Reinsurance & BI Claims
Reinsurers need to evaluate their obligations, especially if legislation is passed expanding their exposure.
- Peter McNamara
- August 2020
Statewide closure orders across the United States already have spawned numerous lawsuits throughout the country by policyholders seeking coverage for losses resulting from state-mandated closures of their businesses.
The policyholders often assert that their revenue losses are compensable under business interruption coverage commonly provided by commercial property policies. Typically, the coverage form states that the insurer “will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.”
The claims arise in a variety of contexts, including loss of income resulting from orders limiting restaurants to takeout service and, as some states begin to reopen, limitations on seating capacity, as well as business interruption or expense resulting from disruptions involving key suppliers to customers. While “business interruption” no doubt has occurred on a widespread basis throughout the country, significant coverage issues often are presented by such claims.
The analysis of the potential ramifications of such claims to reinsurers starts, as always, with the relevant contract terms, including follow-the-fortunes/follow-the-settlements and original-conditions provisions, which generally are intended to align reinsurance coverage with that of the underlying policy. Such provisions will need to be carefully considered by reinsurers in evaluating their obligations, particularly if legislation expanding their cedents' exposure to business interruption losses is enacted.
Although many property policies do not define “direct physical loss” for business interruption coverage, courts generally have required that the insured premises sustain some demonstrable physical damage. Insureds may argue that a finding of the presence of COVID-19 at the insured premises entitles them to coverage for their business interruption losses. Even assuming that position can be established, some courts have held that there is no physical harm where the functionality of the insured premises can be restored by cleaning or sanitizing. Issues also are presented as to the length of time a business closure due to the presence of COVID-19 in the premises would be covered.
Recognizing the limitations in business interruption coverage in the context of COVID-19 claims, legislation is being considered at both the state and federal level intended to effectively compel coverage for claims arising from the pandemic. Legislation proposed in several states would require insurers to pay for business interruption regardless of whether there is physical property damage, or an applicable exclusion. The insurance industry is opposing those proposals.
State legislatures, however, previously have passed laws expanding the scope of coverage in response to other disasters. Although such legislation presents a number of issues, including constitutional issues, the possibility that such legislation may be enacted cannot be dismissed. Any such expansion in coverage likely will have ramifications to the reinsurance industry.
Absent the enactment of legislation altering the scope of the coverage, payments for COVID-19 business interruption claims that clearly are not covered generally are not reinsured. Thus, if losses are paid in response to pressure from regulators, reinsurers may be within their rights—business considerations aside—to deny insurers' claims.
Claim payments that are mandated legislatively, however, put the insurers' reinsurance claims payments in an unsettled area. Reinsurers need to closely monitor proposed legislation and regulatory initiatives that potentially may impact the scope of their obligations to their cedents.
Best’s Review contributor Peter McNamara is a partner at Rivkin Radler in Uniondale, N.Y. specializing in complex insurance coverage and reinsurance matters. He can be reached at firstname.lastname@example.org.