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OVID-19 has exposed long-overlooked frailties in existing insurance and contract terms on costs and delays, provoking a needed conversation. The vulnerabilities came into view within the first months of the pandemic.

First, lawyers called for contractors to invoke the force majeure clauses in their contracts with owners to win grants of extra time—but that didn’t address the costs. About the same time, states, which set workers’ compensation terms, started passing laws or issuing orders that retroactively required insurers to pay virus medical claims for some types of workers under existing workers’ compensation policies.

Then, as coronavirus spurred contractors and owners to negotiate over who would pay for extra costs, movie theaters, restaurants and various professional service firms in the U.S. and U.K. filed lawsuits against their property insurers for business interruption payouts. Design-giant AECOM joined in with its own lawsuit against insurer Zurich last month.

Looking for answers when it comes to risk. 
Graphic: Scott Hilling for ENR. Photo: AP

“From my perspective, there isn’t a comprehensive, well-priced product out there to protect us,” says Amy Iannone, insurance and risk manager for DPR Construction.

As the pandemic took a battering ram to the travel, retail and entertainment sectors of the economy, construction, classed in most cities and states as essential, pressed onward, with some pauses. Although the world of risk management is in turmoil, the final effect on construction can only be estimated.

Take workers’ compensation. It had been expanded since its inception in the 19th century to cover diseases tied to the workplace, but it had never been used to cover infectious disease in a pandemic.

Lawmakers Rework Workers' Compensation

By the time 2020 ended, more than 30 states had amended or weighed amendments to their workers’ compensation statutes to retroactively include a presumption of coverage, according to a compilation by the National Council of Compensation Insurers, the major industry rate-setting organization. In many states, the presumption is only applicable to health care, first responders, teachers, and certain other categories of essential workers.

Sonja Guenther, a workers’ compensation specialist at Denver-based broker IMA Inc., says the pandemic has led the industry to innovate in the capturing of statistics and the impact on payroll reporting and experience modification ratings. Rating bureaus agreed to code COVID-19 injuries as a “cat loss,” or catastrophe loss claim, allowing insurers to capture the impact but preventing it from being a factor in actuarial ratings or experience ratings.

Another innovation, Guenther says, was a temporary change in payroll rules made in early 2020 that allowed employers to shift payroll into less-expensive codes for employees working from home and to document payroll for employees being paid but not working during stay-at-home orders. “Unprecedented, really, in our industry,” Guenther says.

California is an example of a state that changed workers’ compensation.

It started with Gov. Gavin Newsom’s May executive order in the spring that required employers and insurers to presume that some workers who tested positive contracted the virus on or because of the job. In September, state lawmakers extended the order by adopting a new law that covers health care workers, first responders and workplaces where specific percentages of staff test positive during an outbreak.

“These presumptions fundamentally change one of the basic tenets of workers’ compensation, the burden of proof,” wrote Kimberly George and Mark Walls in a November essay on the website insurancethoughtleadership.com. George, a senior vice president at healthcare consultant Sedgwick, and Walls, a vice president at insurer Safety National, noted that typically, under workers’ compensation the affected employee would be responsible for proving an exposure.

But the biggest implication, George and Walls wrote, is that COVID-19 has opened the door for workers’ compensation coverage of all infectious disease in a global pandemic in the future.

Thus far workers’ compensation has not seen losses that would drive up costs, says Michael Deemer, the claims team leader at Risk Strategies, a specialized insurance broker. “The COVID claims have been relatively modest in the amount paid compared to non-COVID claims and (in many cases) they just involve symptoms without hospital stays.”

“We are not seeing disability,” unless the case involves intensive care in the hospital, he says.

The total costs of some non-COVID-19 claims are coming in higher because they are kept open longer. Claims for routine injuries, like slips and falls, are staying open because people can’t get to a doctor and get a physical due to virus prevention restrictions. Also, there may be no office to go back to.

The COVID-19 claims will be less cut-and-dried than a slip-and-fall or a crushing injury, Deemer suggests, and the investigation of the claim by the adjuster and physicians will be different, too, with personal contact with the claimant unlikely or done by video.

Business Interruption: Who Will Prevail?

For now, the multibillion-dollar conflict over property insurance and business interruption claims is more consequential.

According to the National Association of Insurance Commissioners, about 8 million commercial insurance policies include business interruption coverage, 90% cover businesses with fewer than 100 employees, 83% include an exclusion for viral contamination, virus, disease or pandemic, and 98% of all policies had a requirement of physical loss. The total premium was $44.2 billion, with 4.9% specifically for business interruption claims.

The issue raised in many of the lawsuits at first seemed like an open-and-shut matter. While the property claims had already required property damage, many insurers included a newly revised virus exclusion starting in about 2006, after the SARS outbreak.

Yet many policy holders in financial straits believed or hoped such interruptions were covered.

