The coronavirus pandemic will hit every business, and the insurance industry at large, in various areas. When it comes to property & casualty (P&C) insurance coverages, there are several factors that will come into play. The following are a few examples by coverage and for the insurance industry in general:
Personal Lines and Commercial Lines Automobile policies cover both personal and commercial autos, respectively, for liability and physical damage to the insured vehicle. Key drivers of lower claim frequency are lower miles driven and lower traffic density. As average miles driven and traffic density decrease across America, we can expect claim frequency to decrease. This phenomenon could very well continue for many months to come for a variety of reasons.
With fewer vehicles on the road and many American’s staying at home, insurance companies should see fewer claims and consequently downward trending losses and premium levels. This happened in the last major rescission during the housing crisis. This may put some insurers in a position to come to the aid of insureds in the short term who are experiencing financial hard times and may result in significant premium decreases in the long term as opposed to insureds deciding to drop coverage and drive uninsured.
Contingent Extra Expense Coverage / Contingent Business Income Coverage reimburses lost income and extra expenses resulting from damage or operational disruption at the location of a customer or supplier. This might also be referred to as “business interruption coverage”, and is a good option for businesses disrupted due to the inability to supply key materials or goods because employees are out sick, caring for sick family members, or a key manufacturing site has been forced to shut down. Standard commercial insurance would not cover these financial losses. One provision of contingent business interruption coverage is that it can apply to instances of “Civil Authority”, for example when a government enforces an evacuation rule. There are generally two versions of Civil Authority coverage, with one being more liberal than the other.
Version one is more widely used on commercial insurance policies and is more restrictive in nature. In this version, the insurance company will pay for the actual loss of business income sustained and required extra expenses caused by a civil authority action that prohibits access to commercial premises. In general, there are three conditions that must occur in order for coverage to be available: (i) the disruption must be due to direct physical loss of/or damage to property, other than at your physical location, (ii) the disruption must be caused by/or resulting from any Covered Cause of Loss (as defined in the insurance policy) and (iii) the prohibition of access to the commercial premises must be the direct cause of the loss of income.
Generally, the biggest challenge with COVID-19 is that there is no direct loss to property. The loss of income results from the closure of businesses to reduce the spread of COVID-19.
It is possible that a commercial insurance policy may have a “more liberal” version of Civil Authority coverage. In this scenario, two conditions must be met to effect potential coverage. The policy covers the business income loss sustained during the time when access to property is prohibited by order of civil authority. As in the above scenario, this must be the result of a peril that is not excluded under the policy. However, in general, in this situation, direct physical damage is not required in order to trigger coverage.
It should be noted that accommodations under rules and laws may complicate coverage issues. For example, a state or local rule permitting restaurants to remain open on a “take-out” or delivery basis will permit the owners to continue to generate revenue, albeit on a reduced basis. However, this ability may prohibit recovery under a commercial policy.
Business Income/Business Interruption Coverage in the commercial market normally covers a business for lost revenue, rent, relation, loan payments and employee wage due to a slowdown or temporary suspension of normal business operations due to physical property damage of the business. Normally policy endorsements do not cover claims unrelated to property insurance losses. As a result, infectious diseases like COVID-19 are excluded. Some states like New Jersey have introduced legislation to require business interruption covered even if it’s excluded.
Extra Expense Coverage covers additional costs in excess of normal operating expenses incurred while property is being repaired or replaced after being damaged by a covered cause of loss (i.e., flooding or fire). Again, in most instances, COVID-19 is not causing physical damage to business properties. However, if there is contamination to a property from coronavirus exposure, to the extent that it is unusable for its primary purpose, it may result in eligible coverage. We do not believe this is likely to be a common occurrence, but it should be noted that extra expenses incurred to make a work environment or means of production safer for employees may be covered.
Liability Coverage: Some industries, like healthcare, may see an increase in medical malpractice claims. In the future, suits based on lack of screening, inadequate treatment and inability to contain the virus may become issues. Certain sectors, like nursing homes, may also see more of an increase than others. Some of this risk could be limited to the extent the predominant cause of the incident relates to issues resulting from federal and local government policies currently in place.
Captive Coverages may provide protection such as business interruption, where gaps exist in the commercial market. Companies that currently insure the above risks through a captive policy with broader policy terms covering virus related events may have funds available to supplement the loss of revenue, employee wage, etc. Captive policies are often designed to supplement commercial market coverage by dropping down to cover events excluded with typical commercial market policies.
Medical Stop Loss claims will likely increase for the industry as a whole. Currently insured individuals with multiple comorbidities will increase claims costs. In addition, long term care and social services costs may increase as well. States like New York have waived copays and cost sharing components for fully insured plans.
How this Will Impact the P&C Industry
In general P&C carriers with large common stock holdings will likely be impacted the most given the recent market downturns. Restrictive language in policy contracts should limit P&C insurers from adverse levels of claims resulting from COVID-19. However, in the business interruption sphere we will see a fair amount of claims, given the aforementioned announcement by the Insurance Services Office and possible state legislation passed to void policy exclusions, but these will likely be treated case-by-case.
According to Moody’s and Fitch, event cancelations will trigger the hardest hit in the insurance market, with perhaps the exception of medical. With the suspension of all major league and college sports (i.e. March Madness), major festivals like Coachella and South by Southwest, there has been an unprecedented amount of economic loss.
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