Businesses buy property insurance to protect their bottom line in the event that something bad results in lower sales or increased costs. Insurance companies seek to improve their bottom line by increasing sales and reducing their largest cost item, claim payments.
In their effort to improve sales, we see insurance companies rely on spokespeople. For example, Farmers Insurance Company has long engaged the talented actor J.K. Simmons to help sell insurance. His spots involve humorous and unexpected accidents that Farmers says it covered. For example, “Coupe Soup” shows a wave inundating a beachside SUV, while “Billy Goat Ruffians” depicts a Bighorn sheep crashing headlong into its reflection on the side of a pickup. Another spot depicts Mr. Simmons warning that the more you learn about coverage, the more you might find hiding in your coverage.
Insurance companies are now also relying on spokespeople in their effort to reduce claim payments. This past week, the Wall Street Journal Op-Ed section published a piece calculated to reduce claim payments for the insurance industry by making the astonishing argument that it is “unconstitutional and dangerous” for companies to seek to recover losses caused by the novel coronavirus under insurance policies. The lobbyist authors took the usual shots at “plaintiff lawyers,” ignoring that claims are being pursued across the nation at all levels. They also attacked a federal district court judge who made the unremarkable ruling—upon which we have previously commented—that a policyholder can have its day in court to seek to prove that it suffered insurable loss from the novel coronavirus. Unfortunately, these otherwise accomplished authors included blatant factual errors to serve the insurance industry’s bottom line. While the opinion piece was full of misstatements, in this blog we focus on two examples.
The authors argue that “losses associated with communicable diseases—like those from war or nuclear accident—aren’t insurable. The risks are unknowable, preventing calculation of a premium sufficient to cover the losses if the event occurs.” Nonsense. While war and nuclear accident are often excluded from property coverage, major insurance companies such as Zurich expressly sell insurance to cover accidental nuclear radiation. Other policies cover political risk, including losses due to war. Also, many insurance companies sell event cancellation insurance that expressly covers losses caused where a conference is cancelled due to an epidemic. Insurers know better than anyone how to calculate a premium for the risks of epidemics.
More significantly, the authors ignore that insurance companies advertise and sell “all risk” property insurance. Unless excluded, “all risks” of loss of or damage to property are covered, not just the ones the insurer expressly considered. In the “Billy Goat Ruffians” ad, J.K. Simmons doesn’t suggest that coverage was only available because Farmers expected its policyholders to be contending with rampaging bovids. Likewise, whether the novel coronavirus was anticipated by insurance companies selling “all risk” property insurance contracts is not relevant to the claims now working their way through the courts.
The authors also trot out the Contracts Clause of the United States Constitution, citing to an 1837 decision by Chief Justice John Marshall, while ignoring many decades of insurance law on the interpretation of insurance contracts. In making a constitutional argument to help insurers’ bottom lines, the authors overlook key points. First, insurance is a heavily regulated industry, and insurance policies are issued subject to state approval, which makes their construction uniquely susceptible to state law. Second, “all risk” insurance policies generally include language to the effect that the policy shall be deemed to be modified to conform to statutes and shall be “liberalized” to be broadened if rules or regulations broaden coverage under a policy. Insurers expressly accepted the risk that coverage might be broadened by legislation. Third, policy interpretation is subject to longstanding rules dealing with ambiguities or undefined terms. For these reasons, it is well established that laws and regulations fixing the meaning of insurance policy terms (leaving aside court decisions construing disputed terms as a matter of common law) do not offend the Contracts Clause. Statutory guidance and presumptions do not rise to the level of constitutional impairments of contracts.
In the end, the authors make a sales pitch that coronavirus contamination does not result in loss of or damage to property. But courts across the country have recognized that contamination by ammonia, E. coli, smoke, methamphetamine, poisonous spiders, radiation, and many other substances can all cause loss of or damage to property, without any requirement of a visible structural alteration. The authors’ arguments against coverage for losses resulting from the novel coronavirus are most accurately viewed as a non-humorous and demonstrably false version of Mr. Simmons’ sales efforts.