PANDEMIC BUSINESS INTERRUPTION INSURANCE

JULY 2021

PANDEMIC

BUSINESS INTERRUPTION

INSURANCE

or translated provided the source is stated.

The Committee on Capital Markets Regulation (the “Committee”) is an independent 501(c)(3) research

organization, financed by contributions from individuals, foundations, and corporations. The Committee’s

membership includes thirty-nine leaders drawn from the finance, business, law, accounting, and academic

communities. The Committee Co-Chairs are R. Glenn Hubbard, Dean Emeritus of Columbia Business

School, and John L. Thornton, Former Chairman of the Brookings Institution. The Committee’s President is

Hal S. Scott, Emeritus Nomura Professor of International Financial Systems at Harvard Law School and

President of the Program on International Financial Systems. Founded in 2006, the Committee undertook its

first major report

at the request of the incoming U.S. Secretary of the Treasury, Henry M. Paulson. Over ten

years later, the Committee’s research continues to provide policymakers with an empirical and non-partisan

foundation for public policy. This report was prepared by the Committee’s staff.

Pandemic

Business Interruption

Insurance

Table of Contents

Executive Summary ...................................................................................................................... 1

Part I: Background: Coverage of BII under Existing Policies ................................................. 3

A. Policy Coverage and Litigation ....................................................................................... 3

B. Retroactive COVID-19 Coverage Mandates and Compensation Funds ......................... 6

Part II: Addressing Future Pandemic Risk ................................................................................ 8

A. Legislative Proposal: Pandemic Risk Insurance Act ....................................................... 9

PRIA compared to TRIA ...................................................................................................... 10

Total Insurer Exposure .......................................................................................................... 11

Potential Issues with PRIA ................................................................................................... 11

B. Industry Proposal: Business Continuity Protection Program ....................................... 13

C. Chubb Proposal: Pandemic Business Interruption Program ........................................ 15

Small Businesses: Business Expense Insurance Program .................................................... 15

Large Businesses: Pandemic Re ........................................................................................... 16

Total Exposure ...................................................................................................................... 16

D. Comparison of Pandemic Insurance Proposals ............................................................. 16

E. Insurance Proposals Compared to COVID-19 Legislation ........................................... 19

Conclusion ................................................................................................................................... 20

Executive Summary

This report by the Committee on Capital Markets Regulation (the “Committee”) assesses

the role of business interruption insurance (“BII”) during the COVID-19 pandemic and evaluates

proposals to reform BII so that U.S. businesses can insure against losses from future pandemics.

BII is a type of property insurance that offers businesses protection against revenue loss

and certain expenses resulting from events that cause direct physical loss or damage to insured

property that prevents them from using that property.

The Insurance Information Institute

estimates that 30-40% of small businesses carry BII,

which translates to approximately ten million

small businesses in the U.S.

The COVID-19 pandemic and resulting business losses from closures and other disruptions

have brought attention to whether and how BII should cover pandemic-related losses. These

discussions have prompted government and the private-sector to explore forward-looking BII

reforms to address business interruption risks arising from future pandemics. However, the

correlation and magnitude of the risk of a future pandemic make BII for such events difficult to

design.

In Part I of this report, we review the experience of BII during the COVID-19 pandemic.

First, we examine the structure of BII policies and litigation between insurers and policyholders

over whether existing BII policies cover losses arising from the pandemic and associated

government-mandated shutdowns. We find that, because BII policies typically require physical

damage or contain pandemic-related exclusions, insurers have mostly prevailed in arguing that

current BII policies do not cover COVID-related losses. Next, we survey efforts at the state and

federal level to require insurers to cover COVID-related losses retroactively. Due to the

constitutional and economic obstacles to this approach, these proposals have not been

implemented.

In Part II, we evaluate the three main proposals for the federal government to ensure that

businesses have access to pandemic BII. The first proposal, the Pandemic Risk Insurance Act

(“PRIA”), was introduced in Congress by Representative Carolyn Maloney (D-NY). Modeled

after the Terrorism Risk Insurance Act (“TRIA”), PRIA would rely on participating insurers to

offer pandemic coverage, and the government would cover a portion of insured losses over certain

thresholds up to $750 billion. Unlike TRIA, participation in PRIA by insurers is optional. Given

the enormity and unpredictability of pandemic-related losses, there are serious risks that too few

insurers would participate in PRIA for it to be effective. The second proposal, the Business

Continuity Protection Program (“BCPP”), was proposed by the insurance industry. Under the

BCPP, which is modeled after the federal flood insurance program, the federal government would

offer pandemic coverage directly to businesses and seek reinsurance from the capital markets.

Lastly, the Chubb insurance company has put forward a third option, the Pandemic Business

Interruption Program (“PBIP”), which is similar to PRIA but with modifications that place more

CTR. FOR INS. POL’Y & RSCH, NAT’L ASS’N INS. COMM’RS. [hereinafter “NAIC”], Business Interruption/Business

Owner’s Policies (BOP), (Dec. 29, 2020),

https://content.naic.org/cipr_topics/topic_business_interruptionbusinessowners_policies_bop.htm

Suzanne Barlyn, U.S. insurers want taxpayers to back pandemic coverage for business, REUTERS, Apr. 29, 2020,

https://www.reuters.com/article/health-coronavirus-insurance-pandemics/u-s-insurers-want-taxpayers-to-back-

pandemic-coverage-for-businesses-idUSL2N2CF270.

American Property and Casualty Insurance Association [hereinafter “APCIA”], Commercial Insurance and

Business Interruption Coverage in COVID-19 (2020), https://www.apci.org/covid-19-resources/

limits on insurers’ aggregate exposure. The issue with the PBIP is whether the combination of

insurer and government contributions cover a meaningful portion of possible pandemic losses.

In Part II we compare the terms of each proposal, measure the government and insurers’

maximum possible exposure under each proposal and assess concerns regarding each program’s

design. We then compare these proposals with the government support programs that addressed

the economic impact of COVID-19 on small businesses, including the Small Business

Administration’s Paycheck Protection Program (the “PPP”) and the Federal Reserve’s Main

Street Lending Program (the “MSLP”).

In the conclusion, we consider the key difficulties in designing a pandemic BII program.

We conclude that the best course for policymakers may be to: (i) establish a modest BCPP program

to be quickly triggered at the onset of a pandemic; and (ii) supply any further government support

as necessary through enhanced versions of the PPP and MSLP.

Part I: Background: Coverage of BII under Existing Policies

In response to policyholders’ claims for coverage of losses arising from the COVID-19

pandemic, insurers contend that existing BII policies do not cover pandemic risk.

Their arguments

rest both on textual analysis of BII contract language and on a policy-based argument that

“pandemics cannot be insured because they are uninsurable,” due to the difficulty of pricing such

risk and the scale of potential losses.

This position has led to considerable litigation, which is still

playing out in courts.

A. Policy Coverage and Litigation

BII policies typically cover losses from the suspension or reduction of operations caused

by direct physical loss or physical damage to covered property that results from a covered peril.

So far, insurers have mostly prevailed in litigation over whether shutdowns resulting from the

COVID-19 pandemic constitute physical loss or damage and whether they fall under the covered

perils of most BII policies.

Insurance companies have argued that a pandemic does not constitute physical loss or

damage to commercial property, unlike from a fire or other physical event.

However, plaintiffs

have countered, and most courts have agreed, that the common meaning of “physical loss” includes

the “inability to utilize or possess something in the real, material, or bodily world” and the loss of

“the full range of rights and advantages of using or accessing…property,” and thus includes losses

from the COVID-19 pandemic.

See, e.g., id. (“Generally, business interruption losses must result from a risk (like a fire) that is covered in the

purchased business insurance policy that causes actual damage to the building or its contents. This type of damage

does not exist in the context of the COVID-19 pandemic.”).

Id. See also Insurance Information Institute [hereinafter III], Fact Sheet: Understanding Business Interruption

Insurance and Pandemics, https://www.iii.org/sites/default/files/docs/pdf/business_interruption_101_041320_2.pdf

;

Russ Banham, This Insurance Would Have Helped in Coronavirus Crisis But Nobody Bought It, INS. J., Apr. 3,

2020,

https://www.insurancejournal.com/news/national/2020/04/03/563224.htm.

