Recently, insurance industry analysts and professionals have indicated that COVID-19 has the potential to bankrupt the industry—depending on how judges and the US legal system at large handle COVID-related insurance claims from business owners.
Today, we're taking a deep dive into why insurance industry experts are so worried about COVID-19 and current trends in the legal system regarding COVID-related insurance claims.
The Economic Impact of COVID-19
To understand where we are right now (and why insurers are so worried), it's important to understand how COVID-19 has impacted the US economy as a whole.
As of late May, the number of jobs lost to COVID-19 stands at a whopping 40 million. The unemployment rate rose more in two months of COVID than it did in two years of the Great Recession. Americans are losing jobs left and right. As eviction moratoriums lift and the current increase in unemployment benefits come to an end, the plight of US workers will only increase—especially if the pandemic continues to escalate.
In this case, what's bad for workers is bad for businesses. Unless the government issues a second stimulus check or extends the deadline for unemployment benefits, many Americans will soon be tight on money—and that's saying something since around 78% of Americans already live paycheck-to-paycheck.
If Americans have no money to spend, they won't be able to invest in businesses. That could spell disaster for companies, particularly smaller enterprises. Critics have pointed out that small businesses already got the short-end of the stick as far as government stimulus packages go, with large corporations receiving the lion's share of coronavirus-related relief capital.
As a result, COVID-19 has been devastating for small businesses. Over 100,000 small businesses have closed forever, and 7.5 million are at risk of closing. Small business owners across the country feel abandoned and hopeless, and they're shutting their doors in record numbers.
That's a real issue, because small businesses are the lifeblood of the American economy, generating 44% of the US' economic activity. If small businesses continue to close at current rates, it could spin the economy further into a downward spiral, creating a vicious cycle.
The Insurance Industry & COVID-19
All of this brings us to the insurance industry. As the government treads its feet supporting small businesses, more and more small business owners are turning towards insurance providers to try and stay afloat.
Most insurance policies specifically exclude pandemic coverage from their policies—most, but not all. In the UK, the city of London owes the Wimbledon tennis tournament $141 million due to the tournament's pandemic coverage.
Businesses across the US are filing claims with insurers, typically claiming they should receive payouts for the "interruption of business" cased by COVID-19. Technically, most insurance companies aren't obligated to pay out these claims, since most specifically exclude pandemic coverage from their policies (as mentioned earlier).
But that doesn't mean insurers will actually avoid paying for COVID-related losses. US politicians are urging insurers to settle coronavirus-related claims, and small business owners continue to push for settlements. Insurers are in a battle of will with business owners and public figures, and the outcome remains to be seen.
If insurers are forced to settle COVID-related claims, it could bankrupt the insurance industry—at least, according to Chubb CEO Evan Greenberg.
Auto, home, and business owners hold what is called a collective policyholders' surplus. The surplus, calculated by the cumulative value of the insurers' assets, minus their liabilities, is dedicated to paying out claims for catastrophic events. If insurers were put on the hook for COVID, the payouts would come from the surplus.
That's bad news for insurers because the surplus dropped from $847 billion to $770 billion in the first quarter of 2020. According to experts, if business owners could obtain COVID-related payouts, it would cost the industry between $150-400 billion a month, rapidly depleting the surplus and causing insurers to spiral towards bankruptcy.
However, critics counter these concerns by pointing out that businesses often pay a significant amount of money for insurance that they never use—specifically so they don't have to worry when something like COVID-19 happens. These critics contend that insurers should be prepared for an event like COVID, and it's not the fault of business owners if they aren't.
The battle between business owners and insurers isn't likely to resolve anytime soon and may change depending on how the US continues to handle COVID-19. However, the outcome could have lasting effects on businesses and insurers alike for years to come.
If you're entangled in a litigation dispute, we can help. To learn more about our services, contact Elliot Reiner, APLC online or via phone at (916) 778-3228.