COVID-19 has majorly disrupted the global economy, and while many business sectors are subjected to temporary shutdowns or bare minimum operations, the insurance industry is racing forward while confronting unprecedented amounts of risk and uncertainty. Under most state-issued business shutdown orders, insurance companies and agencies have generally made the cut as “essential businesses” that are allowed to continue operating, but the onslaught of COVID-19-related insurance claims, state insurance departmental requests and potential legislation compelling coverage of certain business interruption losses may make the “essential business” designation ultimately seem like a consolation prize.
Yet, the surplus lines insurance industry may not bear the full brunt of COVID-19’s impact on the insurance industry. To what extent surplus lines insurers are compelled to respond to COVID-19 claims from their insureds or are otherwise subject to state orders and legislation must be carefully reviewed on a case-by-case basis. On the one hand, the surplus lines insurance industry has historically been exempt from the traditional insurance rate and policy form filing requirements applicable to licensed insurance companies; on the other hand, nearly all states apply some of their laws to eligible surplus lines insurers and, accordingly, a number of states have already made clear that surplus lines insurers will be treated the same as their licensed company counterparts with respect to COVID-19 directives.
This article explores how surplus lines insurers may need to respond to past, present and future developments arising from COVID-19 insurance policyholder claims, current state insurance department bulletins and orders, and potential future legislation.
The Past: Will Surplus Lines Insurers be required to respond to COVID-19 losses?
With U.S. businesses suffering multi-billion dollar losses deriving from the inability to operate, many business owners are looking to their business interruption insurance policies to seek indemnification from their insurance carriers. Many business interruption insurance policies are triggered only upon the occurrence of a physical loss (or forced closures due to physical damage) and, moreover, many such insurance policies contain exclusions for losses related to pandemics or communicable diseases, although some do not.
A number of bills are percolating in state legislatures seeking to compel insurance companies that have written business interruption insurance policies to provide insurance coverage for COVID-19 related losses, irrespective of the absence of a physical loss (under existing case law) and the existence of a communicable disease exclusion from coverage.
For example, under New York Assembly Bill A10226A, “[a]ny clause or provision of a policy of insurance insuring against loss or damage to property, which includes, but is not limited to, the loss of use and occupancy and business interruption, which allows the insurer to deny coverage based on a virus, bacterium, or other microorganism that causes disease, illness, or physical distress or that is capable of causing disease illness, or physical distress shall be null and void . . . .” New York’s bill applies to “any policy of insurance” which would reasonably appear to capture surplus lines insurance policies as well, although subsequent regulations could modify the legislation’s applicability.
Yet, it remains to be seen if surplus lines insurers are truly meant to be captured under these retroactive laws. Take Ohio Bill H.B. 589, which allows insurers to “apply to the Superintendent of Insurance for relief and reimbursement” from the Superintendent of the Ohio Department of Insurance for COVID-19 coverage that they will be compelled to be retroactive cover if the bill becomes law. However, surplus lines insurers are usually prohibited from taking advantage of state-level backstops.
For example, nearly all states require that surplus lines insurers (or the applicable surplus lines brokers) inform insureds that they are not protected by state guaranty funds, which provide protection to insureds for insolvent insurers and, in some states, that the surplus lines insurer is not subject to the laws and regulations of the state. It remains to be seen if the various states attempting to impose retroactive coverage of COVID-19 claims will apply these standards to surplus lines insurers and agree to reimburse them for portions of such claims when such insurers and their policyholders typically do not enjoy state-level guaranty fund protection.
In addition, a “Business Interruption Insurance Coverage Act of 2020” draft bill has been circulated through the U.S. Congress that would compel insurance companies that offer business interruption insurance to offer coverage for a viral pandemic and “[a]ny exclusion in a contract for business interruption insurance that is in force on the date of the enactment of [the] Act shall be void to the extent it excludes” viral pandemics. This bill would potentially force retroactive coverage for COVID-19 across the United States, and the bill notes that the term “insurer” has the meaning ascribed to it in the Terrorism Risk Insurance Act of 2002, or TRIA, which includes surplus lines insurers.
The Present: Data Calls, Moratoriums and Reporting Requirements
The majority of states have issued various emergency insurance regulations, bulletins and orders related to COVID-19, and some of them are expressly applicable to the surplus lines market.
A number of U.S. jurisdictions are actively seeking COVID-19-related data from surplus lines insurers.
For example, in Missouri, under Insurance Bulletin 20-05 (March 21, 2020), insurers are “strongly encouraged not to cancel, nonrenew, or terminate coverage . . . [and] the Department is requiring that insurers provide information about the steps they are taking in response to this Bulletin . . . .” The Missouri bulletin is expressly applicable to surplus lines insurers.
