discarded, spoiled inventory. Nonetheless, there are certain common considerations for businesses regardless of industry.
- Loss of revenue.
- Supplies ordered but unable to be delivered or accepted.
- Impact on vendor relationships and any claims by or against a vendor.
- Employees furloughed and/or laid off.
- Rent and other real estate costs.
- New equipment, damaged equipment and replacements costs.
- Any new or contemplated debt related to business recovery. Professional service fees incurred (e.g. legal, accounting, engineering, etc.)
It’s noteworthy that some but not all of these items are also relevant and critical in terms of tracking for purposes of loan forgiveness related to the Small Business Administration loans (e.g. Payroll Protection Program or PPP).
Litigation Has Begun
Considerable number of lawsuits have already been filed under the first party business interruption claims against insurance companies. Depending on the region and jurisdiction, substantial number of first party claims have been filed relating to the cruise industry, nursing homes, office buildings, retail shopping centers, grocery stores, and restaurant and other retail establishments.
One such case was initiated by the owners of French Laundry, a Napa Valley, California restaurant. French Laundry typically boasts a six-month waiting period for a table and charges $320 prix fixe per person, not including wine. The lawsuit filed in late-March asks the court to determine whether civil authority orders to suspend operations constitutes a prohibition of access, thus triggering coverage under its insurance policy.
Other cases involve third party claims for wrongful death, price gouging, cures and prevention scams, failure to refund (for concerts, gyms, classes, etc.), employee terminations, legal rights, (gun owners, etc.).
Finally, litigation relating to allegations that insurance companies failed to investigate in good faith claims filed by insureds and/or summarily dismissed such claims has been initiated. There are already half a dozen such cases pending nationwide.
Given the intricacies inherent in business insurance policy language, various terms and coverages are likely to be contested by both the insured and the insurer. Business owners and executives should be proactive in reviewing their policies and determining what recourse they might have. The insurance industry is bracing for a substantial spike in Insurance claims and litigations, where certain policy provisions will be contested and the insureds and the insurers will look at the courts to either define or rule on specific language and its interpretation.
Don’t Go It Alone
Starting with a review of policies, business owners should consult with professionals who are experienced in the intricacies of policy terms, provisions, coverage issues and also the jurisdiction to contest a claim.
Should business owners decide to pursue a course of action – starting with a claim and/or ultimately litigation, Marcum professionals are uniquely qualified to assist. Our team has extensive experience in assisting with the review of loss estimates, qualifying expenses, identifying financial impact directly related to an event, calculating and quantifying the damages. Our professionals also can assist in a review of Extra Expense coverage, if any. We can also examine reported values, co-insurance compliance and perform market and competitor analysis.
Marcum is often called upon to assist legal representatives in coordinating and identifying various financial elements that are unique to each insurance policy to prepare damage reports or analysis and testify in courts if a claim is litigated.
Coronavirus Resource Center
Have more questions about the impact of the coronavirus on your business? Visit Marcum’s Coronavirus Resource Center for up-to-date information.