COVID COVERAGE LITIGATION TRACKER, https://cclt.law.upenn.edu/ (last visited Mar. 17, 2021).

Danielle B. Gatto & Joseph V. Cuomo, Analyzing Business Interruption Insurance Clauses – A Primer for New

York Business Owners, F

ORCHELLI LAW, https://www.forchellilaw.com/announcements/analyzing-business-

interruption-insurance-clauses-a-primer-for-new-york-business-owners/ (last visited Mar. 17, 2021). See also Jill

M. Bisco, Stephen G. Fier & David M. Pooser, Business Interruption Insurance and COVID-19: Coverage and

Issues and Policy Implications, 39 J.

INS. REG. 1, 8 (2020), https://content.naic.org/sites/default/files/inline-files/JIR-

ZA-39-05-EL.pdf; ISO Business Income (and Extra Expense) (BIEE) Coverage Form (CP 00 30 10 12),

http://pacificcoastes.com/assets/BusinessIncomeEE1.pdf.

Jef Feeley & Katherine Chiglinsky, Insurers Winning Most, But Not All, COVID-19 Business Interruption

Lawsuits, I

NS. J., Nov. 30, 2020, https://www.insurancejournal.com/news/national/2020/11/30/592047.htm; Tyrone

R. Childress, Edward M. Joyce & Jason B. Lissy, Jones Day, Policyholders Notch Victory in Fight for COVID-19-

Related Business Interruption Insurance Coverage (Oct. 2020),

https://www.jonesday.com/en/insights/2020/10/policyholders-notch-victory-in-fight-for-covid19related-business-

interruption-insurance-coverage; Jim Sams, Plaintiffs Win One, Lose One in COVID-19 BI Legal Fight, INS. J., Oct.

5, 2020, https://www.insurancejournal.com/magazines/mag-features/2020/10/05/585133.htm.

APCIA, Commercial Insurance and Business Interruption Coverage in COVID-19 (2020),

https://www.apci.org/covid-19-resources/

N. State Deli, LLC v. Cincinnati Ins. Co., 2020 WL 6281507 at *3 (Super. Ct. N.C., 2020). See also Studio 417,

Inc. v. Cincinnati Ins. Co., 478 F. Supp. 3d 794, 798–803 (W.D. Mo. 2020) (holding plaintiffs’ adequately alleged

“physical loss” of property from COVID-19 and closure orders). But see T&E Chi. v. Cincinnati Ins. Co., 2020 WL

6801845 at *5 (N.D. Ill. 2020) (holding COVID-19 closure was not a physical “loss to” business property).

BII policies either follow an “all risks” format, covering all causes of direct physical loss

except those that are specifically excluded,

or they limit their coverage to the causes of damages

enumerated in the policy.

Enumerated risk policies may include a “communicable disease event”

risk, but such coverage is rare.

On the other hand, many “all risks” policies contain exclusions

for losses caused by viruses or bacteria.

These exclusions are typically contained in a clause

excluding damage caused by “bacteria,” alongside “fungus, wet or dry rot, or other pollutants”

(“fungus or pollutant” exclusion) or a clause excluding damage caused by “virus, bacterium or

other microorganism that induces or is capable of inducing physical distress, illness or disease”

(“virus or bacteria” exclusion).

So far, certain judges have been skeptical of the argument that

the “fungus or pollutant” exclusion applies to pandemic-related events,

whereas insurers have

fared better in cases where the policy contained a “virus or bacteria” exclusion.

Some “all risks” policies also have language that excludes risks related to “virus or

bacteria” from coverage for losses arising when civil authorities prohibit access to business

premises as a result of physical damage.

Civil authority action is defined as an event where a

covered cause of losses causes damage to property other than the insured business premises and a

civil authority takes an action to prohibit access to the business premises because of the damage

to the other property.

Coverage typically applies only if (1) the civil authority prohibits access

to the area immediately surrounding the damaged property because of the damage, and the covered

business premises are within one mile of the damaged property and within the area to which the

civil authority has prohibited access; and (2) the civil authority has prohibited access because of

dangerous physical conditions resulting from the damage or continuation of the covered loss that

caused/is causing the relevant damage.

These policies are also typically time-limited, with

coverage beginning only after a 72-hour waiting period and ending three or four consecutive weeks

T&E Chi., 2020 WL 6801845 at *1; Studio 417, 378 F. Supp. 3d at 797; Jill M. Bisco, Stephen G. Fier & David

M. Pooser, Business Interruption Insurance and COVID-19: Coverage and Issues and Policy Implications, 39 J.

INS. REG. 1, 8 (2020); Jane Massey Draper, 30 A.L.R.5th 170, §2(b) (Originally published in 1995).

Jill M. Bisco, Stephen G. Fier & David M. Pooser, Business Interruption Insurance and COVID-19: Coverage

and Issues and Policy Implications, 39 J.

INS. REG. 1, 8–9 (2020). See also Danielle B. Gatto & Joseph V. Cuomo,

Analyzing Business Interruption Insurance Clauses – A Primer for New York Business Owners, F

ORCHELLI LAW,

https://www.forchellilaw.com/announcements/analyzing-business-interruption-insurance-clauses-a-primer-for-new-

york-business-owners/ (last visited Mar. 17, 2021).

See COVID COVERAGE LITIGATION TRACKER, https://cclt.law.upenn.edu/ (last visited Mar. 17, 2021).

See id.

Jill M. Bisco, Stephen G. Fier & David M. Pooser, Business Interruption Insurance and COVID-19: Coverage

and Issues and Policy Implications, 39 J.

INS. REG. 1, 9–10 (2020), https://content.naic.org/sites/default/files/inline-

files/JIR-ZA-39-05-EL.pdf.

See, e.g., Urogynecology Specialist of Florida LLC v. Sentinel Insurance Company, Ltd., 2020 WL 5939172 at *4

(M.D. Fla. 2020) (“Denying coverage for losses stemming from COVID-19, however, does not logically align with

the grouping of the virus exclusion with other pollutants…”). But see Nahmad v. Hartford Cas. Ins. Co., 2020 WL

6392841 at *4 (S.D. Fla. 2020) (holding plaintiffs’ claims excluded by similar “fungus or pollutant” language).

See, e.g., Kahn v. Pa. Nat’l Mut. Cas. Ins. Co., 2021 WL 422607 at *3 (M.D. Pa. 2021) (policy stated “We will

not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or

is capable of inducing physical distress, illness or disease.”).

Jill M. Bisco, Stephen G. Fier & David M. Pooser, Business Interruption Insurance and COVID-19: Coverage

and Issues and Policy Implications, 39 J.

INS. REG. 1, 10 (2020), https://content.naic.org/sites/default/files/inline-

files/JIR-ZA-39-05-EL.pdf.

ISO Business Income (and Extra Expense) (BIEE) Coverage Form (CP 00 30 10 12),

http://pacificcoastes.com/assets/BusinessIncomeEE1.pdf

Id. Furthermore, civil authority coverage typically has a duration limited to 4 consecutive weeks.

after coverage began.

Pandemic closure losses are unlikely to qualify for civil authority coverage,

unless a court adopts a broad understanding of damaged property and views all property within a

municipality or state adopting a closure mandate as the “damaged property” for purposes of the

policy coverage.

The National Association of Insurance Commissioners (“NAIC”) reports that as of

November 2020, 210,454 property and casualty insurance claims had been filed in relation to the

COVID-19 pandemic, at a value of over $1.3 billion.

As of that date, 84% of claims had been

closed without payment, 13% remained open, and 2% had been closed with payment.

Total paid

claims were for $420 million – a very small sum compared to total pandemic-related losses.

According to the Covid Coverage Litigation Tracker, run by University of Pennsylvania Law

School Professor Baker, BII policyholders have filed approximately 1,500 cases in state and

federal court in relation to disputes over BII coverage relating to COVID-19.

So far, results at

the motion to dismiss phase have favored the insurance companies, which have won dismissals in

90% of cases that have been decided in federal court and 51% of cases in state court.

According to the American Property Casualty Insurance Association (“APCIA”), COVID-

19 closure losses for U.S. small businesses were between $255 billion and $431 billion per

month.

This estimate translates to annual losses of $3.06-5.17 trillion for small businesses alone.

