The COVID 19 pandemic has radically altered the insurance claims and underwriting environment and has resulted in more than 1,400 insurance coverage litigations. In the first of three essays on lessons for risk management professionals, Peter A. Halprin, our guest columnist and a Partner at Pasich LLP, discusses the challenges in leveraging even long-standing relationships between risk management professionals, on the one hand, and brokers and insurers, on the other.
As my late grandmother used to say, “It is the world of the owl – who, who, who.” A similar sentiment, attributed to Ben Stein, is that “Personal relationships are the fertile soil from which all advancement, all success, all achievement in real life grows.” Risk management professionals, with similar eloquence, will extol you with tales of the relationships that they have developed with insurers and brokers. Or, rather, they would have told you such tales prior to the pandemic. In the current risk climate even seemingly excellent relationships are under strain and being severely tested.
The background is well-known. 2020 started off well economically, with the United States in the midst of the longest economic expansion in U.S. history and record-low unemployment (Kate Davidson, Recession in U.S. Began in February, Official Arbiter Says, The Wall Street Journal (June 8, 2020). At this juncture, however, one model projects that net U.S. GDP losses from COVID-19 will range from $3.2 trillion (14.8%) to $4.8 trillion (23%) over a two-year period (Terrie Walmsley, Adam Rose & Dan Wei, “The Impacts of the Coronavirus on the Economy of the United States”). Many businesses have been forced into bankruptcy and many more are predicted to enter into bankruptcy (Hank Tucker, Coronavirus Bankruptcy Tracker: These Major Companies Are Failing Amid The Shutdown, Forbes (May 3, 2020). Per the Brookings Institute:
The current crisis could bring a much greater surge in business bankruptcy filings than either of the two most recent recessions. Prior to the current crisis, businesses took on an extraordinary amount of debt—$15.5 trillion, according to one estimate, a 52% increase since its high point during the 2008 crisis. This debt, coupled with the nearly complete shutdown of the economy and the fact that the revenues of many businesses will be slow to recover, even after economic activity resumes, suggests there will be a surge of business bankruptcies. Businesses also may be less hesitant to file for bankruptcy than they otherwise would have, given that some debt is now guaranteed by the government and the distress has been triggered by a crisis outside their control. At the very least, regulators need to assume that a bankruptcy wave is coming (David Skeel, Bankruptcy and the coronavirus, Economic Studies at Brookings (April 2020).
As companies looked, primarily, to their business interruption insurance to help in the face of business income losses, they were met with stiff resistance. According to October 2020 NAIC data on business interruption claims, of the approximately 201,000 claims in the data set, only 3,001 were closed with payment ( National Association of Insurance Commissioners, “COVID-19 Property & Casualty Insurance Business Interruption Data Call: Part 2 – Claim and Loss Information” (October 2020)). The 201,000 claims represent nearly $1.3B in losses of which approx. $296MM were paid. Thus, the average paid loss was $98,614.
Given the number of claims “closed without payment,” it is no surprise that pandemic insurance litigation is increasing. According to the COVID Coverage Litigation Tracker out of the University of Pennsylvania, more than 1,400 cases were filed as of mid-December 2020. Per the Tracker, as of February 1, 2021, there are now more than 185 decisions on the issues in dispute.
The key issues in dispute include whether there has been “direct physical loss of or damage to” property, the applicability of exclusions (primarily the “Exclusion of Loss Due to Virus or Bacteria” Endorsement), causation (and anti-concurrent causation), and the applicability of sublimits. The decisions have varied with four key factors seeming to predominate the early results:
Given the uncertainty inherent in litigation generally, and specifically in this instance, one might think that there would be early efforts to resolve these disputes without litigation. One would also assume that these early efforts would leverage long-standing relationships between corporate risk management professionals, on the one hand, and insurers and brokers, on the other. While these efforts have been made by corporate risk management professionals and, in some cases, brokers, they have largely gone unanswered.
