Living benefit riders to life insurance policies: Pricing considerations and strategy
Adding benefit riders to policies provides meaningful coverage for those who need it, and carriers usually can do so at a relatively low cost.
Business Income and Extra Expense coverage forms (such as ISO CP 00 30 10) provide coverage for income lost due to necessary suspension of operation caused by damage to property. The ISO form includes a Civil Authority extension which expands coverage to lost income resulting from action of civil authority that prohibits access to the property.
In the wake of the coronavirus crisis triggering government shutdowns of businesses across the country, many policyholders will seek to recoup lost income by filing business interruption claims. The American Property Casualty Insurance Association (APCIA) estimates the business interruption loss for small businesses in the US to be up to $431 billion per month, an amount that dwarfs the premiums collected for all commercial property risks in the key insurance lines of about $6 billion per month.1
The general consensus in the insurance industry is that most policies would not cover income loss from shutdowns due to pandemics such as coronavirus, primarily for the following reasons.
However, a number of lawsuits seeking declaratory judgement to confirm coverage for business income loss have been filed by several restaurants across the country. Two such cases that have attracted significant attention, relating to restaurants Oceana Grill in Louisiana and The French Laundry in California, were filed by John Houghtaling (of law firm Gauthier, Murphy & Houghtaling). Houghtaling’s strategy is to file such actions across the country in an attempt to establish case law that coverage exists under business income policies.
These lawsuits state that the underlying policies do not contain exclusions for viral pandemics. In a recent webinar, Houghtaling acknowledged that the virus exclusion provides a “formidable” defense for the insurance industry, so long as it specifically mentions “virus” as an excluded cause of loss.2 However, he asserts that its presence is not as widespread as claimed by many in the insurance industry, and that many policies either do not have it or have other language (such as “microorganism” or “disease”) which he believes could be contested in the courts. As such, his court actions have focused only on policies without the virus exclusion. Thus, much of the ensuing court battle will focus on the meaning of “physical loss or damage” and thereby the applicability of business interruption coverage to coronavirus shutdowns. This article focuses on this aspect of the policy interpretation and some of the arguments being presented on both sides.
Note that this article does not intend to provide legal guidance or advice. There are many policy nuances and clauses that could potentially impact coverage not discussed here, and the matter is further complicated by variation in language among policies. Furthermore, aside from the issues concerning policy interpretation, lawmakers from several states have proposed legislation intending to force insurers to pay such claims regardless of whether they are covered or not. (Such laws, even if passed, would be heavily challenged in the courts by the insurance industry.) There are also other issues for insurers to consider, such as potential reputational damage, in their decision of whether or not to deny coverage.
Coronavirus can physically affect property, at least in the sense that it can remain on surfaces, and can survive up to 2-3 days on plastic and stainless steel.3 However, this effect is only temporary, and does not cause lasting damage; the affected property can be easily cleaned and sanitized – and, even if left untreated the virus eventually dies on its own. Shannon O’Malley (of law firm Zelle LLP) argues, based on a case that analyzed whether mold and mildew from wet air constituted loss or damage, that the court has determined that “there must be a distinct and demonstrable physical change to the property necessitating some remedial action to demonstrate physical loss or damage.”4 Bill Wilson (of insurancecommentary.com) characterizes the court decision as requiring “some permanency and not just a temporary impairment.”5 This would leave coronavirus losses not covered, due to the transient nature of its damage.
Richard P. Lewis (of law firm Reed Smith) counter-argues that other cases establish that lasting physical damage to the property is not necessary, and all that is required is for the building to be rendered unusable for its intended purpose by physical forces.6 He cites examples of cases where smoke from a nearby fire forced an outdoor theater to cancel shows, or ammonia in the air rendered a plant unusable for a period of time, where, he argues, the courts had found that the conditions constituted “physical loss or damage”—even though the smoke or ammonia had later dissipated.
