insurance, COVID-19

The COVID-19 pandemic and heated nationwide protests have forced many business owners to take a closer look at their insurance policies. 

But only one of these events is typically covered by business insurance — and experts in the industry say that’s unlikely to change any time soon.

Colorado businesses deemed nonessential were forced to close earlier this year due the state’s stay-at-home order, resulting in massive revenue losses.

And save for a few extraordinary exceptions — like the Wimbledon tennis tournament, which paid around $1.9 million for pandemic insurance every year from 2003 until this year’s crisis and qualified for an insurance payout of $141 million when the 2020 tournament was canceled — virtually no policies reimburse businesses for loss of revenue due to a pandemic.

Business interruption policies, according to Carole Walker, executive director of the Rocky Mountain Insurance Association, are typically triggered by property damage and were never intended to protect businesses from something like COVID-19. 

“A pandemic is uninsurable,” Walker said. “Business interruption [insurance] really is intended for physical damage losses such as a wildfire, a tornado or a hurricane. These are all things considered in [the cost of] that premium. Insurance companies specifically exclude viruses or bacteria … just because of the risk.”

In early April, the American Property Casualty Insurance Association compiled an estimate on how much insurers would pay out if business interruption claims qualified as insurable losses.

They estimated closure losses for small businesses with 100 or fewer employees had increased, by April 6, to as much as $431 billion per month. 

“These numbers dwarf the annual premiums for all commercial property risks in the key insurance lines of $71 billion per year, or about $6 billion a month,” said David A. Sampson, ACPIA president and CEO, in a statement. 

“Continuity losses for small businesses are approximately 43 to 72 times the monthly commercial property insurance premiums. The total surplus for all of the U.S. home, auto, and business insurers combined to pay all future losses is roughly only $800 billion, with the combined capital of the top business insurance underwriters representing only a fraction of that amount.”

Walker said covering pandemic-related losses would bankrupt most insurers, “so unfortunately it’s not something covered by private insurance.”

But business interruption policies are beginning to reflect the world-changing pandemic — just not in any way that’s beneficial to business owners.

“Insurance companies are issuing [policies] with an exclusion on any kind of COVID coverage at this time,” said Heather Hoelting, agent and the owner at Colorado Springs Insurance Inc. “They are specifically excluding that now for new business. So that is something that is new.”

And while insurance companies have not been able to provide much help to business owners in recouping their revenue losses through insurance, Dave Mellinger, agent and owner at Springs Insurance Brokers, said the insurers he works with have been finding other ways to work with their policyholders during the crisis.

He said many insurers have chosen not to refuse to renew policies for failure to pay, and have been postponing payments rather than canceling policies.

“They’re also going to give back some premiums to a business, too, because of the lack of business going on,” Mellinger said. “So those are the types of adjustments that the insurance companies will make. Some companies also — like for our restaurants — will allow delivery service to be part of the liability coverage … so each company is handling it a little bit differently. But generally they’re going to be a little more lenient on that kind of risk.”

Asked if policies might be written differently in the future and start to cover pandemic-related losses, Walker said whether an event like COVID-19 could be insurable has been the “question of the day” for insurance companies.

“The challenge moving forward is that the risk is there,” Walker said. “We know the risk can come back with another wave of this virus. There’s no vaccine in place. So while some insurers could look at some type of product for business interruption, its availability would be up to a company to evaluate whether that would be a risk that they could insure.”

Walker said such policies would be prohibitively costly for most businesses and that finding future relief for business owners through insurance will likely require federal cooperation.

“It’s really got to be a federal answer, similar to the [Coronavirus Aid, Relief, and Economic Security] Act,” Walker said.

She said the solution would likely entail the federal government establishing a program that would give businesses access to loans to supplement their business interruption losses.

“The insurance industry has something that we need to figure out at a federal level, as to how to insure it or provide coverage or protection for it,” Walker said.

Because of the wide range of variables associated with the pandemic and the formulas insurance companies use to calculate their rates, Mellinger said it’s unclear whether the pandemic might impact insurance premiums in the future.

“When businesses aren’t operating, they’re not having losses. And if they’re not having losses, then the claims loss ratio goes down, so that might affect premiums in the future,” Mellinger said. “There’s so many different variables. But when the claims go down, that’s a big part of driving the rates. So that should hopefully lower the risk.”

Mellinger said insurance companies typically consider changes to their rates or underwriting guidelines about once a year, and that those changes, if enacted, would be reflected in premiums around mid-year 2021.

“So we’re a solid year away before they really truly see how it affects their business and everybody else,” Mellinger said.

Many businesses across the country have also had to test their insurance policies in recent weeks when demonstrations against police brutality and systemic racism have, in some cases, turned destructive.

Businesses across the country have suffered significant property damage and, in some cases, have seen looting.

In Colorado Springs, protests have remained mostly peaceful, with only minimal property damage reported — mostly to public buildings and private vehicles.

But unlike COVID-19, losses incurred during the protests will typically be covered in standard policies.

“The good news is, much of the damage to property that is caused by civil unrest or vandalism or any looting is covered by a standard business policy,” Walker said. “Unfortunately, only about a third of smaller businesses carry business interruption [insurance] in the first place. So it’s not just a coverage question, but it’s whether you purchased the coverage as well.”

The ongoing protests are unlikely to have a direct impact on premiums for businesses, Walker said, since insurance companies base their premiums on patterns and trends over long periods of time, and not single catastrophes.

“So in Colorado, for example, we have billion-dollar hailstorms,” Walker said. “And a $1 billion hailstorm, while devastating, isn’t what they base their premiums on. 

“So the protests that we’ve seen, even with some property damage … wouldn’t likely have a direct effect on any business premium.”

Walker said that in the current environment, it’s important that Colorado business owners speak with their insurance professionals or financial advisors to ensure they have the right coverage in place, especially as the state moves into severe weather and wildfire season.

“Unfortunately, COVID-19 isn’t going to cancel those seasons,” Walker said. “So businesses need to make sure that, as much as possible, we’re protected financially for a disaster when it comes — and that we know what our coverage is and how it works.”