Insurance COVID-19 and your Insurance Policy

Where Do We Go From Here? The virus litigation sport is just beginning...

by Andy Schwartze

Insurance brokers who finally gave up being sales people and transformed themselves into well-grounded risk managers, are constant observers of how the industry works and what factors drive it in different directions. This is important because insurance is a variable cost, determined annually — and not one that is easily predicted.

Clients need to understand the driving forces that impact insurance costs. If there is one simple statement that can be made about the entire financial services industry it’s that when the economy goes in one direction, financial services go the opposite way. Banks and insurance companies are in the business of protecting their assets against the onslaught of nasty economics. They are not in business to cure society’s ills and take great care to shield themselves from unexpected raids on their balance sheets. This is nothing surprising; the days of saying “I’ll take my business elsewhere” have become somewhat obsolete in 2020.

The viral troubles that have beset the world since early spring do not bode well for insurers. As financial pressures close in on struggling businesses their owners and managers fight to find ways to survive and get through the rough times. One of the possible ways to generate badly needed funds is to re-visit insurance contracts, in an effort to see if there are claim possibilities that, in good times, might have been ignored or overlooked. Indeed that rather scary reality, for insurers, is now starting to ramp up. It is still early in the game, but if you watch carefully you will see significant momentum beginning to build as the opponents line up and prepare for the inevitable battle. Here are some indicators that point to growing troubles for the property/ casualty insurers:

By the end of March, Munich Re, one of the biggest in the world, had already reported 800 million Euros in COVID-related losses. In Canada, Intact, Travelers and Aviva have already announced unexpectedly higher claims, not only related to the virus but also to

“Watch for an onslaught against directors and officers of businesses, alleging mismanagement of their facilities resulting in viral spread.”

higher frequency as people took advantage of coverage, fraudulently or otherwise, that under normal circumstances they would not have. Lloyds of London, one of the biggest insurance pools in the world, has conservatively estimated over US$100 billion will have to be paid on COVID-related claims. Event cancelation insurance will cut a large swath through the industry. But the real trouble is yet to come…

One of the earliest class action suits started in Austria many weeks ago, when a group of 2,500 tourists banded together against the Ishgal ski resort. In France, a restaurant won a lower court decision against the giant insurer, Axa, in which it was ordered that the insurer pay COVID losses out of the business interruption insurance policy. In the U.S. a number of states are considering legislation forcing insurers to pay those business customers who have been carrying business interruption insurance (the state of Kentucky dropped that idea after it was decided that the impact of such an order would devastate the insurance industry). Yet, there has been some “tort reform” activity intended to slow the attack on corporate America on the basis of

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COVID-related health issues. What we are seeing, in that space, is the qualifier that the business cannot be sued if it has complied with recommended safety procedures. Obviously, the litigation door remains wide open as allegations of non compliance will be the basis for every suit imaginable.

Many readers will be surprised to learn that “third party litigation funding” is not just active in the U.S., where it is a serious business. A major player in that space is actually based in Toronto. Investing in lawsuits takes the financial pressure off the plaintiffs and, in return, the investor(s) participate in the hoped for settlement.

The virus-related litigation sport is just beginning. National television advertisements by law firms recruiting angry plaintiffs who have lost loved ones in retirement homes, have recently begun showing on our screens. Watch for an onslaught against directors and officers of businesses, alleging mismanagement of their facilities resulting in viral spread. The retirement and long-term care community is on for an enormous legal attack. Liability insurers will be hauled in to court by their clients if they fail to defend as expected. Property policies will be tested. New commercial agreements will either include pandemic waivers or the requirement for pandemic coverage (which certainly now will not be cheap).

For insurance buyers, at the higher dollar level of commercial property and liability insurance contracts, the key forward looking concern embodies two exposures. Firstly, for the insurance market this is a “reinsurance” challenge well underway. The entire free world is going to pay more for reinsurance, which will translate into higher insurance bills. The legal defence cost claims payments (that are covered by typical liability policies) will skyrocket. Secondly, forwardlooking challenges automatically cause insurance companies to “circle the wagons” in self defence. Capacity (coverage levels offered) usually drops; willingness to accept risk lowers and rates rise.

Finally, for HR professionals, life is going to become even more challenging. Employees who are called back to work may resist doing so because they feel unsafe. Companies that embrace more of the growing “work remotely” philosophy will struggle with measuring productivity, disciplining inadequacies and even laying off, or firing, recalcitrant behaviour. “Building the dismissal file” will take on a whole new dimension.

These are tricky times for corporate managers and their insurers. Just recently I had an inquiry from a business owner who asked for a proposal for his business. When I asked a number of important questions, he responded that he just wanted insurance and that I was wasting his time and probably not “a good fit”. I wished him well. He’ll soon learn.

Andy Schwartze, BSc., MBA, CIP, is an insurance broker specializing in property management and real estate. He can be reached at andy@takecover.ca.

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