Over the past several weeks, news reports and their accompanying headlines have signaled what could be a pitched battle between policyholders and insurance companies over coverage for COVID-19 losses. One article noted that “insurance companies are facing political pressure to pay what could be a crippling sum of coronavirus-related claims—even though many of them say their policies don’t cover pandemics.” The headline of that article declared: “Insurers scramble to avoid 9/11-style coronavirus backlash.” Another piece described how the insurance industry had flatly rejected pressure from federal lawmakers “to pay out on business interruption claims from small businesses shut down due to the coronavirus pandemic.” Insurance companies are asking their governments to provide subsidies to cover the losses. Against this backdrop, it is little wonder that lawmakers in Ohio, Massachusetts, and New Jersey have proposed legislation that would retroactively expand business interruption policies to cover losses due to the coronavirus outbreak.
The insurance industry is in the business of evaluating and assessing risks and crafting insurance policies to cover unforeseen events. So why does the industry appear to have been caught off-guard by the significant business losses caused by this particular coronavirus? After all, the COVID-19 outbreak is the seventh pandemic or epidemic of the 21st Century. It is estimated that the previous six outbreaks—SARS, H1N1/Swine Flu, MERS, Ebola, Avian Flu, and Zika—may have resulted in about 600,000 deaths worldwide, including 12,500 deaths in the United States from the H1N1 virus alone. The Swine Flu outbreak infected approximately 24% of the population of the globe, including over 60 million cases in the United States.
In light of this recent history of pandemics, epidemics, and deaths due to influenza, it is curious why the insurance industry was not better prepared to deal with the potentially devastating financial impact currently being sustained by businesses resulting from yet another communicable disease outbreak, like COVID-19. In the past, as with current pandemic, insurance companies attempted to protect themselves from such exposures by issuing endorsements after an outbreak began and was being reported.
For example, the Severe Acute Respiratory Syndrome (or SARS)—the first pandemic of the 21st Century—began in February 2003 and lasted six months. SARS resulted in 8,100 cases in 29 countries and ultimately killed 774 people (although there were no deaths in the United States). Like COVID-19, SARS is a coronavirus and it also originated in China. The SARS mortality rate was 15%, which is significantly higher than other pandemics. By April 1, 2003, insurance companies began issuing SARS-specific endorsements on policies and, by mid-April, the SARS exclusion was almost universally issued. With SARS, the insurance industry was quick to try to limit its future losses from the virus, and the same holds true with COVID-19.
On December 31, 2019, China alerted the WHO about several unusual pneumonia cases in Wuhan, China, a port city of about 11 million people in the central Hubei province. The virus was unknown at the time but was later described as a novel coronavirus and designated COVID-19. Prior to January 24, 2020, insurance companies that issued specialty coverages such as event cancellation policies often offered policyholders the opportunity to purchase additional coverage for losses arising from communicable diseases (at anywhere between 15% to 20% of the total policy premium) even for policies that normally excluded coverage for such losses. Similar communicable disease coverage may also have been available as an add-on for an additional premium in connection with business owners and property policies as well. By January 28, 2020, insurers almost universally began inserting a COVID-19 exclusion in policies—both newly issued and on some existing policies—even when policyholders paid to secure communicable disease coverage. Insurance companies are quick to try and exclude coverage for claims while reticent to extend or acknowledge coverage.
Our Insurance Recovery and Advisory group has encountered several cases in which insurers have “slipped in” COVID-19 exclusions after policyholders had paid for communicable disease coverage without any exclusion. A number of significant issues arise with respect to the issuance of a COVID-19 exclusion for policies already in place, not the least of which is that insurance companies cannot, after inception of the insurance policy, unilaterally limit coverage previously negotiated, secured, and for which a premium was already paid. State regulatory requirements, which are highly standardized for insurance regulation, include regulations prohibiting insurers from engaging in such conduct.
For policyholders who purchased insurance policies before the coronavirus became headline news earlier this year, those policies might well cover the economic damages flowing from the COVID-19 virus. Insurance policies are often complex, sometimes confusing, and could well contain traps for the unwary. As evidenced by the news articles discussed above, it is becoming clear that the insurance industry is going to fight most COVID-19 claims. As a result, businesses facing financial losses due to this latest pandemic, or those worried about potential cancellations or postponements, should consult with an experienced insurance recovery attorney to review the language of all of their insurance policies, coordinate with insurance companies, brokers and adjusters to pursue coverage, and assist with properly crafting of a claim submission in order to optimize coverage under the specific policy at issue.