Seyfarth Synopsis: Legislative development of draft proposals addressing business interruption insurance coverage have continued to be discussed by Congress since our March 23, 2020 Legal Update. As previously discussed, the COVID-19 global widespread pandemic has caused exorbitant business losses, which under many current business interruption insurance policies may not trigger policy coverage. The looming question for many businesses is whether or not business interruption insurance coverage will cover claims for financial losses due to business interruptions caused by the COVID-19 pandemic. As a result, Congress is considering several drafts of legislation, some introduced and others not, which would address the issue of business interruption insurance coverage in order to mitigate financial losses by businesses. Congress is considering these drafts in the context of both the current crisis through the Workplace Recovery Act ("WRA") and for future pandemics through the Pandemic Risk Insurance Act of 2020 ("PRIA"), the Business Interruption Insurance Coverage Act of 2020, and Never Again Small Business Protection Act of 2020. This Legal Update primarily focuses on the PRIA Discussion Draft, which is modeled after the 9/11 Terrorism Risk Insurance Act ("9/11 TRIA,") and, if enacted, would create a reinsurance program for pandemics providing a federal backstop for insurers to respond to financial losses arising from public health emergencies such as the COVID-19 pandemic. At this time, Seyfarth will continue to monitor this issue and related issues to COVID-19 and provide relevant updates as information is released.
Due to the ongoing COVID-19 pandemic declared by the World Health Organization ("WHO"), and more than 4,088,848 confirmed positive cases worldwide, preliminary US Government estimates indicate that the COVID-19 pandemic could "last for 18 months or longer." The result is continued business interruption for the near future. It is clear that the impact will not only be on the health of the population at large, but also on the health of the U.S. economy. With increasing global governmental restrictions, many businesses are forced to close, travel restrictions are enforced, and supply chains are disrupted. These restrictions in the U.S. and throughout the world, have resulted in global business interruption losses in nearly every single industry. Lawsuits seeking business interruption insurance coverage already have been filed. The looming question for many businesses is whether or not business interruption insurance coverage will cover these financial losses. Some insurers dispute whether the requirement for a "direct physical loss" to insured property has been met. Coverage of these losses will be a highly litigated issue. Some in Congress are attempting to address business interruption insurance issues through legislation.
Pandemic Risk Insurance Act of 2020 ("PRIA")
On March 18, 2020, Rep. Maxine Waters, the Chairwoman of the House Financial Services Committee, circulated a memorandum and a draft copy of PRIA, formally calling for the creation of a prospective federal reinsurance program for pandemics providing a federal backstop for insurance to respond to financial losses arising from such public health emergencies modeled directly after 9/11 TRIA. Similar to 9/11 TRIA, this draft as written called for PRIA to be forward-looking to ensure businesses are safeguarded against future losses due to pandemics. On April 6, 2020, Rep. Waters also released a memorandum regarding a fourth proposed federal relief package, which included a provision calling for a federal pandemic risk insurance program. Specifically, the memorandum stated the following about the pandemic risk insurance, "[t]his provision would create a federal reinsurance program similar to the Terrorism Risk Insurance Program for pandemic risks in order to promote the availability and affordability of insurance coverage that includes pandemic risks."
Earlier this month, Rep. Carolyn Maloney circulated a PRIA Discussion Draft to apply prospectively and create a federal reinsurance program which "provides for a transparent system of shared public and private compensation for business interruption losses resulting from a pandemic or outbreak of communicative disease." The contemplated PRIA Discussion Draft would devote federal funding through the Department of the Treasury to administer a federal reinsurance program. The stated purpose of PRIA is to establish a federal program that would achieve the following two objectives, "(1) protect consumers by addressing market disruptions and ensure the continued widespread availability and affordability of business interruption coverage" and "(2) allow for a transitional period for the private markets to stabilize, resume pricing of such insurance, and build capacity to absorb any future losses, while preserving state insurance regulation and consumer protections."
Unlike the 9/11 TRIA, the contemplated PRIA Discussion Draft would provide federal funding to participating insurers that voluntarily elect to participate in the program. Upon participating in the federal PRIA program, insurers would be required to remit premium payments to the federal government and make business interruption insurance coverage available to policyholders for financial losses from public health emergencies, including communicable diseases. Participating insurers would be required to offer business interruption insurance coverage on terms that do not differ materially from limitations applicable to losses arising from events for other business interrupting causes, such as physical loss or damage to property. The contemplated PRIA Discussion Draft provides for reinsurance payments for only emergencies or major disasters declared under the Public Health Service Act, presidential declaration under the Robert Stafford Disaster Relief and Emergency Assistance Act, or a certification by the Secretary of the Department of Treasury. Reimbursement payments would not be paid unless the aggregate industry losses resulting from a certified public health emergency exceed a trigger, which is currently proposed to be set at $250 million. The PRIA Discussion Draft sets an annual cap at $500 billion, such that the Secretary of Department of Treasury and participating insurers would not be liable for paying financial losses in excess of that amount. In sum, business losses above the specified deductible, but below the annual cap, would be covered by the Department of Treasury and participating insurers. The federal share of reimbursement for insured losses under the PRIA Discussion Draft is equal to 95% of the portion of the amount such insured losses exceed the insurer's deductible, where "insurer deductible" is defined as the value of the insurer's direct earned premiums during the immediately preceding calendar year, multiplied by 5%. Significantly, the contemplated PRIA Discussion Draft would void any existing exclusions in a contract of a participating insurer for business interruption insurance that is in effect.
