COVID-19 has and will pose a number of challenges for the insurance industry. It will have an effect on claims handlers, brokers, insureds and insurers. No one will be spared.
Already we are seeing significant disruption to the industry in the U.S., with calls both at a federal and a state level to bring in legislation that would force insurers to pay business interruption claims that result from COVID-19 or the government shut downs that have been issued in response to the pandemic. Predictably, the industry in the U.S. has responded by alleging that such legislation would bankrupt insurers. Commentators and critics have already responded by reminding people that the industry said the same thing during every crisis from 9/11, to Hurricane Katrina and beyond. In any event, the industry is hard at work in Washington, lobbying for a different response to the issue.
In Canada, perhaps driven by the more coordinated government response and by the federal and provincial governments rolling out assistance plans for many businesses, the industry has taken a different approach. The IBAO has asked that brokers and insureds "not flood insurance companies with claims at this time"1.
In a stark contrast to claimants in the U.S., many Canadian insureds are simply looking for confirmation that they do NOT have coverage for the losses they are currently sustaining, so that they can access government subsidy or assistance programs.
Some industry organizations are suggesting that this confirmation can come from brokers, rather than from insurers, and that only those claims for which there is (or may be?) coverage should be sent to insurers. However, in our opinion, it is not the role of an insurance broker to opine on coverage, and it never has been. The broker has no authority to speak for the insurer, and in fact, as the agent of the insured, is necessarily supposed to be an advocate for the insured.
Brokers may find themselves on the wrong end of a huge number of coverage lawsuits arising out of the losses sustained by businesses as a result of the pandemic, without telling their clients that the policies which the brokers placed on their client's behalf will not respond to those losses, so in our opinion any suggestion that brokers filter claims or give insureds coverage advice puts brokers in an impossible position.
Business interruption insurance has garnered most of the headlines, as it is the type of insurance that most companies will turn to first in this kind of situation. However, the issue for many insureds is that business interruption insurance is, for most insureds, a "follow on" coverage that is attached to a property policy, which responds to a reduction in business income or profit (depending on the wording) which occurs as a result of the "physical loss, of or damage to" property.
Most business interruption coverage does not respond unless there has been some sort of predicated property loss that first triggers coverage under the applicable property policy. While the contamination of a workplace (by COVID-19 or otherwise) may be considered a "loss of use" of property and therefore may be covered under certain policy wordings, most of the businesses that have ceased operating have not been shut because of contamination, but because of government orders closing all "non-essential" businesses.
Some companies will have "contingent business interruption" policies which will respond to business interruptions or issues caused by "supply chain" or vendor issues, and some larger organizations (and much of the arts community) will have "event based" business interruption policies, many smaller businesses (comprising the vast majority of Canadian businesses) do not have such coverage. Some businesses will even have coverage for government or regulatory orders to cease operations, but these will be few and far between.
Travel insurance companies are likely already flooded with claims, and in fact a number of the leading operators stopped offering cancellation coverage related to COVID-19 issues well before governments at various levels issued travel advisories or mandated that international travel effectively come to a standstill. The current travel industry policies of offering travellers who booked travel that did not happen as a result of COVID-19 issues travel credits, which are redeemable within a specified time limit, as opposed to refunds, may lead to E&O claims against travel agents.
Most of those claims will be doomed to failure, at least in Ontario, as agents in Ontario are required to offer travel insurance (including trip cancellation insurance) to travellers, and to document the transaction if the insurance is declined by the customer, as it often is.
Despite this, there has already been a class action commenced in Federal Court (against Air Canada (including Air Canada Rouge), WestJet, Sunwing, Air Transat, and Swoop) as a result of the offer or "travel credits" as opposed to refunds.2
The next set of claims to come out of this pandemic will be the cyber claims.
We have already seen and heard that attackers and opportunists will always try to take advantage of a crisis, and that certainly applies to cyber-criminals and ransomware actors. At our own law firm we have seen a significant increase in spam email and phishing attempts.
While the cyber claims that arise will not have the coverage issues that the business interruption claims do, they will pose a different challenge, and that will be related to the industry's capacity to respond to them in a timely manner. In addition, business interruption claims that arise out of cyber incidents are often covered by a cyber policy, and the magnitude of such claims has been increasing as cyber claims become more complex and cyber criminals become more sophisticated. Determining how much of any claim relates to the cyber incident and how much relates to the ongoing pandemic will be an incredibly fraught and thorny problem, and will be sure to result in significant coverage litigation.
Even prior to the pandemic, there was talk that the insurance industry in Canada might be headed into the first truly "hard" market (where premium volumes increase and coverage narrows) since 9/11. The claims that arise out of this pandemic, and the economic contraction that follows, may harden the insurance market even further, and may increase the duration of any resulting hard market. That is certainly something that will bear watching.
1. Canadian Underwriter, "How IBAO wants brokers to treat pandemic business interruption losses" Greg Mackbach, 27 March 2020
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