Using the Insurance Information Institute’s estimate that 30-40% of small businesses carry BII,

these losses could translate to insurance exposures of $76.5-172.4 billion per month.

These

losses are extremely large, especially when considering that U.S. home, auto, and business insurers

together have only $800 billion in policyholder surplus to cover all future losses,

and that

commercial property insurance policies collect only $6 billion per month in premiums.

However, the total number of claims and cases filed, as well as the dollar value of total property

See, e.g., Larry P. Schiffer, Aaron C. Garavaglia, Kelly Mihocik, COVID-19 and Waiting Periods Under Business

Interruption Coverage, T

HE NATIONAL LAW REVIEW (March 23, 2020),

https://www.natlawreview.com/article/covid-19-and-waiting-periods-under-business-interruption-coverage

NAIC, Covid-19 Property & Casualty Insurance Business Interruption Data Call, Part 2: Claim and Loss

Information (Nov. 2020),

https://content.naic.org/sites/default/files/inline-files/COVID-

19%20BI%20Nat%27l%20Claims%20Aggregates_Nov.pdf.

Id.

This estimate appears to have made at the beginning of the pandemic, when losses were likely substantially higher

than at other times during the year, as closure mandates eased and businesses adapted to operating in the new

conditions. It would be useful to see how losses evolved over the past year of the pandemic to get a fuller

understanding of the BII risks that actually arise from a pandemic. See APCIA, Commercial Insurance and Business

Interruption Coverage in COVID-19 (2020), https://www.apci.org/covid-19-resources/

Suzanne Barlyn, U.S. insurers want taxpayers to back pandemic coverage for business, REUTERS, Apr. 29, 2020,

https://www.reuters.com/article/health-coronavirus-insurance-pandemics/u-s-insurers-want-taxpayers-to-back-

pandemic-coverage-for-businesses-idUSL2N2CF270.

This estimate assumes that losses would be evenly distributed between insured and non-insured businesses, i.e.,

the lower bound estimate was calculated by taking 30% of $255 billion.

APCIA, Commercial Insurance and Business Interruption Coverage in COVID-19 (2020),

https://www.apci.org/covid-19-resources/

Contessa Brewer, Insurers lobby for federal pandemic insurance program, CNBC, July 21, 2020,

https://www.cnbc.com/2020/07/21/insurers-lobby-for-federal-pandemic-insurance-program.html

and casualty claims made in relation to the COVID-19 pandemic – $1.3 billion

– is low. The

small dollar value of claims filed suggests that few policyholders are sufficiently confident that

their policies cover pandemic losses to file claims.

B. Retroactive COVID-19 Coverage Mandates and Compensation Funds

In 2020, legislators in eleven states and Puerto Rico introduced bills to require insurers to

cover some or all COVID-19 losses.

Some of the bills took the approach of construing typical

policy language to include pandemic risks,

while others laid down a more direct mandate.

Both

approaches would trigger constitutional scrutiny if passed. The U.S. Supreme Court has held that

the Contracts Clause of the U.S. Constitution prohibits states from passing laws that retroactively

and substantially interfere with private contracts absent limited exceptions,

and the National

Council of Insurance Legislators has argued that a legislative mandate for retroactive coverage

would run afoul of this prohibition.

A few bills were also introduced in Congress in 2020 that would have provided some BII

coverage for past COVID-19 losses, either by mandating compensation to policyholders and

subsequently reimbursing insurers, or by invalidating exclusions in existing policies as applied to

losses arising from the pandemic.

Reimbursing insurers for payments would avoid the

constitutional issue that invalidating exclusions would raise, but this would place the cost of

NAIC, Covid-19 Property & Casualty Insurance Business Interruption Data Call, Part 2: Claim and Loss

Information (Nov. 2020),

https://content.naic.org/sites/default/files/inline-files/COVID-

19%20BI%20Nat%27l%20Claims%20Aggregates_Nov.pdf.

See tracking at Business Interruption Insurance 2021 Legislation, NAT’L CONF. STATE LEGISLATURES (Feb. 12,

2021),

https://www.ncsl.org/research/financial-services-and-commerce/business-interruption-insurance-2021-

legislation.aspx (last visited Mar. 18, 2021); Business Interruption Insurance 2020 Legislation, NAT’L CONF. STATE

LEGISLATURES (Dec. 11, 2020), https://www.ncsl.org/research/financial-services-and-commerce/business-

interruption-insurance-2020-legislation.aspx; Business Interruption Legislation, WHOLESALE & SPECIALTY INS.

ASS’N (Feb. 9, 2021), https://www.wsia.org/wcm/Legislative_Advocacy_Compliance___PAC/COVID-

19/Business_Interruption_Legislation/wcm/Legislative_Advocacy___PAC/Business_Interruption_Legislation.aspx?

hkey=ac65ce8a-5295-409d-ba17-f97d14f954a0 (last visited Mar. 18, 2021). Some bills requiring insurers to provide

coverage were accompanied by other legislation to create a fund to compensate insurers for some or all of their

losses. See, e.g., A.B. 3844, 219th Leg., 2020-21 Reg. Sess. (N.J. 2020).

See, e.g., A.B. 3844, 219th Leg., 2020-21 Reg. Sess. (N.J. 2020); H.B. 858, 2020, H.R., Reg. Sess. (La. 2020);

S.B. 1188, 2019-20 Gen. Assemb. 123d Sess. (S.C. 2020).

See, e.g., H.B. 589, 133d Gen. Assemb., 2019-2020 Reg. Sess. (Ohio 2020); A.B. AO1937, 2021–22 H.R., Reg.

Sess. (N.Y. 2021), S.B. S04711, 2020-21 S., Reg. Sess. (N.Y. 2021).

Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 400 (1983). See also General Motors

Corp. v. Romein, 503 U.S. 181, 191 (1992)l Robert J. Kaler, Holland & Knight, Proposed COVID-19-Related

Business Interruption and Property Loss Insurance Legislation (Apr. 24, 2020),

https://www.hklaw.com/en/insights/publications/2020/04/proposed-covid19-related-business-interruption-and-

property.

Letter from Matt Lehman, Majority Leader, Indiana House of Representatives, NCOIL President & Tom

Considine, Chief Executive Officer, NCOIL to Nydia M. Velazquez, Chair, House Committee on Small Business

(Mar. 25, 2020),

https://us.eversheds-sutherland.com/portalresource/TC-ML-letter-to-Congress-re-COVID-3-25-

2020.pdf.

Business Interruption Relief Act, H.R. 7412, 116th Cong. (2020); Business Interruption Insurance Coverage Act,

H.R. 6494, 116th Cong. (2020). See Mark A. Packman, Proposed Legislation Regarding Business Interruption

Insurance for COVID-19 Claims, N

AT’L L. REV. (July 15, 2020), https://www.natlawreview.com/article/proposed-

legislation-regarding-business-interruption-insurance-covid-19-claims; DIANE P. HORN & BAIRD WEBEL, CONG.

RSCH. SERV., IN11383, BUSINESS INTERRUPTION INSURANCE AND COVID-19: FEDERAL LEGISLATIVE INITIATIVES 2

(May 11, 2020), https://crsreports.congress.gov/product/pdf/IN/IN11383. See also Never Again Small Business

Protection Act of 2020, H.R. 6497, 116th Cong. (2020) (providing prospective coverage only, by requiring insurers

to offer coverage for government-ordered closures).

coverage with the government. As of June 2021, neither Congress nor any state had passed any

such legislation.

There were also several proposals at both the state and federal levels to establish funds to

directly compensate businesses and employees who suffered losses from the pandemic, not

attached to any insurance coverage mandate.

For instance, a consortium of trade associations

proposed a federal compensation program for affected businesses, modeled loosely after the

September 11 Victims Compensation Fund (“VCF”).

The National Council of Insurance

Legislators (“NCOIL”), an organization primarily composed of state legislators serving on

insurance and financial institutions committees also expressed support for this proposal.

The

proposals would have established a federally funded administrator that would be responsible for

helping businesses affected by COVID-19 to retain and rehire employees, maintain employee

benefits, and meet operating expense obligations.

Neither Congress nor any state has passed any

legislation modeled after these compensation proposals.

