This is the first in a series where I intend to respond to pending legislation intended to force insurance companies to make loss related to virus or pandemic a covered cause of loss.
There is a great temptation in the halls of government in the wake of any catastrophic event for the government to swoop in and help those who are suffering most. That temptation isn’t reduced at all as stories come to light about different ways that people are suffering during the catastrophe.
Then the news comes out that insurance companies begin to read their policies and interpret them so that those insureds (who are legitimately suffering from a loss that they’ve already suffered) have no coverage for this catastrophic loss.
Let’s put this into perspective.
Right now, our nation is reeling from a virus that many of us don’t fully understand. What we do understand is that in less than a month, over 30 million people filed for unemployment. We also know that businesses all over the country have been forced to close their doors for an undisclosed length of time.
My barber’s situation.
My barber is what some would call a solo-preneur. He’s an entrepreneur, but he has no interest in creating anything bigger than he can handle himself. He hustles, too. For the longest, he would simply take walk-ins and from the time he came to his shop until 10-12 hours later when he left, he would cut hair, trim beards, and shoot the breeze with a steady stream of man and boys. Most of the time, he’d be cutting one, while 2-3 others waited in the wings.
Today, he can’t do what he does. Assume that he works just 10 hours/day, 6 days/week and that he can finish most cuts in 15 minutes (he can). At $15/cut, he’s out $600/day. He’s just one of many different businesses that haven’t been able to operate for the better part of a month and many aren’t going to get back to business for weeks to come.
Isn’t this why I buy insurance?
Of course, you buy insurance for the economic impact of a loss that causes you not to be able to operate your business. As has been addressed in several different places, many business income policies are not going to provide coverage for this loss. Even if the policy includes virus, pandemic, or governmental action as a covered cause of loss, there is another hurdle to overcome. There was no direct physical damage at the location listed on the policy. Even if one were to consider the potential contamination by a virus as physical damage, the locations weren’t closed down because of any specific damage anywhere, they were closed down to prevent the possibility of damage.
This isn’t covered unless the insured is in Pennsylvania, where a court recently issued a decision that the Governor’s declaration of a state of emergency can be considered direct physical damage. Read that article on Insurance Journal.
I’m from the government and I’m here to help.
That’s why legislators of several states have introduced bills to relieve the individual business owners of the burden created by this uninsured loss. At least five states have had similar bills filed with their legislatures. Let’s look at the key points of those bills.
- Each bill applies to businesses with fewer than 100 (in some states 150) employees.
- Each bill makes business income losses related to the loss of use and occupancy of premises due to global virus transmission or pandemic.
- Each bill amends the policies that are currently in effect and that go into effect after the law is enacted, whether the policy states it or not.
- Each bill allows for insurers that pay claims based on the law to apply to the state for reimbursement of those losses.
- Each bill allows the states to create an assessment to recoup its costs related to reimbursing claims. This assessment would apply to all property and casualty insurers operating within the state.
The intended results of these acts are to help some of these small businesses to recoup their lost business income that resulted from the government ordered cessation of operations to stop the spread of the coronavirus. That’s pretty clear. But what are the unintended consequences of any of these acts passing their respective legislatures?
I’d like to set aside the potential contractual issues that come from a state simply altering the insurance contract by fiat for now. I’m fairly certain that this aspect of the law will make it very difficult to stand any constitutional challenge, but I’m not a constitutional law expert (at least not officially). I’d like to concentrate on the practical and financial consequences that may occur should these laws go into effect.
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