Fiduciary duty or duty of care? What a quandary for insurers this business interruption insurance situation continues to be. Easily a trillions of dollars concern in western economies alone, more each day as the mandated shutdowns continue. The author has previously noted the tension between repudiation/denial of BI claims and the drumbeat of public and government pressure to afford cover; is there also a public duty of care insurers hold to ensure there’s an SME business community to insure once the permission is given to restart the economy?
Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
- No one anticipated COVID-19 in the manner in which it came.
- Few SMEs had excess cash set aside for this dark of a day or bad business weather.
- Few insurance policies were sold that covered BI losses that were not precipitated by direct physical damage.
- Even fewer insurance policies afforded BI cover that was prompted by government or other indirect reactions to a pandemic.
- Very few insurance proceeds have reached the street.
All the efforts have been focused on defensive postures by carriers, concerned outreach by SMEs to government, plaintiffs’ bar attorneys aggregating clients who have suffered economic losses due to shutdowns and loss of clientele from social distancing, and constitutional challenges proposed by US elected representatives. Oh, and for U.S. SMEs, plenty of effort collecting business records for applications for stimulus loans. Lots of actions, few results.
At this time there must be a recognition that posturing does not resolve anything, nor does it get recovery funds to the street. Government and litigation trying to force insurance companies to foot a trillion dollar plus bill for BI losses is truly a fools’ game. The full capitalization/available cash from insurers would be insufficient to resolve BI claims, if the claims could be accurately calculated, and if the claim period was known (which at this time it is not.) What would be accomplished is the functional failure of the risk financing industry as it’s known.
That being said, can the insurance industry simply build a defensive wall of policy terms and deny claims and any duty to mitigate the costs of risk for the SMEs?
Sure they could, and a large portion of the Before COVID (BC) cohort will fail, and the existence of a significant driver of business would sunset, along with the need for those firms’ insurance policies.
One wonders if SMEs can wait for government sponsored programs to get up to speed, or if sufficient funding will be available to address the needs of even a portion of the many millions of businesses in need. In what way can insurance companies step in- without compromising uniform application of policy terms- and shine a little light on these dark days?
There are many P& C carriers providing givebacks, rebates, credits, and other premium forbearance (see the curated list by Nigel Walsh here), the vast majority being personal motor/auto benefits. By the author’s calculation of available and applicable US auto premiums the $8-10 billion total being rebated or credited to individual insureds falls about $6 billion short per month of what excess premiums calculate to. It’s a start, for sure, but a closer look is needed.
In contrast, what is in the press are reports of not only denials of business insurance policies’ coverage for business interruption, but uncertain positions carriers may be taking in supporting those denials- see mention of one carrier in this Business Insurance article, “Most small UK businesses not insured for pandemic: Watchdog”, and the FCAs position that carriers will need to be self-regulating for confirmation of pandemic policy cover. Plenty of discussion on the topic prompted by a posting by Nick Pester of Zego here.
Having ten US states to date with legislative proposals to change insurance contracts ex post facto to include BI cover for pandemics is an expression of frustration of the part of those states in there not being a better resolution for the economic shortfall. Passage of any of the bills will prompt litigation focused on Article 1, Sections Nine and Ten, of the U.S. Constitution that expressly forbids alteration of contracts after the fact. Other countries have different treatments and brief research for this article finds the UK Parliament might have the right to pass such a law stipulating insurance companies being responsible ex post facto existing insurance contracts, due to the doctrine of parliamentary supremacy allowing Parliament to pass any law it wishes (https://en.wikipedia.org/wiki/Ex_post_facto_law ). No matter the legal handling the outcome of any actions would potentially take years (months at minimum) for benefits to flow to insureds.
Slow admin of government programs, little or no coverage for SMEs within insurance policies. SMEs shuttered, tens of millions unemployed. Who will provide confidence that SMEs’ rents can be paid, benefits can be maintained, TAXES PAID, and confidence that the end of the shutdowns is not ad sundown for SMEs?
Carriers can take action without compromising any legal positions re: insurance contracts. Governments can take actions.
- Reduce policy premiums to a minimum– $10, or 10 euro. Get regulators on board. No need to change policy terms, risks are lower since businesses are shuttered. Backload renewal premiums into 2021.
- Rebate some premiums for April– same support as above.
- Governments- provide some tax credits to the carriers for the premium forgiveness.
- Carriers, brokers, agents– make a specific and comprehensive effort to review the provisions and endorsements of every policy to confirm there absolutely is no room for BI cover. Policies are worded differently- direct physical loss, direct physical damage, direct property damage, damage due to a covered risk, etc. Spend time on finding cover in concert with efforts spent denying/defending against cover.
- Collaborate with peer companies in establishing recovery funds that are dedicated to SME benefits. Not policy benefits, but support benefits.
- Reach out to every customer to suggest recovery resources that may be of benefit to them. Actually know what those resources are.
- Suspend payment of firms’ sales tax and withholding taxes until the shutdown ends and cash flow begins.
- Find clever ways to accelerate acceptance, review, and funding of loans. Want to pass meaningful law changes? Look at the CFR that stipulates SOP for the SBA (how about those acronyms?) The persons who can make this happen know what the acronyms mean.
Every effort is needed to cut the Gordian knot of admin barriers that delay getting benefits to the SMEs.
There will be a lot of financial resources spent developing and defending positions in court; why not calculate the cost of helping vs the cost of defending?
The insurance industry, regulators, governments, insureds, capital markets and banks have a vested interest in continuity of SMEs’ viability, finding practical solutions for the current crisis, and planning for the next pandemic or economic outcome of systemic risk effects. Planning must begin now, and efforts are underway, e.g., the Ten C’s Project. Government programs initiated on an adhoc basis are not adequate response vehicles, and laying the burden upon the shoulders of insurance is not a prudent path to follow. We need to collectively mitigate the current effects and collectively solve how future economic occurrences will not be like what COVID-19 has wrought.
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