Small Businesses Sue Insurers for Denying Lost-Income Claims

Co-op and condo boards that have lost vital income due to shuttered businesses in their commercial spaces during the coronavirus pandemic have awakened to a cold reality. Many insurance carriers have said that lost-income insurance claims will not be paid if there is a clause in the policy excluding viruses and bacteria from coverage, or if there is an absence of physical damage to the property, such as a fire or flood. 

Co-ops and condos, it turns out, are not the only insurance customers who are outraged by the insurance industry’s stance. The Washington Post reports that more than 10 restaurants, bars and bakeries in Washington have sued their shared insurance company, joining a growing list of small business that are seeking relief from an industry they thought would protect them from any unpredictable event, including a pandemic of historic proportions.

The owners are pressing carriers to honor business-interruption policies during an outbreak that has wreaked so much financial havoc that it could bankrupt insurance companies and put at risk claims not related to COVID-19. The insurance industry has an $800 billion surplus that, despite its size, could vanish in a matter of months, insurers say, if they start paying out these claims.

Federal and state lawmakers are also getting involved. Legislators in several states, including New York, have introduced bills that would require carriers to pay business-interruption claims for small companies that have experienced COVID-19 related losses or have been ordered closed. Notably, the bills could demand such payouts even if policies excluded viruses or required physical damage. Similar bills have been introduced in the House of Representatives, including one that would have the federal government cover excessive losses in the insurance sector.

If passed, those bills could push the insurance industry into insolvency, says Sean Kevelighan, chief executive of the Insurance Information Institute. The insurance business works by spreading risk around so the industry isn’t hit all at once with claims, says Kevelighan, and about 40% of all companies have business-interruption insurance. If lawmakers require carriers to pay these claims, it could cost the insurance industry $150 billion a month, which would quickly deplete its $800 billion surplus, he says.

But carriers have what’s called “reinsurance” to protect them from such severe events. Reinsurance companies could cover between 40 and 60% of the insurance industry’s COVID-19-related losses, says Frank Nutter, president of the Reinsurance Association of America. But if the business-interruption lawsuits are successful or the government steps in and carriers are on the hook, insurance companies would be responsible for the remaining share of the payouts, which could still be tens of billions of dollars every month.

Virus exclusions were widely adopted by insurance carriers after they were hit by massive claims from the SARS outbreak in 2003.