See, e.g., Letter from American Booksellers Association, American Hotel & Lodging Association (AHLA),

American Land and Title Association (ALTA), American Property Casualty Insurance Association (APCIA), Asian

American Hotel Owners Association (AAHOA), Certified Commercial Investment Member Institute (CCIM

Institute), Coalition of Franchisee Associations (CFA), CRE Finance Council, The Council of Insurance Agents &

Brokers (CIAB), Franchise Business Services (FBS), Independent Insurance Agents & Brokers of America

(IIABA), Institute of Retail Estate Management (IREM), International Council of Shopping Centers (ICSC),

International Foodservice Distributors Association (IFDA), International Franchise Association (IFA), Mortgage

Bankers Association (MBA), NAIOP, the Commercial Real Estate Development Association, National Apartment

Association (NAA), National Association of Convenience Stores (NACS), National Association of Mutual

Insurance Companies (NAMIC), National Association of Professional Insurance Agents (PIA), National

Association of REALTORS®, National Association of Theatre Owners (NATO), National Franchisee Association

(NFA), National Multifamily Housing Council (NMHC), National Retail Federation (NRF), National Waste and

Recycling Association (NWRA), The Payroll Group (TPG), The Petroleum Marketers Association of America

(PMAA), Real Estate Board of New York (REBNY), The Real Estate Roundtable (RER), Retail Industry Leaders

Association (RILA), Reinsurance Association of America (RAA), Society of Independent Gasoline Marketers of

America (SIGMA), U.S. Travel Association & Wholesale & Specialty Insurance Association (WSIA) to President

Donald J. Trump, Secretary of the Treasury Steven T. Mnuchin, U.S. Senate Majority Leader Mitch McConnell,

U.S. Senate Democratic Leader Charles Schumer, U.S. House Speaker Nancy Pelosi & U.S. House Republican

Leader Kevin McCarthy (Mar. 31, 2020),

https://www.namic.org/pdf/20memberadvisory/200331_joint_trades_covid-

19_business_and_employees_fund_letter.pdf [hereinafter Business and Employees Fund Letter]; Rob Bordelon &

Joseph Annotti, Texas Public Policy Foundation, The Workplace Recovery Act: A Public-Private Solution White

Paper (April 2020),

https://files.texaspolicy.com/uploads/2020/04/02184520/Bordelon-Annotti-Workplace-

Recovery-Act.pdf?utm_source=hs_email&utm_medium=email&_hsenc=p2ANqtz--

M4Pj7PdbxrqVhytv0XrSKpUpPuYl1n4uYnlTv5s7KYClnwcx7GST7je9eAc7vZUOA_SY3. See also Pat Hatler,

Brandon Roman & Kelly Mihocik, A Survey of Recent Biz Interruption Insurance Legislation, LAW 360, June 9,

2020,

https://www.law360.com/articles/1278954/a-survey-of-recent-biz-interruption-insurance-legislation.

Business and Employees Fund Letter, https://www.namic.org/pdf/20memberadvisory/200331_joint_trades_covid-

19_business_and_employees_fund_letter.pdf; Pat Hatler, Brandon Roman & Kelly Mihocik, A Survey of Recent Biz

Interruption Insurance Legislation, LAW 360, June 9, 2020, https://www.law360.com/articles/1278954/a-survey-of-

recent-biz-interruption-insurance-legislation; FIN. SERVS. COMM. MAJORITY STAFF, NOVEMBER 19, 2020, HCDI

SUBCOMMITTEE HEARING ENTITLED, “INSURING AGAINST A PANDEMIC: CHALLENGES AND SOLUTIONS FOR

POLICYHOLDERS AND INSURERS” 5 (Nov. 16, 2020), https://financialservices.house.gov/uploadedfiles/hhrg-116-

ba04-20201119-sd002.pdf.

Letter from Matt Lehman, Majority Leader, Indiana House of Representatives, NCOIL President & Tom

Considine, Chief Executive Officer, NCOIL to Nydia M. Velazquez, Chair, House Committee on Small Business

(Mar. 25, 2020),

https://us.eversheds-sutherland.com/portalresource/TC-ML-letter-to-Congress-re-COVID-3-25-

2020.pdf.

Business and Employees Fund Letter, https://www.namic.org/pdf/20memberadvisory/200331_joint_trades_covid-

19_business_and_employees_fund_letter.pdf.

Part II: Addressing Future Pandemic Risk

Pandemics represent a substantial systemic risk that must be addressed on a market- and

economy-wide basis, but the risk of a pandemic does not appear to meet the key characteristics of

an insurable risk. For example, for a risk to be insurable, there must be a large number of separate

and distinct exposure units, the chance of loss must be calculable, the amount of loss must be

measurable in advance, the loss cannot be widespread and catastrophic, and premiums must be

economically feasible.

But pandemic losses are systemic, correlated and subject to millions of

simultaneous claims. Pandemic losses also cannot be accurately modeled with respect to shifts in

macroeconomic consumer demand and likely too expensive to provide affordable coverage given

the size of losses and unknown frequency of future pandemics. In addition, because it is difficult

to distinguish direct pandemic losses (that occur due to closure) from the general decline in revenue

(that would occur anyways due to falling consumer demand), pandemic-related BII could force

insurers to cover general recession-related losses in addition to direct losses from closures.

Without government support and/or effective BII, the economy would suffer substantial

contraction in response to a pandemic, especially if the pandemic results in mandatory closure

orders to prevent spread of the disease. Under the current private contract system for BII,

individual businesses and the wider economy are generally exposed to this risk. In theory, a pre-

established BII program may be preferable to the Paycheck Protection Program (“PPP”) or Main

Street Lending programs (“MSLPs”) established to address COVID-19 costs to small and medium

sized businesses. However, because future pandemics may follow very different paths from

COVID-19 and, given the inability of private insurers to predict and cover enormous potential

losses, it may be exceedingly difficult to design an effective program. This section discusses

options to reform the BII system to address pandemic risk and then compares those options with

the government’s actions in response to the COVID-19 crisis.

Before considering the various proposals to reform the BII system, it is important to

differentiate between voluntary and mandatory pandemic-related BII. If businesses rely on insurers

to voluntarily offer pandemic-related BII, then insurers may limit coverage and/or charge

prohibitive prices, so a significant portion of losses would go uncovered. Meanwhile, if the

government mandates pandemic-related BII by requiring any insurer offering BII to offer coverage

for pandemic-related losses, then insurers may stop offering BII entirely in order to avoid the

unacceptably large losses (and corresponding solvency risk) involved. This could very well result

in BII no longer being available for other historically insured perils such as fire, explosion, and

windstorm. In addition, if the government requires businesses to buy pandemic-related BII in the

marketplace, then coverage would surely come at high premiums. And if losses are too large for

insurers to actually meet their coverage obligations, then businesses would suffer the worst of both

worlds: no real coverage combined with the dead-weight loss of having paid useless premiums.

We now turn to a summary and evaluation of the major federal proposals to provide

businesses with access to pandemic-related BII with government support.

Robert I Mehr and Emerson Cammack, Principles of Insurance, R.D. IRWIN, 34-37 (1976); George E. Rejda and

Michael McNamara, Principles of Risk Management and Insurance, P

EARSON, 13th Ed. (March 2016).

A. Legislative Proposal: Pandemic Risk Insurance Act

The Pandemic Risk Insurance Act (“PRIA”), H.R. 7011, introduced by Representative

Carolyn Maloney (D-NY), is the leading legislative proposal to address future pandemic risks.

Modelled on the Terrorism Risk Insurance Act (“TRIA”),

PRIA would create a government

backstop for insurers to cover pandemic losses.

Importantly, private insurers would voluntarily

elect to participate in the program, but when they did, they would have to make coverage for

pandemic losses available in all BII policies on the same material terms as coverage for events

other than public health emergencies

and businesses could then voluntarily choose to purchase

pandemic coverage.

Thus, the terms of pandemic-related BII would vary by participating insurer.

Under PRIA, participating insurers must cover 100% of: (i) the first losses up to an

aggregate of $250 million per public health emergency;

plus (ii) each participating insurer’s

deductible per calendar year (equal to 5% of the PRIA premiums the insurer collected in the prior

year).

