Insurers' COVID-19 Notepad: What You Need to Know Now (Week of April 6)

Joint Proposal of Insurers and Policyholder Community for Federal COVID-19 Fund:

On March 31, 2020, over 30 policyholder groups joined with the major insurance trade associations to request creation of a federal recovery fund to provide liquidity to businesses hard-hit by the COVID-19 pandemic. The proposed COVID-19 Business and Employee Continuity and Recovery Fund, modeled after the 9/11 Victims Compensation Fund, would be financed by the federal government and overseen by a special federal administrator. Compensation under the proposed program would be distributed to eligible businesses according to a formula based on payroll, payroll support, operating expenses, lost income of sick employees.

In a letter to members of California’s congressional delegation, major insurer organizations asserted that insurance “cannot account for a situation in which losses are catastrophic and nearly universal.” They explained that standard business interruption policies do not provide coverage against infectious diseases such as COVID-19, and were not actuarially priced to do so. The letter was issued in the wake of several proposals for legislation that would mandate any policy providing business interruption coverage to pay COVID-19 related losses, regardless of potentially applicable exclusionary language. The letter urged the creation of the COVID-19 Business and Employee Continuity and Recovery Fund (“Recovery Fund”) as a means of addressing this national crisis.

COVID-19 and Sexual Abuse Reviver Statutes:

New York State Senator Brad Hoylman is calling for an extension of the look-back period contained in the Child Victims Act, passed and signed into law in early 2019 that allows victims of child sexual abuse to file claims through August 2020 that would otherwise have been barred by the applicable statute of limitations (S.7082/A.9036). Senator Hoylman believes that the extension is warranted because court filings have been and will continue to be curtailed due to the COVID-19 pandemic.

COVID-19 and Automobile Insurers:

In a joint letter to state insurance commissioners, the Consumer Federation of America and Center for Economic Justice requested that auto insurers be directed to provide premium offset payments to policyholder whose driving frequency has been materially reduced as a result of the COVID-19 pandemic. The letter, citing local, state, and federal “stay-home” directives, contends that “millions of Americans” are either “sheltering in place or have otherwise significantly reduced their driving.” As a result, the letter asserts that the exposure faced by auto insurers is drastically reduced, and the premiums charged “based on outdated estimates of miles driven” are excessive, unfair to consumers, and will “produce huge windfall profits to insurers.”

New Business Interruption Suits Against Insurers

Barbara Lane Snowden d/b/a Hair Goals Club sued Twin City Fire Ins. Co. in Texas State Court alleging breach of contract, violations of the Texas Insurance Code, and breach of the duty of good faith. The complaint alleges the insurer wrongfully denied a claim for business interruption losses suffered as a result of the COVID-19 pandemic and local county “stay home” order.

In Scratch Restaurants LLC et al v. Farmers Group Inc. et al, an insured seeks a declaration of coverage for business interruption losses arising out of COVID-19 related shut down orders. The complaint alleges that several insured restaurants suffered covered losses when they were forced to close following government-issued orders, including the March 15, 2020 order issued by Los Angeles Mayor Eric Garcetti. 

Various “owners and operators of restaurants and movie theaters” have sued their property insurers in federal court in Illinois, seeking coverage for business losses allegedly sustained as a result of COVID-19 related government ordered closures. The suit also claims damages based on the insured’s alleged bad faith denial of the claims under Illinois law. Plaintiffs assert the insurer “issued blanket denials [of coverage] to Plaintiffs for any losses related to the closure orders — often within hours of receiving Plaintiffs’ claims,” without first conducting any investigation as required under Illinois law. Big Onion Tavern Group, LLC, et al. v. Society Insurance, Inc., No. 1:20-cv-02005 (N.D. Ill. March 27, 2020) (Complaint at ¶ 5). Plaintiffs also alleged that the insurer’s reason for denying coverage – “that the actual or alleged presence of a substance like COVID-19 does not result in property damage” – is “contrary to the law in Illinois.” Id. at ¶ 8.

