Insurers should stop crying wolf and start paying COVID-19 claims

Just three days after the first coronavirus case was reported in the United States on Jan. 21, 2020, insurance companies began incorporating coronavirus-specific exclusions into newly issued policies. Less than two weeks later, nearly every insurance carrier had followed suit, including coronavirus exclusions on new policies while declaring to anyone who would listen that standard property and casualty insurance policies were not “designed” or “intended” to respond to COVID-19 losses.

Thus, well before the first shelter in place order was issued, P&C insurers made a loud and clear announcement to their policyholders: we have no intention of paying any COVID-19 claims regardless of what your policy says. Six months on, the pandemic persists, as does the nearly uniform refusal by insurers to acknowledge coverage and pay claims for COVID-19-related losses.

As should be expected, those coverage denials have prompted numerous lawsuits — more than 1,100 and counting — against many insurance carriers for the wrongful denial of claims.

The basic insurance policy form most in dispute in these cases are “all-risk” property policies, which are designed to insure against all risks of “loss of or damage to property.” Under these policies, unless a risk is expressly excluded, all risks are covered, not just those risks the insurers thought about.

Insurers leverage ‘trial-by-media’ in defense strategy

As insurers mount their legal defenses in the courtroom, they have simultaneously launched a full-throated campaign in the media, arguing that any effort to make them pay COVID-19 claims would violate the U.S. Constitution and crater the entire industry.

These “woe is us” arguments suffer from a common fatal flaw: they are demonstrably false.

Insurers are attempting to engage in a sleight of hand that would make Houdini proud. They are conflating legislative efforts to require them to cover every COVID-19 claim with policyholder lawsuits that seek a judicial declaration that their COVID-19 claims are covered under the specific wording of a particular insurance policy.

This type of declaratory relief falls squarely within the constitutional mandate of the judiciary and, as such, none of the existing COVID-19 insurance lawsuits raise a single constitutional issue or concern.

Insurers deploy fear tactics in defense arguments

The insurance industry’s trial-by-media does not stop at non-existent Constitutional concerns. Carriers are also attempting to scare the public and possibly influence judges into believing that the entire insurance industry will go bankrupt if they are required to pay COVID-19 losses, which they estimate to be $800 billion. But the numbers simply don’t add up.

Last year, the insurance industry generated $5 trillion in revenue. Of that amount, the P&C sector collected $1.6 trillion — double the amount insurers claim they would lose if they paid every single COVID-19 claim.

Further, insurers themselves don’t even estimate their risk of loss nearly that high. According to published reports from the SEC, as of Aug. 26, insurance and reinsurance companies have only established COVID-19 claim reserves of $21.9 billion.

The centuries-long role of the Courts in insurance disputes

For hundreds of years, courts have been called upon to interpret the archaic and arcane language of insurance policies, and state courts have developed rules to aid in that interpretation.

For example, courts construe grants of insurance coverage broadly to afford policyholders the greatest possible protection while narrowly construing policy limitations against insurance companies. Policy exclusions are only enforced if they are stated in plain, clear and unmistakable language that is subject to only one interpretation.

Before COVID-19, a number of courts had concluded that property insurance policies covered losses that did not result in structural damage — such as the loss of use of property because of contamination by ammonia, e. coli, smoke, methamphetamine, poisonous spiders, noxious odors, and many other causes. In keeping with that line of authority, U.S. District Court Judge Stephen Bough of the Western District of Missouri recently denied an insurer’s motion to dismiss a COVID-19 complaint holding: “even absent a physical alteration, a physical loss may occur when property is uninhabitable or unusable for its intended purpose.”

Recognizing that courts have handled insurance coverage disputes for centuries without destroying the insurance industry, it’s hard to see how the COVID pandemic — as unprecedented as it is — will somehow be the ruin of insurers. And the insurance industry was uniquely suited to anticipate the types of losses American businesses are now facing.

COVID-19 is far-reaching, but it is far from the first pandemic. For insurers to now argue that, without exception, they have no responsibility for COVID-19 related losses is simply wrong. Insurers should drop the PR campaign and instead start paying out covered claims. Next, they should work closely with Congress to figure out the best way to create a robust pandemic insurance market for the next pandemic.

That is an investment everybody should be behind.

Richard Giller, Robert Wallan and Brian Finch are partners at Pillsbury Winthrop Shaw Pittman LLP, who focus on insurance coverage claims and catastrophic risk management. Opinions here are the authors’ own.