Who Pays?

In the entertainment industry, there are all sorts of insurance policies that you might think would cover a CV-19 shutdown. Cast insurance when a film or television production has a star unable to work because he or she came down with COVID-19. Public appearance insurance when a musical star is too sick to give a sold-out concert. A completion guarantor might be on the hook to finish a film when production stops. In the business world, there’s business interruption insurance. Ah, but there’s the fine print. Acts of war and outbreaks of disease are commonly excluded from applicable policies and completion guarantees. And if you tried to get this kind of insurance today, forgetaboutit.

Even Lloyd’s of London isn’t touching this risk category. It is hard to conceive of an insurance company, or even a consortium of insurance companies bound together, that could actually afford to issue such pandemic coverage almost at any price.

The government has made up for some of this with its rolling stimulus packages, now over $3 trillion in Congressional action (not counting the emergency response from the Federal Reserve), but most of the costs are shoved onto the people impacted. Businesses and workers. For those businesses lucky enough to have legacy business interruption insurance in place, they must be jumping for joy that they had the wisdom to have such coverage. But facing devastating losses, insurers who had issued these policies are twisting and squirming to avoid honoring what seem to be contractual obligations to cover losses. And you can bet that any new business interruption policies are and will be “oh so clear” to avoid anything to do with this and any future pandemic.

If a restaurant is under government order to shut down its regular “seated at a table” operations but is still selling takeout, has its business been interrupted? If office-driven businesses continue to have meetings with virtual meetings (Zoom, Microsoft Team, etc.), or staffers are continuing to field calls from home, is there a covered interruption? Even if revenues have dropped by 80-90%, even as operating costs continue?

And what “caused” the shutdown? The “virus” or the governmental order? Such that if the virus caused the shutdown it not might be covered under an exclusion, but if the government order caused it, there may be coverage? But didn’t the virus cause the government order? Some policies require that the interruption be at least a certain length, often a month. So when did the shutdown start? And if governments are slowly allowing businesses to reopen, is that the end of the interruption even if no customers/clients show up? What about “essential businesses” which remain open but whose income has been decimated?

As insurance carriers are circling the wagons against CV-19-related claims and consistently denying coverage for any reason they can think of, looking at the fine print, businesses that are facing catastrophic losses that have such interruption policies are filing suit. Courtrooms may be closed, but the judicial system is still handling filings for civil and criminal cases… and those being denied coverage are lining up and filing suit. The line is getting pretty long.

One such litigant, Hollywood’s iconic family run Musso & Frank Grill (founded in the middle of the Spanish Flu in 1919), has filed a suit against its carrier, which quickly denied the claim. “The lawsuit states that the carrier, Mitsui Sumitomo Insurance, didn’t even bother to launch an investigation of the loss — as the restaurant says is required under state law — but rejected its claim outright based on the virus exclusion.” Michael Hiltzig writing for the Los Angeles Times, April 26^th. The Echeverria family that has run the business from inception has run through a lot of chaos over the years, but nothing quite as bad as this outbreak. Their annual premium is $47,000.

“A week later, however, [Mitsui Sumitomo Insurance] said it would handle the claim in-house, and four days later, on April 1, it notified the owners that ‘COVID-19 is not a covered cause of loss’ and cited policy language excluding coverage of any ‘loss or damage caused by or resulting from any virus, bacterium or other microorganism’ that causes illness. Representatives for Mitsui couldn’t be reached for comment.

“The policy provisions, however, don’t quite spell out what’s meant by a ‘loss due to virus.’ [Michael J.] Bidart, the restaurant’s lawyer, argues that under California law, it would apply only to cases in which a virus itself was found on the restaurant premises, prompting a shutdown… ‘That couldn’t be the case here,’ he says, ‘because no coronavirus was ever there.’ The proximate cause of the shutdown was a government order that banned the use of the premises, which Bidart says is covered by the policy.

“One can start to discern the outlines of a new category of case law to bedevil lawyers and judges here: Has a virus ‘caused’ a business loss when the government has ordered it closed to keep a virus away from the premises? In coming years, will the name of Musso & Frank be linked not only with Hollywood history but also with legal history?” LA Times.

Pandemics and acts of war are normal exclusions however, generally under a notion that such events are a. too costly to insure, and b. everybody else in society has to deal with this anyway. It’s a big deal. “‘A lot of the firms that do this stuff are being inundated with claims to be reviewed,’ says Michael J. Bidart, a specialist in insurance bad-faith lawsuits who is representing the Echeverrias. ‘There’s going to be a large public policy debate.’

“The insurance industry already is moving to put a fence around its potential exposure to business interruption claims… Closure losses just for businesses with 100 employees or fewer are reaching as much as $431 billion a month, according to the American Property Casualty Insurance Assn. That’s as much as 72 times the monthly premiums collected on commercial property policies, the group says… ‘Pandemic outbreaks are uninsured because they are uninsurable,’ its chief executive, David Sampson, said in a statement.

“The crisis is likely to generate litigation over canceled travel plans, scrapped business deals and purportedly negligent exposure of workers and customers to the virus, among many other grounds… Insurers have been reportedly discouraging pandemic business interruption claims at the source — telling policyholders not to even bother filing them because they’re certain to be denied under the virus exclusion.

“Those reports prompted California Insurance Commissioner Ricardo Lara to issue a notice April 14 instructing insurers that they could not reject claims out of hand — every policyholder, he said, is entitled to file a claim, have it investigated and receive a detailed explanation for any denial.

“‘We’ve been hearing from businesses that they were told, ‘Don’t bother to file a claim because it will be denied,’ ’ Tony Cignarale, deputy commissioner for consumer services and market conduct, told [Hiltzig]. ‘We want to make sure that process is being followed. You can’t just tell your agents and brokers to reject a claim.’” LA Times.

Americans are used to relying on insurance, risk pooling with a mark-up for the company that sets up the pool. It’s one of those financial constructs that allowed the Western world (and later most of the rest of the world at some level) to grow into the financially powerful nations that exist today. People could take business risks to build new operations without worrying about ancillary risks – from things like flood and fires – that could otherwise blindside them. In time insurance covered all kind of risks, from FDIC covering bank deposits to embezzlement, malfunctioning equipment, accidents, etc.

We have a surfeit of nasties waiting in the wings that will challenge our economic institutions and constructs to the core. Stuff where insurance companies will try to exclude from coverage. COVID-19 is the worst domestic disaster we’ve seen in a century and its impacts are not remotely near conclusion. But the disease is just one (particularly horrible and contagious) in a litany of recent pandemics and is hardly likely to be the last. Add that to the even more devastating impact that we face from climate change, and you have to wonder how business and society will be able to adjust… just to continue. It is clear that private insurance is not configured to handle such massive disasters… but then is even our government?

            I’m Peter Dekom, and the political, economic and social realignment generated by this pandemic may be force the greatest deep and abiding changes this planet has ever faced in recorded history.