Once aggregate insured losses exceed $250 million plus the applicable insurer’s

deductible, then participating insurers must cover 5% of the next insured losses up to $750 billion,

with the government covering the other 95% of losses up to $750 billion. Once aggregate system-

wide insured losses exceed $750 billion in a given calendar year,

then federal government

coverage would cease for that calendar year, and the Treasury would allocate additional insured

losses pro rata among participating insurers until every insurer has covered up to its full deductible

amount.

Once every insurer has covered up to its full deductible amount for that calendar year,

then neither the federal government nor insurers would cover additional losses in that calendar

year.

See H.R. 7011, Pandemic Risk Insurance Act of 2020, 116TH CONGRESS (2019-2020) (May 26, 2020),

https://www.congress.gov/bill/116th-congress/house-bill/7011/text

[“PRIA Bill”].

FIN. SERVS. COMM. MAJORITY STAFF, NOVEMBER 19, 2020, HCDI SUBCOMMITTEE HEARING ENTITLED, “INSURING

AGAINST A

PANDEMIC: CHALLENGES AND SOLUTIONS FOR POLICYHOLDERS AND INSURERS” 4 (Nov. 16, 2020),

https://financialservices.house.gov/uploadedfiles/hhrg-116-ba04-20201119-sd002.pdf

. See also Terrorism Risk

Insurance Act of 2002, 15 U.S.C. § 6701 note (2020) (Pub. L. No. 107-297, 116 Stat. 2232, renewed through 2027

by Terrorism Risk Insurance Program Reauthorization Act of 2019, Pub. L. No. 116-94, 133 Stat. 2534, tit. 5, § 502

(2019)) [hereinafter collectively referred to as TRIA. Because the TRIA included in the U.S.C. as a note, section

references are to the public law rather than U.S.C.].

See generally PRIA Bill, supra note 44.

PRIA Bill, supra note 44, at § 4(c)(2).

See generally PRIA Bill, supra note 44.

PRIA Bill, supra note 46, at § 4(e)(1)(B).

PRIA Bill, supra note 46, at § 3(10), § 4(e)(1)(A),

PRIA Bill, supra note 46, at § 4(e)(2)(A),

PRIA Bill, supra note 46, at § 3(10), § 4(e)(2)(B).

PRIA Bill, supra note 46, at §4(e)(2).

PRIA compared to TRIA

Table 1 below sets forth how the PRIA proposal compares to the existing TRIA program.

Table 1: Comparing TRIA and PRIA

Layer of Coverage

TRIA

PRIA

First losses before the

Program Trigger

Insurers cover 100%

Up to $200 million in

aggregate losses per terrorist

act

Insurers cover 100%

Up to $250 million in

aggregate losses per public

health emergency

Insurer Deductible

Each Insurer covers

additional losses equal to

20% of the TRIA premiums it

collected in the prior year

Estimated $45 billion

Each insurer covers

additional losses equal to 5%

of the PRIA premiums it

collected in the prior year

Unknown

Second losses after the

applicable insurer has met

its deductible

Government covers 80%,

insurers cover 20%

Up to $100 billion aggregate

losses

Government covers 95%,

insurers cover 5%

Up to $750 billion aggregate

losses

Above second losses

maximum

No coverage.

The Treasury allocates losses

above $750 billion pro rata

among participating insurers

that have not yet met their

full deductible.

Until every participating

insurer has met its deductible.

Then, no coverage.

Surcharge on Policyholders

Government recovers any

outlays by imposing a

surcharge on subsequent

TRIA policies

N/A

Two key differences between PRIA and TRIA are also noteworthy. First, in contrast to

PRIA’s voluntary participation, all property and casualty insurers are required to participate in

TRIA.

Such mandatory participation has been acceptable to the insurance industry because of

the TRIA limitations on their total losses. We also note that, under TRIA, the government must

impose surcharges on TRIA policyholders in order to recover 140% of its coverage outlays over

TRIA §§ 102(6), 103(a), (c); 30 C.F.R. § 50.3 (2021).

time (i.e., its 80% share of losses from $200 million to $100 billion).

However, these surcharges

progressively decline to zero once a terrorist attack has caused more than $37.5 billion in insured

losses.

PRIA does not have a similar provision, so the government would not directly pass its

costs onto PRIA policyholders the way it does under TRIA.

Total Insurer Exposure

Under TRIA, private insurers’ total exposure is approximately $56.2 billion, which consists

of: the first $200 million of losses, plus their deductible, which CCMR staff estimates at $45

billion,

plus 20% of the balance of insured losses up to $100 billion. In contrast, under PRIA,

we estimate insurers’ aggregate exposure per calendar year to be approximately $37.75 billion plus

4.75% of the prior year’s premiums.

The $37.75 billion minimum includes the first $250 million

of losses plus 5% of losses up to $750 billion, which is the minimum of insurer exposure before

taking insurer deductibles into account. Because we do not know the relevant premiums, we cannot

estimate insurers’ total annual exposure over $37.75 billion.

Crucially, whereas terrorist incidents are typically limited in time and scope, pandemics

can affect entire economies for extended periods of time, and this will increase PRIA premiums.

While the 9/11 attacks caused the largest insured losses from a nonnatural disaster on record at

$45 billion,

APCIA’s estimate of small business pandemic losses of $251-431 billion per month

are far greater.

Given the much-larger losses associated with pandemics compared to terrorism,

PRIA premiums will likely be much larger than TRIA premiums, which means that insurer

deductibles would increase aggregate insurer exposure well beyond $37.75 billion.

Potential Issues with PRIA

Insurers may avoid participating in PRIA to avoid large losses from a future pandemic.

For instance, while PRIA’s deductibles and program cap apply per calendar year,

pandemics can

span more than one calendar year, and multiple pandemics may occur in close proximity to one

another, making aggregate losses from future pandemics (and the effective ceiling on insurer

liability) hard to predict in advance. In addition, since insurer participation in PRIA is voluntary,

TRIA § 103(e).

Id.

A Congressional Research Service Report estimated the deductible in 2017 to be $42 billion. See

ONGRESSIONAL RESEARCH SERVICE, Terrorism Risk Insurance: Overview and Issue Analysis for the 116th

Congress, 4-5 (Dec. 27, 2019), https://fas.org/sgp/crs/terror/R45707.pdf

. Using the Bureau of Labor Statistics’

estimate of annual core CPI inflation, CCMR staff estimates the inflation-adjusted deductible at $45 billion for

2021.

In order to supply this estimate, the Committee has assumed that: (i) every insurer meets its deductible before

aggregate insured losses surpass $750 billion in the calendar year (in which case insurers are not exposed to losses

above $750 billion); and (ii) aggregate insured losses are at least $750 billion in the relevant calendar year. The

4.75% of the prior year’s premiums is the insurer deductible, adjusted downward in order to avoid double-counting

the 5% of losses up to $750 billion already counted in the $37.75 billion.

Susanne Sclafane, Carrier Groups Ready Proposal for Federal Pandemic Loss Fund – Not PRIA, CARRIER

MGMT., May 19, 2020, https://www.carriermanagement.com/news/2020/05/19/206826.htm.

CONGRESSIONAL RESEARCH SERVICE, Terrorism Risk Insurance: Overview and Issue Analysis for the 116th

Congress, 1 (Dec. 27, 2019), https://fas.org/sgp/crs/terror/R45707.pdf

APCIA, Commercial Insurance and Business Interruption Coverage in COVID-19 (2020),

https://www.apci.org/covid-19-resources/

See, e.g., Robert Armstrong, US insurance industry rift deepens over pandemic cover, FIN. TIMES, July 9, 2020,

https://www.ft.com/content/4d7249eb-efa5-4b51-86ec-fe36a1467185

See PRIA Bill, supra note 46, at § 3(10), § 4(e)(1)(A), § 4(e)(2)(A),

when fewer insurers choose to participate, each participating insurer must assume a larger portion

of risk up to the $750 billion annual maximum, so unless a critical mass of insurers chooses to

participate, the program may not have any participation at all. Thus, although the approximate cap

on insurer liability may at first seem tolerable in relation to all property and casualty insurers’

aggregate net income ($66.2 billion in 2019) or surplus reserves ($866.2 billion in June 2020),

the risk of in a multi-year pandemic with too few PRIA-participating insurers may deter any single

insurer from participating in PRIA.

