The losses sustained by American businesses in the wake of the COVID-19 pandemic will be measured at a level that may never be seen again in our lifetime. On July 30th, the U.S. Bureau of Economic Analysis issued an advance estimate stating that the nation’s real gross domestic product (GDP) decreased at an annual rate of 32.9% in Q2 2020, which reportedly is the worst recorded drop in American history. It was estimated early on that “business interruption losses from the coronavirus just for small businesses in the U.S. could be between $220-$383 billion per month,” resulting in as many as 30 million claims by small business owners. One of the consequences of a record hit to the economy and record business losses is mounting litigation. According to tracking data, more than 700 business interruption insurance lawsuits have been filed regarding COVID-19 related business losses – more than five times the number of cases filed after each of Hurricanes Ike, Irma and Harvey and Superstorm Sandy. Companies need relief, and the private and public sectors continue to introduce potential strategies for mitigating the impact of COVID-19 and preparing for the unfortunate possibility of future pandemics. We previously discussed the federal Pandemic Risk Insurance Act of 2020 that was introduced in May 2020. We hit the highlights below regarding several additional measures that have been implemented or proposed.
New Insurance Product Offering Pandemic Coverage. Companies currently holding business interruption insurance policies have been met repeatedly with denials of coverage due, in large part, to the common policy requirement that covered business losses be the result of physical damage to the property. A recent decision in a Michigan case was unfavorable to the plaintiff, with the judge finding that there must be tangible damage “that alters the physical integrity of the property” for the restaurant owner to recover. The market is working to meet the novel conditions under which businesses have been hampered by COVID-19. For example, One80 Intermediaries has introduced a pandemic protection program offering coverage that includes “non damage business interruption and crisis management” services. The coverage would extend to known epidemics or outbreaks (e.g. Ebola and those caused by known coronaviruses, excluding COVID-19), as well as “unknown newly emerging viral diseases.” COVID-19 and outbreaks caused by SARSCoV-2 are excluded from coverage. For a minimum premium of $35,000, coverage limit options start at $1,000,000. One80 has marketed its program as “the most accessible product for mid-to-small sized companies due to the lower limit offerings, but also suitable for Fortune 500 companies.”
The Business Interruption Relief Act of 2020. In addition to the “physical damage” requirement standing in the way of most companies collecting under their business interruption policies, some policies specifically exclude coverage of damages caused by or related to viruses. On June 29, 2020, Rep. Mike Thompson introduced H.R. 7412 – The Business Interruption Relief Act of 2020 in an effort to incentivize insurance companies to waive their virus exclusions and cover COVID-19 losses suffered due to government mandated shutdowns. The Act would create a voluntary program for insurers in which insurers could choose to pay out claims to eligible businesses and be reimbursed by the federal government. Eligible businesses would be limited to those with business interruption insurance that (a) includes civil authority shutdowns, but (b) excludes virus-related damages. Under the Program, the federal government would “reimburse any participating insurer that voluntarily pays benefits under an eligible policy for COVID-19 losses, thereby waiving the [virus] exclusion.” Among the stated purposes of the proposed legislation is to avoid costly litigation between insurance carriers and policy holders, while securing “policy benefits to compensate for government shutdowns and business interruption.” The bill was referred to the Committee on Financial Services.
Federal Tax Credit for Event Cancellation Ticket Refunds. Due to government mandates, many venues have remained closed or been limited to reopening with severely reduced capacity. On July 23, 2020, Rep. Ron Kind and Rep. Mike Kelly introduced the Entertainments New Credit Opportunity for Relief & Economic Sustainability (ENCORES) Act, a bipartisan bill that seeks to provide some relief for entertainment venues suffering the consequences of event cancellations. The bills would provide tax credit for music and event venues who have paid ticket refunds to customers. The available tax credit would be for 50% of the value for refunded tickets, provided that the venue first offered vouchers to customers who declined and requested a refund instead. Eligible businesses are ones that have 500 or fewer full-time employees and organize, promote, produce, or manage live concerts, comedy shows, sporting events, and live theatrical productions. A companion Senate version of the bill was introduced on July 29th.
Public-Private Collaboration: Chubb Pandemic Business Interruption Program. Several proposals have been introduced that would create a public-private collaboration for covering pandemic business interruption losses, including the Pandemic Risk Insurance Act of 2020. In July 2020, Chubb presented its Pandemic Business Interruption Program proposal, which has two components – a program for small businesses that “provides an immediate cash infusion when a pandemic is declared” and a voluntary medium/large business program under which losses would be “paid through the existing industry claims adjudication process.” Insured small businesses would receive a pre-determined payment based on monthly payroll expenses, which would allow for the rapid payment of claims. Medium and large businesses would be subject to a more traditional claims process, with a maximum payout of $50 million per policy.
The aggregate limits for coverage would be $750 billion for the small business program and $400 billion for the medium/large business program. Under both components of the program, the federal government would be accepting a considerable portion of the risk – beginning at 94% reducing to 88% over 20 years for the small business program and beginning at 95% reducing to 90% over 10 years for the medium/large business program. Under the small business program, premiums paid by companies are meant to account for the insurance company’s coverage only, whereas premiums paid by medium and large businesses would account for the government coverage as well. A summary of the essential components of the Chubb program is available here. In a recent interview, Chubb’s Chairman/CEO discussed the company’s proposal, noting “[t]his is not something that’s going to ripen in the short term, and it shouldn’t….What we’re trying to do as a company is help the debate, help spark ideas. I’m sure what will come out in the end will look different.” We will keep you posted on developments.