They have filled dockets in state courts with lawsuits that argue that the virus does in fact inflict property damage that triggers coverage for business interruption. Despite insurers’ use of industry standard forms and exclusions, the language in basic insurance agreements varies from company to company, and some policies apparently lack the exclusion. Attorneys have searched for openings that could be the basis of claims.

With billions of dollars at stake, property and casualty insurers argue that the claims would wipe out reserves and disrupt insurance markets. They place some blame on aggressive attorneys.

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harles Chamness, chief executive of the National Association of Mutual Insurance Companies (NAMIC), portrayed the claims as part of an unethical strategy by lawyers that includes publicizing claims by famous chefs whose restaurants were hit hard by the pandemic. The publicity was to create favorable public opinion that would then “make everything easier in your legal cases,” Chamness said in a video addressed to association members on the NAMIC website. “It shouldn’t work that way, but it might.”

Outside the courthouse, however, some state legislators and governors sought to finance future pandemic economic emergencies by tapping insurers.

As of December, lawmakers had introduced bills in nine states that would require insurers to include pandemic clauses under business interruption policies. In Pennsylvania and Louisiana, the requirements would apply to all companies, and in the other states they would apply to small companies. Some of the proposed laws provide for insurer-created pools to fund claims.

Andrew Pauley, NAMIC’s general counsel for governmental affairs, took stock of the lawsuits and proposed laws.

In a white paper on NAMIC’s website, he wrote that one to two months of claims could completely eradicate the reserve capacity of the entire property/casualty insurance industry. He characterized the litigation to retroactively change business interruption and workers’ compensation as the product of “well-intended—but what in reality were rash—ideas to assist during the pandemic.”

Agents and brokers, who understand the terms of policies, can have incentive not to discourage claims by clients.

“If your client comes to you and wants to submit a claim, submit the claim on their behalf” even  if you tell them you don’t believe it will be paid, said Christopher J. Boggs, executive director for risk management and education for the Independent Insurance Agents and Brokers of America Virtual University, in a webinar hosted by Insurance Journal. Insurers, not brokers, deny claims.

AECOM v. Zurich Lawsuit

AECOM’s claim will have to overcome language in its “all-risk” global property policy with Zurich that excludes all contamination except that caused by radiation. AECOM claimed Zurich had deleted a virus or pandemic exclusion used by insurers, and that as an “all-risk” policy covering AECOM’s many workplaces, Zurich had an obligation to pay. Each case will depend on the jurisdiction, facts and policy language.

In the U.S. so far, the plaintiffs have by and large not prevailed in court.

And several sources report that insurers are armor-plating the language in pandemic exclusions for policies up for renewal. “Any carriers that have language in their contracts that wasn’t really clear are now being explicit. They are just really tightening them up,” said DPR’s Iannone.

Plaintiffs in England, however, have more to show than their counterparts in the U.S. An appeals court in London last month upheld claims for business interruption coverage made against a group of eight insurers, including Hiscox, by various companies that had been forced to shut down or had been cut off from customers and revenue by the pandemic.

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  hat does the future hold? Property and casualty insurers have proposed a government-backed plan similar to terrorism insurance. It has not gone far in Congress and could have many obstacles to overcome. The businesses likely to buy such policies are ones most likely to shut down in a pandemic, creating problems for spreading out losses that insurance relies on.

There was one type of stand-alone specialty insurance for pandemic-related losses unrelated to property policies.

Chad Wright, head of North American Alternative Risk Transfer for broker Marsh, says his company had launched an insurance policy called PathogenRX in 2018 with Munich Re and technology firm Metabiota. It was designed to help companies grappling with interrupted operations in a pandemic.

Discussions now with potential clients are centered on buying coverage for future pandemics. “We got flooded with inquiries after the pandemic hit,” Wright said. Now Marsh, Munich Re and Metabiota are overhauling the product, which was originally based on epidemics, not pandemics.

Under the original plan for PathogenRX, a health actuary would model, using morbidity and mortality tables, things that may not necessarily kill you but would likely keep you from traveling from one area to another or might close an international border, like Zika. The initial client base would likely be travel or hospitality related. It was to be structured around a change in sentiment score based on a certain number of fatalities in a region, said Wright.

Now, the coverage is being rethought.

New potential triggers would involve declarations of a pandemic or a civil authority lockdown followed by evidence that a policyholder suffered a loss.

Wright said there would be a limit as high as $50 million and as low as $500,000, with the annual premium in the range of 3% to 6% of the limit of the policy. Policy holders could use the claim to help with cash flow, delay costs or pay for personal protective equipment. Until the present pandemic abates, Wright acknowledges, customers may wonder if it makes sense to buy a new policy.

The bigger questions remain, too. One is whether insurance can ever produce affordable policies for all global risks, including events few believe will happen in their lifetime. Another is whether a society that decides after the fact that it needs coverage it didn’t clearly purchase should be able to claim it anyway.