On March 10, 2020, the New York Department of Financial Services (DFS) issued a letter to all DFS-regulated insurance entities providing guidance and requesting assurance that all regulated entities have preparedness plans to address the operational risk, and are identifying, monitoring, and managing the financial risk, posed by COVID-19. The letter requires each regulated entity to submit a response to DFS describing its preparedness plans as soon as possible, but no later than April 9, 2020. All New York-licensed insurers and accredited reinsurers are required to respond.

The letter states that insurers’ preparedness plans should retain flexibility to address possible effects from COVID-19 and be reflective of the insurer’s “size, complexity and activities.” With respect to operational risks, the letter states that a preparedness plan should include the following, at a minimum:

1. Preventive measures tailored to the entity’s specific profile and operations to mitigate the risk of operational disruption, which should include identifying the impact on consumers and vendors;
2. A documented strategy addressing the impact of the outbreak in stages, so that the entity’s efforts can be appropriately scaled, consistent with the effects of a particular stage of the outbreak;
3. Assessment of all facilities, systems, policies, and procedures necessary to continue critical operations and services if members of the staff are unavailable for longer periods or are working off-site, including the effectiveness and security of remote access;
4. Employee protection strategies critical to sustaining an adequate workforce during the outbreak, including employee awareness and steps that employees can take to reduce the likelihood of contracting COVID-19;
5. Assessment of the preparedness of critical third-party service providers and suppliers;
6. Development of a communication plan to effectively communicate with consumers and vendors and to deliver important news and instructions to employees, along with establishment of forums for questions to be asked and addressed;
7. Testing of the plans to ensure that the policies, processes, and procedures are effective; and
8. Governance and oversight of the plans, including identifying the critical members of a response team, to ensure ongoing review and updates to the plans, including the tracking of relevant information from government sources and the entity’s own monitoring program.

The letter notes that potential COVID-19-related financial risks to an insurer’s operations include With respect to financial risks, the letter states that a preparedness plan should include the following, at a minimum:

1. Assessment of the overall impact of COVID-19 on reserve requirements, consumers’ ability to make timely premium payments, and resources required to timely process claims;
2. Assessment of the credit risk of counterparties and business sectors impacted by COVID-19;
3. Assessment of the credit exposure to counterparties and business sectors impacted by COVID-19 arising from investing and other financial transactions;
4. Assessment of the scope and size of admitted assets or other investments adversely impacted by COVID-19 that currently are in, or potentially may move to, nonperforming/delinquent status, including consideration of stress testing and/or sensitivity analysis of such assets or investments;
5. Assessment of the valuation of assets and investments that may be, or have been, impacted by COVID-19; and
6. Assessment of the overall impact of COVID-19 on earnings, profits, capital, and liquidity.

Finally, the letter notes that an insurer’s board of directors (or equivalent governing body) is responsible for ensuring that appropriate plans are in place and that sufficient resources are allocated to implement such plans. Senior management, in turn, is responsible for ensuring that effective policies, processes, and procedures are in place to execute the plans, and for communicating the plans throughout the organization to ensure consistency in approach and that employees understand their roles and responsibilities. Insurers’ preparedness plans should include frameworks for board and management oversight of the plans, through existing board committees or newly formed management committees that would report to the board.

While COVID-19 presents a myriad of unique issues, insurers can leverage existing enterprise risk management policies and procedures and disaster recovery plans to monitor, mitigate, and manage their exposure. Insurers should also review their disaster recovery plans against the Federal Financial Institutions Examination Council’s (FFIEC’s) updated guidance on pandemic preparedness (though the FFIEC’s mandate does not extend to insurance companies, the guidance is relevant for all financial institutions). Finally, insurers should monitor any guidance (or additional requests for information) issued by other state insurance regulators or the National Association of Insurance Commissioners following the full-day virtual meeting on state responses to COVID-19 that is scheduled for March 20.

Additional COVID-19-Related DFS Guidance and Requests

DFS issued separate letters on COVID-19 preparedness to other DFS-regulated noninsurance financial institutions, and has issued coverage-related guidance to (1) insurers authorized to write accident and health insurance in New York, and (2) insurers authorized to write property/casualty insurance writing travel-related coverage in New York. The guidance to accident and health insurers instructs insurers to remove barriers to testing and treatment for COVID-19 and highlights certain provisions of New York insurance law governing mandated health benefits and services. The travel-related guidance to property/casualty insurers explains DFS’s position on cancel for any reason benefits in the context of travel insurance and potential coverage for COVID-19 under travel insurance policies.

On March 10, 2020, DFS also issued a 308 request to insurers authorized to write property/casualty insurance in New York related to business interruption and related coverage provided under commercial property insurance policies in New York. For purposes of the request, DFS considers “commercial property insurance” to include the following, along with substantially similar insurance: business owner policies, commercial multiple peril policies, and specialized multiple peril policies. The request directs all authorized property/casualty insurers to provide policyholders under commercial property policies with an explanation of benefits under their policies and the protections provided in connection with COVID-19. The request notes that the explanation of benefits should include all relevant information, including:

• What type of commercial property insurance or otherwise related insurance policy does the insured hold?
• Does the insured’s policy provide “business interruption” coverage? If so, provide the “covered perils” under such policy. Please also indicate whether the policy contains a requirement for “physical damage or loss” and explain whether contamination related to a pandemic may constitute “physical damage or loss.” Please describe what type of damage or loss is sufficient for coverage under the policy.
• Does the insured’s policy provide “civil authority” coverage? If so, please describe what type of damage or loss is sufficient for coverage under the policy. Please also describe any relevant limitations under the policy. Please explain whether a civil authority prohibiting or impairing the policyholder’s access to its covered property in connection with COVID-19 is sufficient for coverage under the policy.
• Does the insured’s policy provide “contingent business interruption” coverage? If so, please describe what type of damage or loss is sufficient for coverage under the policy. Please provide the “covered perils” under such policy. Please also indicate whether the policy contains a requirement for “physical damage or loss” and explain whether contamination related to a pandemic may constitute “physical damage or loss.”
• Does the insured’s policy provide “supply chain” coverage? If so, is such coverage limited to named products or services from a named supplier or company? Please also indicate whether the policy contains a requirement for “physical damage or loss” and explain whether contamination related to a pandemic may constitute “physical damage or loss.”
• For each instance of coverage described above, please provide the applicable waiting period under the insured’s policy. Please also indicate whether the amount of time coverage remains in effect once becomes active for a given incident.

Authorized property/casualty insurers are required to send DFS copies of all explanations of benefits provided to New York policyholders and a representation that the explanations have been provided, together with a report on business interruption coverage the insurer provides in New York. The report must include the volume of business interruption coverage, civil authority coverage, contingent business interruption coverage and supply chain coverage the insurer has written in New York that has not lapsed as of March 10, 2020 (expressed in amounts of direct premium, policy types and number of policies written of each type). Insurers that do not write the business described in the 308 request are required to notify DFS in a letter signed by an officer or other authorized representative of the insurer. Responses are due to DFS on or before March 18, 2020.

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