In one example, a business with a sophisticated manuscript program looked to its brokerage team for assistance in getting carriers to agree to settlement meetings. The initial response from the broker was that they had 1,500 plus clients with the same claim and would likely be unable to help. Another risk manager lamented that turnover at the insurance carriers had resulted in many longstanding contacts ending up at other companies and otherwise unable to assist. In addition, underwriting and claims teams often have different incentive structures and act accordingly when it comes to claims. That said, even if one were to assume that underwriters might be more receptive to claim concerns, some clients have faced pressure from underwriters to drop pandemic claims in connection with renewals.
While, as counsel, I try to work with clients and their brokerage teams to bring carriers to the table prior to filing suit, the above demonstrates the inherent challenges in leveraging relationships in the current environment. This isn’t to say it is impossible, just that a measure of realism needs to be injected into expectations regarding such relationships.
And, while we hope the status quo is an anomaly, the pandemic highlights the possibility of future so-called “grey rhino”* events. For those risk management professionals thinking about what lessons can be learned from the pandemic, the first is that even long-standing relationships will be under strain in challenging claims and underwriting environments. In layman’s terms, this means that relationships may not assist insureds in getting claims paid or avoiding significant premium increases. And, in even more practical terms, this means that risk management professionals need to rely – first and foremost – on the language of their policies.
I still think my grandmother is right, the world does revolve around relationships. And this isn’t to say that relationships cannot be helpful, they can be very helpful. But when a claims or underwriting environment is that which is currently before us, risk management professionals need to begrudgingly accept that millions of dollars of annual premium and many meals and other events may not move the needle. Careful scrutiny of insurance programs, and insurance program language, remains the best risk mitigation tool for an uncertain future.
* “Gray rhino” events are differentiated from “black swan” events. The former is something big and obvious that is coming towards you. See Mark Siwik, “ERM in the Age of Pandemics and Cyber Crime: Part III – Leaders Need to Be Held Accountable,” Perspectives (September 2020). By contrast, a “black swan” is “an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight.” Investopedia, “Black Swan,” (Updated Aug. 17, 2020), https://www.investopedia.com/terms/b/blackswan.asp. Given the likelihood of a coming pandemic, it is hard to characterize it as a true “black swan” event. Per one insurance treatise, “Insurers could not claim that the pandemic was completely unexpected as an event itself because the world has seen its share of rising health epidemics in recent decades, from Ebola to SARS to H1N1, swine flu, Zika, MERS, and HIV/AIDS.” Jeffrey W. Stempel & Erik S. Knutsen, Stempel and Knutsen on Insurance Coverage § 28.01 (4th ed., 2021-1 Suppl. 2015).
The background is well-known. 2020 started off well economically, with the United States in the midst of the longest economic expansion in U.S. history and record-low unemployment (Kate Davidson, Recession in U.S. Began in February, Official Arbiter Says, The Wall Street Journal (June 8, 2020). At this juncture, however, one model projects that net U.S. GDP losses from COVID-19 will range from $3.2 trillion (14.8%) to $4.8 trillion (23%) over a two-year period (Terrie Walmsley, Adam Rose & Dan Wei, “The Impacts of the Coronavirus on the Economy of the United States”). Many businesses have been forced into bankruptcy and many more are predicted to enter into bankruptcy (Hank Tucker, Coronavirus Bankruptcy Tracker: These Major Companies Are Failing Amid The Shutdown, Forbes (May 3, 2020). Per the Brookings Institute:
The current crisis could bring a much greater surge in business bankruptcy filings than either of the two most recent recessions. Prior to the current crisis, businesses took on an extraordinary amount of debt—$15.5 trillion, according to one estimate, a 52% increase since its high point during the 2008 crisis. This debt, coupled with the nearly complete shutdown of the economy and the fact that the revenues of many businesses will be slow to recover, even after economic activity resumes, suggests there will be a surge of business bankruptcies. Businesses also may be less hesitant to file for bankruptcy than they otherwise would have, given that some debt is now guaranteed by the government and the distress has been triggered by a crisis outside their control. At the very least, regulators need to assume that a bankruptcy wave is coming (David Skeel, Bankruptcy and the coronavirus, Economic Studies at Brookings (April 2020).