Moreover, BII insurers do not have enough specialized claims adjusters capable of

simultaneously examining millions or potentially tens of millions of individual business

interruption claims in a widespread pandemic – especially as the industry enters hurricane, flood,

and wildfire season. BII insurers are normally able to expect that only a very small percentage of

their BII customers are likely to be shut down at any one time from covered perils such as fires

and windstorms – but a pandemic could impact practically all customers at the same time.

Indeed, insurance trade groups oppose the PRIA proposal.

One of industry’s core

arguments against the PRIA is that insurance is an inappropriate mechanism to address pandemic

risks.

NAMIC, APCIA, and the Independent Insurance Agents of America (“Big ‘I’”) have

argued that the nature and scope of each pandemic cannot be readily determined in advance, so

there is limited opportunity to diversify against the risk of a pandemic geographically or otherwise

in advance

and insurers therefore lack the capacity to manage such risks.

However, executives for Chubb, Farmers, and Marsh have disagreed with the broader

industry position that pandemic risks are uninsurable.

They have argued that insurers do have

the risk management capacity to handle these risks, and that they are not impossible to diversify.

One would assume that a basic risk management technique would be to charge higher premiums

to businesses in the most exposed industries, including travel and leisure. This would then raise

See NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS, U.S. Property & Casualty Insurance Industry, 2019

Full Year Results (2020), https://content.naic.org/sites/default/files/inline-files/YE2019%20Industry%20Report.pdf

See also NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS, U.S. Property & Casualty Insurance Industry,

2020 First Half Results (2021),

https://content.naic.org/sites/default/files/inline-

files/Property%20%26%20Casualty%20and%20Title%202020%20Mid-

Year%20Industry%20Report%20%281%29.pdf.

National Association of Mutual Insurance Companies [hereinafter NAMIC], APCIA, Independent Insurance

Agents of America [hereinafter “Big ‘I’”], Press Release, Insurance Trades Unveil Federal Pandemic Solution (May

21, 2020), https://www.namic.org/news/releases/200521mr01

; Robert Armstrong, US insurance industry rift

deepens over pandemic cover, FIN. TIMES, July 9, 2020, https://www.ft.com/content/4d7249eb-efa5-4b51-86ec-

fe36a1467185.

See Susanne Sclafane, Carrier Groups Ready Proposal for Federal Pandemic Loss Fund – Not PRIA, CARRIER

MGMT., May 19, 2020, https://www.carriermanagement.com/news/2020/05/19/206826.htm.

Robert Armstrong, US insurance industry rift deepens over pandemic cover, FIN. TIMES, July 9, 2020,

https://www.ft.com/content/4d7249eb-efa5-4b51-86ec-fe36a1467185

; NAMIC, APCIA, Big “I”, Press Release,

Insurance Trades Unveil Federal Pandemic Solution (May 21, 2020),

https://www.namic.org/news/releases/200521mr01.

Robert Armstrong, US insurance industry rift deepens over pandemic cover, FIN. TIMES, July 9, 2020,

https://www.ft.com/content/4d7249eb-efa5-4b51-86ec-fe36a1467185

; Robert Hartwig, APCIA, Uninsurability of

Mass Market Business Continuity Risks from Viral Pandemics (2020), https://www.uscriskcenter.com/wp-

content/uploads/2020/05/Uninsurability-of-Pandemic-Risk-White-Paper-Hartwig-APCIA-FINAL-WORD.pdf.

Robert Armstrong, US insurance industry rift deepens over pandemic cover, FIN. TIMES, July 9, 2020,

https://www.ft.com/content/4d7249eb-efa5-4b51-86ec-fe36a1467185

Id.

the issue as to whether these industries would buy the high-priced insurance that they needed and

whether industries with lower or no risk would decide to buy the insurance at all.

Ultimately, given the enormity of pandemic-related losses, the difficulty of predicting them

in advance, and the disincentives for any single insurer to participate in PRIA, there is a serious

risk that insurers would not participate in PRIA due to the unacceptably large risks involved.

B. Industry Proposal: Business Continuity Protection Program

Insurance industry trade groups have proposed an alternative to PRIA that would be similar

to federal flood insurance.

Under this proposal, the U.S. Department of Treasury would use

federal funds to establish a Business Continuity Protection Program (the “BCPP”), which would

sell revenue replacement assistance to any business that wanted it.

Nonprofits would also be

eligible for coverage.

The assistance would cover up to 80% of its policyholders’ payroll and

operating expenses for up to three months during a federally-declared viral emergency.

Payouts

would be triggered automatically following the president’s declaration of a viral emergency.

Payouts would be limited to those policyholders who had purchased protection at least 90 days

before the declaration of the viral emergency.

Businesses receiving payments would be required

to use the funds to pay necessary payroll and operating expenses and to follow applicable federal

pandemic guidance.

The proposal does not specify the premiums businesses would pay for BCPP coverage,

but this represents an important tradeoff in the program. With higher premiums, fewer businesses

will purchase coverage; and with lower premiums, the government itself will be exposed to more

net losses over the life of the program.

Except for those insurers that voluntarily offer to sell excess coverage themselves, the

BCPP proposal takes pandemic risk entirely outside of the insurance industry, which may be

appropriate because of the uninsurable nature of pandemic risks, but it carries a potentially high

price tag for the government. The proposal does contemplate that the U.S. Treasury might purchase

reinsurance from the private market to protect taxpayers,

but this would raise similar questions

about whether reinsurers would undertake this risk any more than insurers themselves. Licensed

insurance agents and brokers would be the authorized distribution network to market and sell the

Susanne Sclafane, Carrier Groups Ready Proposal for Federal Pandemic Loss Fund – Not PRIA, CARRIER

MGMT., May 19, 2020, https://www.carriermanagement.com/news/2020/05/19/206826.htm.

APCIA, Insurance Trades Unveil Federal Pandemic Solution (May 21, 2020), https://www.apci.org/media/news-

releases/release/60933/; APCIA, NAMIC, INDEPENDENT INSURANCE AGENTS & BROKERS OF AMERICA, Business

Continuity Protection Program (updated Sept. 2020), https://home.treasury.gov/system/files/311/BCPP-Overview-

9-20.pdf. See also APCIA and NAMIC, The Business Continuity Protection Program: Building on Experience to

Develop an Affordable and Effective Federal Program for Future Pandemic Business Relief (Dec. 8, 2020),

https://content.naic.org/sites/default/files/national_meeting/Don%20Griffin%20APCIA%20Presentation%20on%20

BCPP%20120820.pdf.

Id.

Termed “viral emergency” in proposal. See id.

Id.

See id.

Id.

BCPP’s revenue replacement assistance.

The proposal also contemplates that the BCPP would

work with pandemic risk mitigation experts to develop guidelines and safety standards that would

be provided to businesses that purchased coverage.

The BCPP would create a new type of presidential declaration to trigger payment.

First,

individual state governors would request a viral emergency declaration from the federal

government.

Then, if the U.S. President declared a viral emergency, the BCPP would disburse

payment automatically to affected businesses for the portion of their expenses located in the

emergency zone (as allocated in the application form).

Given the magnitude of expenditures this

declaration would trigger, the contours of this presidential power would be appropriately cabined

by parameters in the authorizing legislation.

Indeed, using APCIA’s estimate of small business

closure losses between $255 billion and $431 billion per month from the beginning of the COVID-

19 pandemic,

the government’s total exposure for 90 days of coverage under the BCPP could be

between $612 billion and $1.04 trillion.

It is difficult to assess how much demand there would be for coverage under the BCPP

without specificity as to the premiums to participate in the program. An additional point of concern

relating to the BCPP proposal is whether the three-month coverage period would be sufficient. As

demonstrated by COVID-19, there is risk that closures and other damages arising from the

pandemic may continue beyond that period.

After releasing their initial BCPP proposal, insurance industry trade groups later updated

it to provide for excess coverage beyond the base program.

Under the “BCPP Plus” approach,

businesses that purchase base BCPP coverage would be eligible to purchase excess coverage from

insurers, and the federal government would backstop 90% of these covered losses, with insurers

covering the remaining 10%.

Because insurers would not be required to offer excess coverage,

businesses would not be required to purchase it, and premiums are unspecified,

we are unable to

estimate the ultimate effect of excess coverage on the scope and cost of the base BCPP proposal.