In California, under Business Interruption Survey (March 26, 2020) all admitted and non-admitted insurance companies have been requested to provide certain information on their business interruption and related coverages provided under their commercial insurance policies.
In addition, many states have been issuing moratoriums on cancelling or non-renewing insurance policies and, in some cases, such orders expressly apply to the surplus lines market.
As an example, Arkansas Insurance Department issued Bulletin No. 6-2020 (March 20, 2020) requires that “all admitted and surplus lines insurance carriers” adhere to a 60-day moratorium on the cancellation or nonrenewal of insurance policies issued in the state, as well as affirmatively report to the department the appropriate email address of the company’s designated “field consumer contact.”
In Washington, the Washington Office of Insurance Commissioner issued Emergency Order No. 20-03 (March 25, 2020), requiring that all “insurers, insurance producers, surplus lines brokers and other entities regulated by the Insurance Commissioner” provide grace periods for nonpayment of premium and waive otherwise applicable charges and fees associated with nonpayment of premium, such as late fees and reinstatement fees.
Some states and associations, by contrast, are providing additional flexibility to the surplus lines market.
In New York, on March 30, 2020, Governor Andrew Cuomo issued Executive Order No. 202.13 that, among other things, imposed a moratorium on an insurer cancelling, non-renewing, or conditionally renewing any insurance policy issued to an individual or small business. In the case of a group insurance policy, this includes insuring certificate holders that are individuals or small businesses for a period of 60 days for any such policyholder that faces a financial hardship as a result of the COVID-19 pandemic. While New York’s executive order defines an insurer to include an excess (surplus) lines insurance company, Excess Line Association of New York Bulletin No. 2020-17 (as revised on April 6, 2020) indicates that it is the position of the New York Department of Financial Services that New York’s moratorium does not apply to commercial lines insurance policies issued by surplus lines insurers.
In addition, the National Association of Insurance Commissioners’ International Insurers Department has extended its financial filing and payment deadline to July 31, 2020, for an alien (non-U.S.) surplus lines insurer to complete its 2019 year-end filings in order to maintain inclusion on the Quarterly Listing of Alien Insurers, a requirement under the Nonadmitted and Reinsurance Reform Act of 2010 for alien surplus lines insurance companies to write surplus lines business in the United States.
The Future: Pandemic Risk Insurance Act and Potential Mandatory Coverage
While legislative efforts to compel retroactive insurance coverage for COVID-19 losses will surely be challenged in the U.S. courts, it seems nearly inevitable that the federal government will seriously consider a framework for the provision of future pandemic insurance protections akin to that of TRIA. However, a federal solution such as this could take many months given the current state of the COVID-19 pandemic and political environment.
Current discussions are occurring within the U.S. Congress regarding a draft bill that would establish the “Pandemic Risk Insurance Act of 2020” or PRIA. Just like TRIA, the PRIA program would be administered by the U.S. Department of Treasury and would require participating insurance companies that offer business interruption insurance to make available insurance coverage for a “public health emergency,” which includes “any outbreak of infectious disease or pandemic” on terms that do not differ materially from the terms applicable to losses arising from other events. Like TRIA, PRIA would also subject participating insurers to individual and industry deductibles, and then such insurers would share with the U.S. federal government in losses up to certain thresholds.
Critically for surplus lines insurers, the draft PRIA bill defines the term “insurer” to include any entity that is licensed to provide primary or excess insurance in any state, as well as “an eligible surplus lines carrier listed on the Quarterly Listing of Alien Insurers . . . .” Therefore, the draft PRIA bill expressly contemplates that it will apply to all varieties of surplus lines insurers, including insurance companies eligible to write surplus lines coverage by virtue of being licensed in at least one state as well as alien insurance companies that have secured surplus lines eligibility through listing on the Quarterly Listing of Alien Insurers. However, unlike TRIA, the current draft PRIA bill is voluntary in nature and would allow insurers to participate and take advantage of the federal backstop upon the payment of premium for reinsurance coverage. It remains to be seen whether a final version of PRIA will remain voluntary in nature and/or otherwise require retroactive coverage for COVID-19 related claims as well.
While surplus lines insurers may find themselves required to offer pandemic risk insurance coverage on their business interruption insurance policies, such companies may also find themselves in the best position to rapidly respond to COVID-19 insurance needs. Surplus lines insurers historically enjoy greater flexibility than their licensed insurance counterparts that must file rates and forms for approval and, as such, surplus lines companies can often expedite new (and badly needed) insurance products to market. Moreover, the surplus lines marketplace is often the first line of defense for addressing emerging insurance needs, with the ability to craft uniquely-tailored products for specific requirements of insurance customers. While the insurance industry – and the global economy – attempts to regain stability and predictability, we expect the surplus lines market to be a large part of our continued economic recovery in the wake of the COVID-19 pandemic.
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