A lawyer believes that legislation that could force commercial insurers to cover for business interruptions caused by the coronavirus lockdown could lead the industry into insolvency.
According to Steven Badger – a lawyer from Zelle LLP who specializes in representing commercial insurers in coverage disputes – commercial insurance companies are currently facing two threats: the millions of claims by small businesses that want their insurers to cover lockdown-related losses, and state legislatures considering laws to force insurers to provide retroactive coverage to policyholders regardless of contract language.
Of the two, forcing insurers to pay for claims through legislative changes is the bigger risk to companies, Badger told Reuters. While the lawyer is confident that any attempt to rewrite insurance contracts would be deemed unconstitutional under the Contracts Clause of Takings Clause, he fears what would happen should such changes come to pass.
Badger said that commercial insurers hold over $800 billion in reserves. If those companies are forced to liquidate those reserves under the proposed laws to pay for pandemic-related losses, it could leave those companies unable to pay for other legitimate claims, he warned. The lawyer also cautioned that the legislation might cause reinsurers to hesitate acting as backstops for risk that is not specified in their contracts with insurers.
“That will completely disrupt and could bankrupt the insurance industry,” Badger told Reuters in an interview. “And it’s horrible policy.”
Insurers typically pay out business interruption insurance if a business has to shut down due to a fire or natural disaster. Meanwhile, civil authority provisions cover shutdowns required by the state of local government in response to disasters. Badger explained that the COVID-19 shutdowns do not fit either of those scenarios.
“The entire concept of insurance depends upon just a few people having losses that everyone contributes to with their premiums,” he said. “The concept doesn’t work when everyone has the very same loss.”