Three US state legislatures are considering legislation aimed at forcing insurers to cover pandemic-related business interruption losses — overriding exclusions in policies.

Should such legislation be applied all over the US, the insurance industry would be faced with the “largest loss in its history” and widespread insurer insolvency, says insurance expert Robert Hartwig.

With thousands of businesses around the world shuttered for indefinite periods as a result of national lockdowns related to the Covid-19 public health crisis, business interruption costs are mounting.

State legislators in New Jersey, Ohio and Massachusetts have tabled Bills that would essentially alter contracts retroactively to force insurers to pay out in breach of the terms of their policies, Dr Hartwig told The Royal Gazette.

“If that law were to become the law of the land, it would lead to complete and total collapse of the property insurance markets of the United States and many insolvencies,” Dr Hartwig said.

Bermuda’s property and casualty re/insurers would be among those impacted.

Standard business interruption policies have contained a virus or bacteria exclusion, for about 14 years after lessons learnt from the Sars outbreak, said Dr Hartwig, director, Centre for Risk and Uncertainty Management, at the Darla Moore School of Business at the University of South Carolina.

The vast majority of such policies state there must be “direct, physical loss or damage” of property to suspend business activity — fire, explosion, smoke or wind, for example.

The Bill tabled in Massachusetts states that “no insurer in [Massachusetts] may deny a claim for the loss of use and occupancy and business interruption on account of (i) Covid-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses); or (ii) there being no physical damage to the property of the insured or to any other relevant property”.

While the New Jersey and Ohio Bills would apply to insureds with up to 100 employees, the Massachusetts bill would apply to insureds with “150 or fewer full-time equivalent employees”.

Insurers challenging such laws will have the US Constitution on their side, particularly the Obligation of Contracts clause in Article 1, which was designed to prevent states from interfering with private contracts.

“No disaster goes unused by politicians,” Dr Hartwig said. “Even though they are passing legislation they know is unconstitutional, they can claim that they stood up to big, bad insurers.”

He added that the exclusions meant insurers had not been paid for this risk: had they been, premiums charged would have been higher over the past decade and more.

Oceana Grill in New Orleans, which lacked a virus exclusion, last week asked for a declaratory judgment about its all-risk insurance policy from underwriters at Lloyd’s of London, citing a civil authority order by Louisiana’s governor and actions by the city’s mayor to restrict gatherings at restaurants.

Attorney John Houghtaling, who’s representing the restaurant, said he’s seeking to make it clear that virus-related mandatory shutdowns should trigger a civil authority clause for business-interruption policies. “The purpose of the Oceana action was to bring awareness,” Mr Houghtaling told Bloomberg News.

Meyer Shields, an insurance analyst at Keefe, Bruyette & Woods, said yesterday in a note to clients: “The initial reaction [which was ours as well] assuming modest business interruption losses without an actual, covered property loss now appears too optimistic.

“Insurers have been cautiously optimistic that virus exclusions will hold in Covid-19 business interruption claims, but some courts have held that contamination may constitute a covered ‘physical loss’.”

Other underwriting exposures for the Bermuda market lie in the island’s booming life reinsurance business, which will be impacted if mortality rates spike.

Dr Hartwig didn’t see too much of concern for life reinsurers, for now at least. “If we look at the excess mortality being generated by Covid-19 outside Italy, it’s not, for now, substantially different from what we might see in an ordinary flu season in the US,” he said.

The ongoing flu season was expected to claim about 50,000 lives in the US alone, he added. As of yesterday, the US death toll for Covid-19 was 913.

Many insurers and reinsurers will be on the hook for the postponement or cancellation of events. Organisers of the Olympic Games, scheduled to take place in Tokyo in July and August, this week postponed the event until next year. The Euro 2020 football tournament was also put back a year.

“I do expect there to be some exposure with events, but probably manageable losses,” Dr Hartwig said. “There’s not a lot of public information available, as these policies tend to be unique and that is privileged information between the broker, client and insurer. Bermuda is part of that market and Lloyd’s as well.”

Another exposure is workers’ compensation coverage, which, in the case of Covid-19, would be triggered by health workers contracting the disease in the course of their work, for example.

“We are hearing reports of this happening, but it does not appear to be an epidemic among healthcare workers at this point in the US,” Dr Hartwig said.

“Having said that, there are likely to be substantial workers’ compensation costs for insurers that provide coverage in healthcare settings and that could include nursing homes.

“Also we’ve seen several states have expanded their workers’ compensation statutes to include the time an individual spends in quarantine.”

In the case of a nurse quarantined for 14 days because of exposure to Covid-19, an insurer would be required to pay wages for that period, whether or not the person became ill, he said.