By Jason Ernest, Esq.
President & CEO
Insurance Agents & Brokers of Pennsylvania
President & CEO
Insurance Agents & Brokers of Pennsylvania
Legislatively mandated insurance coverage for lost business income related to COVID-19 – when it is clearly excluded from insurance policy language – is not the answer to the financial crisis gripping the commonwealth. In fact, such a move would ultimately hurt all insurance policyholders. That being said, there are solutions that could help the many businesses negatively affected by COVID-19. Allow me to explain.
First, understand that insurance works on predictive modeling. What this means is that through mountains of data, and years of experience, the industry can reasonably predict what will happen. Insurance companies have a good handle on what the frequency of accidents and losses will be in a year, and the severity of those losses. Business interruption policies are intended to cover income losses that are caused by direct physical damage to the property from a covered peril, such as from fire, explosion, flood or other natural disasters. Based on very educated estimates as to what will transpire in a year, insurance companies charge premiums that they feel will cover the predicted losses. It’s a fine balance of charging enough to cover predicted losses, while at the same time keeping the prices affordable for the insured.
Viruses do not cause direct physical damage to property. In addition, they are generally excluded from policies. First, there is no predictability to these situations – the data that insurance companies rely on just isn’t there. Second, whereas direct physical damage situations are limited in nature, viruses can affect the entire country (as we are seeing now). If insurance companies were to cover virus risks, which are both unknown and wide-arching, insurance premiums would be restrictively expensive. A business would be hard-pressed to afford coverage, greatly exposing them for the host of covered losses under the policy. To mandate coverage now, when an insurance company has not collected ample premium based on a risk they excluded, would bankrupt the company.
As I said earlier, this doesn’t mean there isn’t a solution here. Protection of businesses is critical, and one the insurance industry is committed to. The industry fully supports the stimulus money provided in the CARES Act. Taking that further, our national association, the Big “I”, is working with a large group of business and insurance stakeholders urging the creation of the COVID-19 Business and Employee Continuity and Recovery Fund which would be backed by the federal government and under the authority of a special federal administrator with the ability to enter into contracts with interested businesses (like insurance agencies) to administer the fund and facilitate the distribution of federal funds to impacted businesses. We are aware of a similar concept being considered in the Pennsylvania legislature, and we fully support that.
Insurance plays a very important role in the business world. It protects against many risks, and has allowed many businesses to return after direct physical damage. However, it cannot be expected to cover every situation, especially those that are novel and not accounted for. It was never the intent, and to force it now would be the wrong decision, causing irreparable harm to the industry – ultimately hurting all insurance policyholders.
Jason Ernest, Esq. is president and CEO of Upper Allen Township-based Insurance Agents & Brokers (IA&B). IA&B is the premier resource and champion for independent insurance agents in Pennsylvania, representing nearly 1,000 agencies across the commonwealth. Learn more at IABforME.com.