In another action in the same federal court, several restaurants seek similar relief as a putative class action. Billy Goat Tavern I, Inc. et al v. Sociate Insurance (No. 1:20-cv-02068, N.D. Ill., March 31, 2020). There, the complaint seeks a declaration that the plaintiffs and all others similarly situated have sustained a “direct physical loss” due to COVID-19 related shut down orders, and are entitled to coverage under the applicable business interruption insurance.

Another restaurant establishment, Prime Time Sports Grill, Inc. filed a declaratory judgment action against Lloyd’s in the U.S. District Court for the Middle District of Florida. The complaint alleges that plaintiff’s commercial property insurance policy “all risks” coverage includes coverage for loss of business income and operating expenses resulting from COVID-19. Complaint at ¶ 3. Specifically, plaintiff alleges that it lost business when ordered to close by the March 17, 2020 directive of the Governor of Florida. Id. at ¶ 6. The complaint notes that Lloyd’s denied the insured’s claim on March 23, 2020. Id. at ¶8. 

Newly Proposed State Legislative Action

Louisiana legislators have introduced two new bills seeking to force insurers to retroactively cover business interruption claims arising out of the COVID-19 pandemic. On March 31, 2020, Rep. Royce Duplessis introduced H.B. 858, and Sen. Rick Ward introduced S.B. 477. Both proposed bills would mandate every policy insuring against loss to property, including loss of use and occupancy and business interruption, provide coverage for business interruption due to COVID-19 as provided in the Emergency Proclamation Number 25 JBE 2020. Both proposed bills, if passed, would apply retroactively to March 11, 2020. 

Pennsylvania has introduced H.B. 2372, under which business interruption policies in effect as of the date of the Governor’s disaster declaration (March 6, 2020) would include coverage of perils related to COVID-19, subject to a reimbursement mechanism for business interruption insurance claims paid due to COVID-19. 

On March 27, 2020, New York Assembly Bill A10226 was introduced. It would require that “certain perils be covered under business interruption insurance during the coronavirus disease 2019 (COVID-19) pandemic.” The N.Y. Bill, as currently drafted, would apply “to policies issued to insureds with less than 100 eligible employees in force on the effective date” of the N.Y. Bill, and includes a proposed mechanism for reimbursement.

Additional State Insurance Commissioner Actions

The Arkansas Insurance Department issued bulletin no. 9-2020 addressing common policy language found in coverages that may be impacted by the COVID-19 pandemic. The bulletin notes that business interruption insurance and civil authority coverage often require physical damage, and typically exclude viruses and diseases, such as COVID-19, from an insured peril.

Florida’s Office of Insurance Regulation (OIR) issued Informational Memorandum OIR-20-03M: (1) directing insurers to review and update their business continuity and/or continuity of operations plans; (2) requiring that any insurer that activates its business continuity and/or continuity of operations plan in response to the COVID-19 pandemic must immediately notify the OIR; and (3) if a regulated entity’s business operations are compromised to the extent that it jeopardizes the company’s ability to provide essential insurance services to policyholders, it must immediately notify OIR, and provide details of which operations are compromised. 

The Mississippi Insurance Department issued Bulletin 2020-3 and clarified Bulletin 2020-4, mandating effective March 24, 2020 a sixty (60) day moratorium on the cancellation/non-renewal of policies for the non-payment of premiums. The moratorium does not preclude insurers from issuing cancellation/non-renewal notices for non-payment of premiums during the moratorium period.

The Missouri Department of Commerce and Insurance issued Insurance Bulletin 20-05 in response to the COVID-19 emergency. The bulletin “strongly encourages” that “coverage for residents of the State of Missouri should continue under all insurance policies in effect as of March 13, 2020, and shall remain in effect until such time as Executive Order 20-04 is terminated or this bulletin is rescinded, whichever is later,” and “Insurers are strongly encouraged not to cancel, nonrenew, or terminate coverage while this Bulletin remains in effect.” 

The Washington Office of the Insurance Commissioner (OIC) has issued a special data call to insurers regarding business interruption and related commercial coverage written in Washington State. The OIC requests insurers report the volume of business interruption coverage, civil authority coverage, contingent business interruption coverage and supply chain coverage they had in effect on March 15, 2020. The OIC also instructed insurers to examine issued policies, explain the coverage each policy offers in regard to COVID-19, and provide “a clear and concise explanation of benefits” to policyholders and the OIC.

