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Pandemic Proposals Test the Boundaries of “Insurance”

Pandemic Proposals Test the Boundaries of “Insurance”
By Centers for Better Insurance • Issue #46 • View online
Texas and Washington State pandemic business interruption proposals shine a light on overlooked definition of property insurance.

Over the last year movie theaters have been forced to close, restaurants have reconfigured from dine-in to delivery operations, and other businesses have simply seen sales fall off a cliff as foot traffic disappeared. While revenue collapsed, payroll, rent and utility obligations continued. Some businesses have turned to their property insurers by making claims under “business interruption” coverage, though few have so far reached a successful conclusion.
Against this backdrop, several proposals have emerged for a national public-private partnership that would make available some form of pandemic business interruption coverage supported at least in large part by a federal financial commitment. In the meantime, a handful of state legislatures have before them proposals mandating insurers to provide pandemic business interruption “insurance”.
The debate over each of these pandemic risk programs has somehow skipped over the most fundamental question: Is this insurance? 
A careful look at two recent state legislative proposals frames the question clearly.
Texas SB 249 would require business interruption insurance to “cover loss caused by a pandemic, including loss caused by the order of a civil authority made to prevent the spread of a pandemic, without regard to whether the pandemic caused a direct physical loss to the policyholder’s property.” The insurance envisioned by this proposal would payout if:
  • The business closes in order to comply with a pandemic lockdown order;
  • The business remains open but experiences lost sales because customers are afraid to venture out in public because of the pandemic; or
  • The business incurs additional costs to stay open such as installing plexiglass barriers between cashiers and customers to reduce the risk of transmission during the pandemic.
SB 249’s removal of the prerequisite of direct physical loss to property seems to contradict other Texas laws. For example, Texas Ins. Code. Sec. 2251.002 and Sec. 2301.002 define commercial property insurance as “coverage against loss caused by or resulting from loss, damage, or destruction of real or personal property.” Similarly, Texas Ins. Code. Sec. 2301.051 defines “residential property insurance” as “insurance coverage against loss to tangible personal property or to residential real property at a fixed location.” As it stands, Texas law does not seem to recognize the possibility that property insurance could cover financial losses that do not result from a physical loss of property.
A similar tension arises with Washington State’s SB 5351. This proposal would require that “[e]very property insurance policy containing a grant of coverage for direct physical loss of or damage to property shall be construed to include the deprivation of such property and the loss of the ability to use such property.” Such a legislative interpretation appears to conflict with another Washington State law. RCW 48.18.040 defines “insurable interest” under property insurance as “any lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage.”
Of course, the Texas and Washington legislatures could resolve any inconsistencies simply by changing existing statutes to expand the notion of “property insurance” so it includes coverage of purely economic losses without a precondition of property damage. It would be far more challenging for state lawmakers to reconcile any such mandatory non-damage property insurance coverage with the frameworks embedded in:
  • Insurance accounting standards;
  • Federal income tax rules;
  • Dodd-Frank; and
  • McCarran-Ferguson.
Now is the time to develop a full understanding of the relationship between the pandemic risk and insurance before we stumble into an unworkable legislative “fix” that causes far more problems than it ever could solve.
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