APCIA, NAMIC, INDEPENDENT INSURANCE AGENTS & BROKERS OF AMERICA, Business Continuity Protection

Program (updated Sept. 2020), https://home.treasury.gov/system/files/311/BCPP-Overview-9-20.pdf

Id.

Id. at 4.

This estimate appears to have made at the beginning of the pandemic, when losses were likely substantially higher

than at other times during the year, as closure mandates have eased and businesses have adapted to operating in the

new conditions. It would be useful to see how losses evolved over the past year of the pandemic to get a fuller

understanding of the BII risks that actually arise from a pandemic. See APCIA, Commercial Insurance and Business

Interruption Coverage in COVID-19 (2020), https://www.apci.org/covid-19-resources/

This calculation assumes full participation to assess the government’s maximum potential liability.

APCIA, NAMIC, INDEPENDENT INSURANCE AGENTS & BROKERS OF AMERICA, Business Continuity Protection

Program, 5 (updated Sept. 2020), https://home.treasury.gov/system/files/311/BCPP-Overview-9-20.pdf

Id. at 5.

C. Chubb Proposal: Pandemic Business Interruption Program

Chubb, with support from Marsh and Farmers, has argued that the insurance industry does

have the capacity to cover some pandemic risks and has offered its own public-private partnership

model to do so. The Pandemic Business Interruption Program (“PBIP”), has two components.

First, the Business Expense Insurance Program (“BIP”), would establish a model similar to the

PRIA to handle small business losses, but with a lower level of exposure for private insurers. The

second component would establish a government-run reinsurance program, the Pandemic Re, for

medium and large businesses (those with over 500 employees). Chubb proposes that PBIP

coverage would be triggered by the U.S. Centers for Disease Control and Prevention (“CDC”)

medical criteria, the declaration of an emergency by the Department of Health and Human Services

or the president, or the implementation of a federal, state, or local lockdown.

Small Businesses: Business Expense Insurance Program

Under the BIP, all property and casualty insurers that offer BII policies would be required

to participate. As previously observed, if the government compels BII insurers to offer pandemic-

related coverage, then insurers may stop offering BII entirely in order to limit their exposure.

Purchase of coverage would remain voluntary for businesses.

Under the program, participating businesses would be entitled to receive a pre-determined

payment based on their payroll, following a government declaration of a pandemic and ensuing

lockdown.

Chubb proposes that private insurers would cover 6-12% of the first losses of covered

businesses (the ratio would rise from 6% in year one of the program to 12% in year twenty), up to

a maximum determined by the government, while the government would cover the remainder of

first losses. After this unspecified maximum was reached, government would cover all additional

losses up to a pre-determined maximum, with no industry participation, unlike PRIA, where

second layer losses are shared. After the maximum of government coverage is reached, there would

be no private or government coverage.

Importantly, there is no additional cost to insurers based

on the premiums they receive.

Chubb envisions that the total coverage amount of the program could float at the

government’s discretion, but suggests starting with $250 billion in first layer losses and $500

billion in second layer losses, therefore providing a $750 billion total program limit.

Although

the proposal does not specify whether these total coverage limits reset annually (like PRIA) or per

pandemic, they appear to apply per pandemic.

Using these numbers, private industry’s maximum

exposure under the BIP would rise from $15 billion in year one (6% of $250 billion) to $30 billion

in year twenty (12% of $250 billion). This $30 billion maximum is notably less than the estimated

$37.75 billion insurer exposure under PRIA (before adjusting upward for insurer deductibles based

CHUBB, Pandemic Business Interruption Program (July 8, 2020), https://www.chubb.com/content/dam/chubb-

sites/chubb-com/us-en/about-chubb/pandemic-business-interruption-program/documents/pdf/pandemic-business-

interruption-program.pdf.

Id. at 6

Id. Chubb envisions a 14-day waiting period for payments and a three-month multiple of payroll expenses to

determine eligible payments.

Id.

See id. (referring to a “program limit” rather than an annual limit).

on premiums). And this coverage would only be for businesses with fewer than 500 employees.

There would be no coverage under BIP for larger businesses.

The Chubb proposal further provides that any businesses that decline coverage would be

required to acknowledge that their pandemic-related losses would not be covered and that they

would not be eligible for any other federal programs rolled out to minimize the impact of the

pandemic, like PPP or the MSLPs.

Chubb argues that this opt-out system will encourage

participation.

This observation is undoubtedly true, but does it make sense to provide small

business with such a Hobbesian choice? Moreover, faced with political pressure to provide strong

support to the economy as a whole, it is unclear whether governments will actually exclude opting-

out businesses from other support programs. Chubb also contends that the premiums would be

affordable, but Chubb does not explain why or estimate what the premiums would be.

Large Businesses: Pandemic Re

The Pandemic Re component of the PBIP proposal would establish a separate program for

medium and large businesses using a government-run reinsurance mechanism.

Businesses with

more than 500 employees would be eligible to participate in the program on a voluntary basis, and

insurer participation would also be voluntary. The maximum payout on these policies would be

$50 million per policy holder.

100

Chubb proposes to have a total program capacity of $400 billion,

with private insurers’ maximum share of coverage increasing from $15 billion in year one to $30

billion in year ten.

101

The balance of covered losses would be covered by Pandemic Re, a newly

established government reinsurance entity. Thus, the industry’s maximum exposure under the

Pandemic Re would be $30 billion (in year ten) of the total $400 billion in coverage.

Total Exposure

Without taking premiums into account (which would in this case reduce insurers exposure)

and using Chubb’s suggested numbers for the layers of coverage, the government’s total share of

disbursements under the PBIP for both the basic and reinsurance programs would be around $1.1

trillion, which consists of: (i) $720 to 735 billion from the BIP (88-94% of the first $250 billion of

losses, plus 100% of $500 billion of additional losses), plus (ii) $370 to 385 billion from the

Pandemic Re (92-96% of $400 billion in losses). Meanwhile, insurers would bear a maximum of

$60 billion in losses, which consists of $30 billion each for coverage under the BIP and Pandemic

Re. The revenue received from premiums would substantially reduce the insurers’ exposure.

D. Comparison of Pandemic Insurance Proposals

Table 2 below compares the key terms of PRIA, BCPP, and PBIP. As to PBIP, because

insurers’ exposure rises progressively over twenty years after adoption, we have supplied the

government and insurers’ exposure in the first and twentieth years that PBIP would be in effect.

Moreover, because PBIP includes one program for small businesses (where insurer participation

is mandatory) and another for large businesses (where insurer participation is voluntary), we have

supplied two exposure estimates that include and exclude the latter voluntary program.

Id.

Id. at 4.

100

Id.

101

Id.

Table 2: Comparison between Insurance Proposals

Metric

PRIA

BCPP

PBIP

Modelled on

TRIA Terrorism Insurance

FEMA Flood Insurance

TRIA Terrorism Insurance

Structure

Operated by Insurers,

Backstopped by

Government

Operated within the U.S.

Treasury Department.

Operated by Insurers,

Backstopped by Government

Insurer

Participation

Voluntary, except if an

insurer participates it must

participate for all covered

lines.

None, except to provide

administrative support and

as voluntary reinsurers and

excess coverage providers.

Brokers and agents to

provide sales and services

support.

Mandatory for insurers that

offer BII

Business

Participation

Voluntary

Voluntary. Businesses

declining protection must

sign acknowledge they will

be ineligible for BCPP

benefits.

Businesses that opt out are

not eligible for federal

program benefits

Program Period

(for the purposes

of loss coverage

limits)

Per Calendar Year

Per Public Health

Emergency

Unspecified, but appears to

be per pandemic event

Coverage

Trigger

Determined by insurer-

policyholder contract,

predicated on declared

public health emergency for

a pandemic.

Presidential declaration

following finding of public

health emergency

Government declares a

pandemic or lockdowns take

effect. For small businesses,

14 day waiting period after

qualifying event.

Covered Losses

Determined by insurer-

policyholder contract.

Includes event cancellation

insurance policies.

Payroll and operating

expenses. Event

cancellation coverage

authorized to be designed

within base and excess

coverage programs.