Even if the presence of the virus on surfaces were found to constitute physical loss or damage, insurance industry experts argue that in order to get coverage, the insured would need to confirm through investigation that the virus was indeed present on or near the property. O’Malley cites a case in which the courts rejected an insured’s claim for loss due to a federal import ban on certain meat products due to suspected contamination without the insured showing actual physical damage. She notes that courts require actual loss, and not merely for the property to be treated as if it were physically contaminated.
Note that the Civil Authority extension (a major focus of Houghtaling’s cases) typically does not require damage to the insured’s property specifically, only that the order result from damage to property in the surrounding area (often within a mile, but this can vary by policy). Even so, O’Malley argues, court decisions arising out of shutdowns due to 9/11 and severe weather events show that coverage is contingent on there being actual physical damage present, rather than fear of future adverse outcomes, such as future attack, hurricane damage, or contagion.
Houghtaling disagrees, and argues that the Civil Authority extension does not require an insured to prove that there was actually damage present, only that the civil authority’s shutdown was motivated by dangerous physical conditions in the area. California attorney Charles Miller likened this to a hypothetical case of a mom-and-pop shop ordered to shut down due to a government determination—made by trained professionals using expensive equipment—that there was contamination present; in such a case, the argument goes, the insured could not be reasonably expected to independently validate the government’s claim in order to obtain coverage.7
In this regard, Houghtaling argues that wording of many of the shutdown orders includes language that favors the insureds, as they specifically mention that the virus causes damage to property. For example, the Louisiana governor’s order includes, among its stated reasons for the shutdown, “physical contamination of property due to its propensity to attach to surfaces for prolonged periods of time.”8 (Houghtaling has been vocal in advising governments to include such language in their orders, maintaining that the inclusion of such language is prudent in the interest of public safety, as it warns businesses of the extent of the danger in remaining open.)
However, Jonathan MacBride (of Zelle) argues that the language of the shutdown orders should not matter, maintaining that policy wording will be the ultimate determinant, and that several aspects of the standard policy language do in fact preclude coverage.9 For example, he notes that the shutdowns would certainly have been put in place regardless of whether there were physical damage or not, in order to maintain social distancing and to “flatten the curve.” He therefore argues, based on similar cases, that the orders cannot be considered as being “due to” or “resulting from” damage, as is typically required by policies. Furthermore, the meaning of “physical loss or damage” within the policy language context would need to be decided (as discussed earlier), regardless of whether the orders characterize coronavirus as physical damage or not.
There are other aspects of the Civil Authority extension that will likely be debated in the courts. For example, the standard wording of the extension is that it applies where there is an “existence of an order of civil authority that prohibits access to the insured premises.” Regarding businesses affected by COVID-19, are they truly cases where “access” is “prohibited?” Or are these cases where access is “impeded” or “regulated” or where “nonessential traffic is discouraged” but access is still permitted (particularly for some purposes such as take-out or delivery)? Another example is the condition that “[a]ccess to the area immediately surrounding the damaged property is prohibited by civil authority.” Does this condition preclude coverage, given that people are free to walk the streets in the area?
While many in the insurance industry have concluded the standard policy language does not provide coverage for coronavirus-related business income losses, insurers should brace for court battles ahead. Given the extremely unusual nature of the situation, combined with an impending economic recession, it is difficult to predict how the courts will rule on these issues. Furthermore, Houghtaling’s firm has formed a restaurant industry coalition, which includes a number of celebrity chefs, for the purpose of pressuring the insurance industry into paying for business interruption losses (for policies on which the virus exclusion is not present). Houghtaling has indicated that he has been in talks with President Trump trying to work out a potential compromise at the federal level (for example, a resolution whereby the insurers would agree to cover some or all of the loss in exchange for federal reimbursement or bailout). It is important for insurers to monitor the progress on these issues.
COVID-19, business interruption coverage, and the “physical loss or damage” requirement
While many in the insurance industry have concluded that standard policy language does not provide coverage for coronavirus-related business income losses, insurers should brace for court battles ahead.