As companies looked, primarily, to their business interruption insurance to help in the face of business income losses, they were met with stiff resistance. According to October 2020 NAIC data on business interruption claims, of the approximately 201,000 claims in the data set, only 3,001 were closed with payment ( National Association of Insurance Commissioners, “COVID-19 Property & Casualty Insurance Business Interruption Data Call: Part 2 – Claim and Loss Information” (October 2020)). The 201,000 claims represent nearly $1.3B in losses of which approx. $296MM were paid. Thus, the average paid loss was $98,614.
Given the number of claims “closed without payment,” it is no surprise that pandemic insurance litigation is increasing. According to the COVID Coverage Litigation Tracker out of the University of Pennsylvania, more than 1,400 cases were filed as of mid-December 2020. Per the Tracker, as of February 1, 2021, there are now more than 185 decisions on the issues in dispute.
The key issues in dispute include whether there has been “direct physical loss of or damage to” property, the applicability of exclusions (primarily the “Exclusion of Loss Due to Virus or Bacteria” Endorsement), causation (and anti-concurrent causation), and the applicability of sublimits. The decisions have varied with four key factors seeming to predominate the early results:
- Was the “presence” of the pandemic alleged at a property? (pleading and factual issue)
- Is there an applicable exclusion? (legal and factual issue)
- What was the cause of loss? (legal and factual issue)
- What is the state of the applicable law? (legal issue)
Given the uncertainty inherent in litigation generally, and specifically in this instance, one might think that there would be early efforts to resolve these disputes without litigation. One would also assume that these early efforts would leverage long-standing relationships between corporate risk management professionals, on the one hand, and insurers and brokers, on the other. While these efforts have been made by corporate risk management professionals and, in some cases, brokers, they have largely gone unanswered.
In one example, a business with a sophisticated manuscript program looked to its brokerage team for assistance in getting carriers to agree to settlement meetings. The initial response from the broker was that they had 1,500 plus clients with the same claim and would likely be unable to help. Another risk manager lamented that turnover at the insurance carriers had resulted in many longstanding contacts ending up at other companies and otherwise unable to assist. In addition, underwriting and claims teams often have different incentive structures and act accordingly when it comes to claims. That said, even if one were to assume that underwriters might be more receptive to claim concerns, some clients have faced pressure from underwriters to drop pandemic claims in connection with renewals.
While, as counsel, I try to work with clients and their brokerage teams to bring carriers to the table prior to filing suit, the above demonstrates the inherent challenges in leveraging relationships in the current environment. This isn’t to say it is impossible, just that a measure of realism needs to be injected into expectations regarding such relationships.
And, while we hope the status quo is an anomaly, the pandemic highlights the possibility of future so-called “grey rhino”* events. For those risk management professionals thinking about what lessons can be learned from the pandemic, the first is that even long-standing relationships will be under strain in challenging claims and underwriting environments. In layman’s terms, this means that relationships may not assist insureds in getting claims paid or avoiding significant premium increases. And, in even more practical terms, this means that risk management professionals need to rely – first and foremost – on the language of their policies.
I still think my grandmother is right, the world does revolve around relationships. And this isn’t to say that relationships cannot be helpful, they can be very helpful. But when a claims or underwriting environment is that which is currently before us, risk management professionals need to begrudgingly accept that millions of dollars of annual premium and many meals and other events may not move the needle. Careful scrutiny of insurance programs, and insurance program language, remains the best risk mitigation tool for an uncertain future.
* “Gray rhino” events are differentiated from “black swan” events. The former is something big and obvious that is coming towards you. See Mark Siwik, “ERM in the Age of Pandemics and Cyber Crime: Part III – Leaders Need to Be Held Accountable,” Perspectives (September 2020). By contrast, a “black swan” is “an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight.” Investopedia, “Black Swan,” (Updated Aug. 17, 2020), https://www.investopedia.com/terms/b/blackswan.asp. Given the likelihood of a coming pandemic, it is hard to characterize it as a true “black swan” event. Per one insurance treatise, “Insurers could not claim that the pandemic was completely unexpected as an event itself because the world has seen its share of rising health epidemics in recent decades, from Ebola to SARS to H1N1, swine flu, Zika, MERS, and HIV/AIDS.” Jeffrey W. Stempel & Erik S. Knutsen, Stempel and Knutsen on Insurance Coverage § 28.01 (4th ed., 2021-1 Suppl. 2015).
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