Payroll plus operating

expenses for certain classes

Loss Coverage

Formula

Tranche One: First losses

up to $250mn:

Insurers cover 100%

Tranche Two: For each

insurer, next losses up to

5% of last year’s PRIA

premiums:

Insurers cover 100%

Tranche Three: For insurers

that have met their

Tranche One: First losses

up to three months:

Government covers 80%

Policyholder bears 20%

Excess coverage allowed to

be purchased by larger

businesses.

Tranche Two:

Next losses after three

months:

No coverage

Policyholder bears 100%

Note: Under “BCPP Plus,”

if insurers voluntarily sell

excess coverage, the

Tranche One: First losses up

to $250bn aggregate total:

Insurers cover 6% in year

one rising to 12% in year

twenty.

Government covers 94% in

year one falling to 88% in

year twenty.

Tranche Two: Next losses up

to $750bn aggregate total:

Insurers cover 0%

Government covers 100%

Tranche Three: Losses after

$750bn aggregate total:

No coverage

Metric

PRIA

BCPP

PBIP

deductible, next losses up to

$750bn in aggregate:

Insurers cover 5%

Government covers 95%

Tranche Four: Losses after

$750bn aggregate total:

Reallocated among insurers

until each has met its

deductible, then

policyholder bears 100%

government would

backstop 90% of covered

losses, and insurers would

cover the other 10% of

covered losses

Policyholder bears 100%

Businesses with

>500 employees

Eligible for insurance

alongside small businesses

Eligible for coverage

alongside small businesses,

and excess coverage would

be available under “BCPP

Plus”

Ineligible, but there is a

separate “Pandemic Re”

program for large businesses

where insurer participation is

voluntary

Insurance

Industry:

Estimated

Exposure

$37.75bn plus 4.75% of last

year’s PRIA premiums

102

Offset by premiums

collected.

None, except for those

insurers voluntarily

offering excess coverage or

acting as voluntary

reinsurers

Excluding Pandemic Re:

Rises from $15bn in year one

to $30bn in year twenty

Including Pandemic Re:

Rises from $30bn in year one

to $60bn in year twenty

Offset by premiums

collected.

Government:

Estimated

Exposure

$712.25bn minus 4.75% of

last year’s PRIA premiums

Government: between

$612bn and $1,004bn, plus

90% of excess coverage

under “BCPP plus”

Excluding Pandemic Re:

Government: Falls from

$735bn in year one to

$720bn in year twenty

Including Pandemic Re:

Government: Falls from

$1,120bn in year one to

$1,090 in year twenty

102

Consistent with the discussion in Part II.A, these figures assume that: (i) first, every insurer meets its deductible

before aggregate insured losses surpass $750 billion; and (ii) second, aggregate insured losses do in fact surpass

$750 billion in the relevant calendar year.

E. Insurance Proposals Compared to COVID-19 Legislation

The PRIA, BCPP, and PBIP all have substantial aggregate price tags for the government

and insurers roughly $612 billion to $1.112 trillion.

103

These substantial costs are approximately

in line with Congress’s spending on small business relief under its pandemic relief legislation. For

example, the most comparable portion of the pandemic relief bills to pandemic BII is the PPP,

originally introduced in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act,

104

and expanded in subsequent pandemic relief legislation.

105

The PPP funded low-interest,

forgivable loans to small businesses (with under 500 employees) to cover payroll and other

specified expenses,

106

and had disbursed a total of $762 billion in funds as of April 18, 2021.

107

In addition, at its closing, the Fed’s Main Street Program had disbursed $16.5 billion in loans to

businesses with less than 15,000 employees.

108

Many, including Hal Scott and Glenn Hubbard,

have argued that that even the COVID-19 relief packages were too small, as well as poorly

designed.

109

A more comprehensive response, aimed at avoiding devastation of small businesses,

could cost over $1 trillion.

These comparable figures raise an important policy question: is it more effective to cover

pandemic losses through BII or through the PPP and MSLPs? In theory, a preestablished program

like pandemic BII may be rolled out more quickly and efficiently than ad hoc spending, because

BII could offer prompt disbursements to small businesses, and thereby encourage fast pandemic

mitigation measures early on, and thereby (potentially) avoid the extended economic disruption

associated with a slow pandemic response. However, Congress enacted (and the executive branch

implemented) the PPP quite swiftly, so the marginal gains from a preestablished program may be

modest. In addition, even if the preestablished program were affordable, it would be difficult to

design BII relief in advance, because different pandemics may follow quite different trajectories.

Thus, the unpredictable nature, frequency, and duration of pandemics are major obstacles to

designing thoughtful and effective automatic relief.

Given these limitations, any pandemic response must strike a balance between speed,

efficiency, and flexibility. To do so, the optimal approach may be to combine modest automatic

relief with a larger discretionary package tailored to the specific pandemic at hand. First, at the

onset of a pandemic, a short-term and affordable program modelled on BCPP could extend full

government coverage for pandemic-related business interruption losses for a limited period of

103

This analysis considers only the cost of maximum potential government outlays and does not incorporate analysis

of premiums collected, although that would potentially offset some or all the costs in a crisis situation. None of the

proposals have provided sufficient information on premium pricing to make premium analysis meaningful.

104

Pub. L. No. 116-136 (2020).

105

See ROBERT JAY DILGER, BRUCE R. LINDSAY & SEAN LOWRY, CONG. RSCH. SERV., R46284, COVID-19 RELIEF

ASSISTANCE TO SMALL BUSINESSES: ISSUES AND POLICY OPTIONS (Mar. 31, 2021).

106

Id.

107

Small Bus. Admin., Paycheck Protection Program (PPP) Report: Approvals through 4/18/2021 (Apr. 2021),

https://www.sba.gov/sites/default/files/2021-04/PPP_Report_Public_210418-508.pdf

108

Fed. Reserve Bd., Periodic Report: Update on Outstanding Lending Facilities Authorized by the Board under

Section 13(3) of the Federal Reserve Act 8 (January 9, 2021),

https://www.federalreserve.gov/publications/files/pdcf-mmlf-cpff-pmccf-smccf-talf-mlf-ppplf-msnlf-mself-msplf-

nonlf-noelf-01-11-21.pdf#page=7; Fed. Reserve Bd., For-Profit FAQs, 26 (Final Archived Version) (Dec. 29, 2020),

https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm.

109

See Hal Scott, Here’s how the Fed can do more to support small businesses, FIN. TIMES, Jan. 11, 2021,

https://www.ft.com/content/0d0b0f48-df3c-4b2f-97b8-d2da0415d8d6

; Glenn Hubbard & Hal Scott, Main Street

Needs More Fed Help, WALL ST. J., Apr. 16, 2020, https://www.wsj.com/articles/main-street-needs-more-fed-help-

11587055459.

time. Second, Congress could use this window of opportunity to design further relief tailored to

the size, scope, and duration of the disruption. By quickly and efficiently disbursing automatic

relief while preserving future policy flexibility, this reduces the enormous pressure for Congress

to act as quickly as possible, and it thereby creates a longer runway to consider and debate a

thoughtful pandemic relief package.

Conclusion

Ultimately, it is extremely difficult to predict the dimensions of future pandemic risk, and

as a result, it is equally difficult to design a pandemic BII program that adequately addresses that

risk. Although PRIA attempts to establish a strong public private partnership, it may be

simultaneously too big and too small to be effective. On the one hand, future pandemic losses may

quickly outstrip PRIA’s $750 billion cap, leaving businesses unprotected beyond that point. On

the other, the uncertain duration and frequency of pandemics, combined with the enormity and

unpredictability of pandemic-related losses, threaten to deter insurers from participating in the

program at all. At the other end of the spectrum, the PBIP offers far less participation from insurers,

so the government bears the vast majority of risk. If insurer participation is trivial in relation to

aggregate losses, then a pre-established pandemic program may add little to the government

response to a future pandemic.

In light of these considerations, the most effective pandemic insurance scheme may be to:

(i) establish a modest BCPP program that offers immediate relief at the onset of a pandemic; and

(ii) supply any further government support as necessary through a more streamlined version of the

PPP and a more generous version of the MSLP employed in 2020. Given this structure, any BCPP-

adjacent program should be large enough to afford Congress sufficient time to assemble a

thoughtful package tailored to the specific pandemic at hand.

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