West Virginia issued Bulletin no. 20-04 requesting assurance that all insurers have continuity of operations and preparedness plans to address any operational risks, and that they are identifying,
monitoring, and managing the financial risk posed by the COVID-19 crisis.

European Regulators

The European Insurance and Occupational Pensions Authority (EIOPA) has urged that in light of the financial pressures of the pandemic, insurers and reinsurers should temporarily suspend discretionary dividend distributions and share buy backs benefiting shareholders.

Fitch Adjusts Outlook on Insurers

March 20 Fitch Ratings revised its outlook for the underlying fundamentals of the P/C insurance sector to “Negative” from “Stable.” Fitch reports that while "[c]laims experience relating to coronavirus and related economic disruption is not anticipated to significantly increase loss ratios in the near term, … as the duration and severity of the crisis lengthens uncertainty regarding future sources of underwriting losses expands."

Fitch Ratings also revised to “Negative” from “Stable”its outlook for the underlying fundamentals of the London market insurance sector, and its outlook for the underlying fundamentals of the French, German and Italian non-life insurance sectors.

On April 2, 2020, Fitch Ratings placed the “AA-” financial strength rating of Lloyd’s of London on “rating watch negative” due to concerns surrounding the impact the COVID-19 pandemic may have on the market. The rating agency has had a negative outlook for Lloyd’s since June 2017, due to underwriting results.

Citing COVID-19 Concerns, Insurers Revise Financial Targets

On March 30, 2020, Australian insurer QBE Insurance Ltd. withdrew its 2020 financial targets due to COVID-19 uncertainty. “In light of the unprecedented COVID-19 pandemic and uncertain economic and investment market outlook, we consider it prudent to withdraw those previously advised targets,” QBE said in the statement. The insurer stated that an update will be provided at the annual general meeting, to be held virtually on May 7, 2020. 

MunichRe has withdrawn its stated profit guidance for 2020, citing “considerable claims burden” from the COVID-19 pandemic. The reinsurer has cancelled its share buy-back program for 2020 as well.

Morgan Stanley says COVID-19 Concerns For P/C Insurers “Overblown”

Of note, Morgan Stanley analysts have stated that concerns surrounding property/casualty insurers being forced to pay otherwise uncovered COVID-19 business interruption losses are “overblown.” “We remind that language in commercial property policies is clear on requiring physical property damage from a covered peril to trigger a BI claim, and pandemic coverage is also usually excluded from standard policies,” the report said. The Morgan Stanley report stated: “We expect any losses to be manageable.”

Insurance as an Essential Business

On March 19, 2020, the U.S. Department of Homeland Security, Cyber Security & Infrastructure Security Agency issued a memorandum including “insurance services” among the “Essential Critical Infrastructure Workforce” identified as necessary to protect local and state communities by “ensuring continuity of functions critical to public health and safety, as well as economic and national security.” For the avoidance of doubt, a number of states are now expressly adopting and following that guidance. For instance:

The Office of Insurance and Safety Fire Commissioner of Georgia issued Bulletin 20-EX-4 on March 24. The bulletin identifies insurance services as an essential business and mandates that insurance companies must have individuals on-site to complete such functions as claims adjusting and processing.

The Governor of Kansas issued Executive Order No. 20-15 exempting entities that provide insurance services from any “stay home” or similar order prohibiting citizens from leaving their homes.

The Kentucky Department of Insurance guidance pursuant to Executive Order 2020-257, including insurance services as a “life-sustaining business” and exempt from the Executive Order encouraging Kentuckians to stay home.

Michigan’s Department of Insurance issued Bulletin 2020-12-Ins, clarifying that some workers in the insurance industry are considered critical infrastructure workers and therefore exempt from the Executive Order 2020-21 directing Michigan residents remain at home.

On March 23, 2020, New Mexico issued insurance bulletin no. 2020-007. The bulletin provides that certain insurance providers are deemed essential businesses for the purpose of the New Mexico Department of Health Emergency Order.