Workplace Recovery Act ("WRA")
In order to address the current COVID-19 pandemic, Sen. Steve Daines has proposed the Workplace Recovery Act ("WRA") to create a fund with payouts intended to remedy operational losses, but not lost profits. This proposal will allow businesses to "phase out support as quickly as possible, creating the lowest possible cost of rebuilding the economy." This proposal would apply both retroactively and prospectively. Retroactively, WRA would provide direct reimbursement to every business for operating losses, limited to 90% of past revenues through a federal automated security trust ("FAST") program, covering payroll, operating expenses, rent, and debt service through December 31, 2020. Prospectively, WRA would establish a new government funded business interruption insurance add-on for every privately administered commercial insurance plan to protect against future pandemics. Businesses would be required to pay a small premium to cover transaction and processing fees, while the government will back-stop all national crisis operating losses not otherwise covered.
Business Interruption Insurance Coverage Act of 2020 and Never Again Small Business Protection Act of 2020
In addition to the PRIA Discussion Draft and WRA, Congress is considering two additional legislative measures that have been introduced in regards to business interruption insurance coverage policies. On April 14, 2020, Rep. Mike Thompson introduced H.R. 6494, Business Interruption Insurance Coverage Act of 2020, and Rep. Bryan Fitzpatrick introduced H.R. 6497, Never Again Small Business Protection Act of 2020. The contemplated H.R. 6494 bill, Business Interruption Insurance Coverage Act of 2020 would void any existing exclusions in a contract of a participating insurer for business interruption insurance that is in force, but if enacted would permit reinstatement of these preexisting provisions if certain requirements are met. H.R. 6494 would require that business interruption insurance policies cover losses resulting from (1) future viral pandemics; (2) any forced closure of business, or mandatory evacuation; and (3) any power shut-off conducted for public safety purposes. The contemplated H.R. 6497, Never Again Small Business Protection Act of 2020 would require business interruption insurance coverage policies to provide coverage to policyholders during any presidentially declared national emergency or disaster. H.R. 6497 would permit a contract for business interruption insurance to exclude coverage for business interruptions resulting from such a national emergency only if certain requirements are met.
On March 18, 2020, House Small Business Committee Chairwoman ("HSBC") Rep. Nydia Velazquez along with a bipartisan group of House of Representatives members, including 12 democrat members and 6 republican members, wrote a letter to four insurance industry trade companies calling for the insurance industry to work with member companies and brokers to "recognize financial loss due to COVID-19 as part of policyholders' business interruption coverage." The industry response in opposition of such proposed legislation was immediate. For example, on March 25, 2020 the National Council of Insurance Legislators ("NCOIL") wrote a letter outlining the industry position to Rep. Velazquez. NCOIL indicated its concern with federal action adding business interruption insurance coverage after the fact, stating the following, "[t]o do so could destabilize these insurers and render them unable to pay claims for which they did accept the risk, and did rate & reserve. This could jeopardize the solvency of any number of insurers."
The National Association of Insurance Commissioners ("NAIC") also made its opposition known to any such federal measures in a March 25, 2020 public statement. NAIC expressed concern over insurance companies being required to cover such claims, which in their view would "create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country is currently experiencing." In fact, the Congressional Research Service ("CRS") has noted in its published March 31, 2020 Business Interruption Insurance and COVID-19 Report that David Sampson, CEO of the American Property Casualty Insurance Association ("APCIA"), estimated the cost of covering business interruption claims for small businesses to be anywhere from $110 billion to $290 billion monthly. Similarly, APCIA has released two statements (March 26, 2020 and April 6, 2020) expressing concern over such policies, "[p]andemic outbreaks are uninsured because they are uninsurable. Any action to fundamentally alter business interruption provisions specifically, or property insurance generally, to retroactively mandate insurance coverage for viruses by voiding those exclusions, would immediately subject insurers to claim payment liability that threatens solvency and the ability to make good on the actual promises made in existing insurance policies."
Seyfarth will continue to monitor this issue and related issues to COVID-19 and provide relevant updates. Businesses must pay very close attention to any further actions by Congress and should continue to proactively manage their COVID-19 risk, liabilities, and financial losses by evaluating the adequacy of the coverage provided under their current business interruption insurance coverage.
Originally published 13 May, 2020
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