Some of the most prominent names in U.S. insurance are working to fill a coverage gap that has left many commercial policyholders unprotected from the devastating business interruptions caused by COVID-19 lockdowns.

The U.S. property and casualty sector envisioned the potentially widespread commercial effects of a pandemic well enough to specifically exclude it from most business insurance policy forms more than a decade ago. In the wake of the coronavirus shutdowns, that bit of standard contract print has prompted businesses to sue their insurers and lawmakers to draw up legislation to try to force payouts for pandemic-related interruptions.

Insurers whose policies exempt them from pandemic claims denounce with one voice attempts to recast policy terms to force payouts for coronavirus interruptions. But some of the industry's biggest lobby groups agree that some sort of coverage should be available for future disease outbreaks that result in business stoppages — as long as it has lots of public money behind it.

Click here to read how Europe is approaching a similar backstop question.

Backstop a 'necessity'

The private insurance market does not have the capacity to write coverage for business interruption losses for pandemics, said Lloyd Dixon, director of the RAND Center for Catastrophic Risk Management and Compensation.

"If we want to use the insurance mechanism to cover business interruption losses and wage losses, it's going to be a necessity to have government involvement in the program," Dixon said in an interview.

U.S. Rep. Carolyn Maloney, D-N.Y., in May introduced a bill to create a government-backstopped insurance program modeled after the Terrorism Risk Insurance Act, or TRIA, which was created in the aftermath of 9/11. Most terrorism risk coverage fell under commercial multiperil, workers' compensation and "other liability," according to the most recent available federal government data.

Jason Upton, president of a Guntersville, Ala.-based restaurant and food delivery insurance agency, supports that approach. A government-backed insurance program would offer a more efficient pandemic response than the ad hoc response that has poured trillions onto taxpayers and businesses, Upton wrote in an email. Such aid is not sustainable, and businesses like his would rather not rely on a legislative response, he said.

"Let's pay into a system designed to let the insurance industry experts handle these losses," said Upton, president of The Upton Group LLC.

Yet a chasm separates insurance voices over whether underwriters should have to put up any of their own capital to insure and pay for a portion of pandemic losses, or whether it should be government-funded only. The demand for protection from future pandemic losses is massive, but coverage is small and unaffordable to most without government backing, experts say.

Risk to economic recovery

Without an affordable market, observers fear the same forces that threatened to hold back the economic recovery from the 9/11 attacks will take hold in the wake of the COVID-19 recession. Within the insurance market, some of those forces are already in motion.

Tarique Nageer, a terrorism insurance adviser for Marsh, highlighted the response from reinsurance companies, which cover insurers when their payout losses exceed a certain point.

After 9/11, insurers largely covered business losses because terrorism was not explicitly addressed as a coverage or an exclusion, Nageer said in an interview. As those contracts came up for renewal, reinsurance companies began to exclude that risk, and primary insurers withdrew coverage for it specifically, Nageer wrote in a June research report.

RenaissanceRe Holdings Ltd. indicated during its second-quarter earnings conference call a precursor to such an adjustment. Kevin O'Donnell, the company's president and CEO, assured investors that RenRe has been actively defending its book of business against pandemic losses during recent policy renewals.

"We were able to attain COVID-19 exclusions on many deals, and we're only comfortable renewing business without one when the underlying policy contained a COVID-19 exclusion, the product was intended to cover losses from economic recession ... or where exposure was minimal," O'Donnell said.

Marsh lobbied actively for Congressional renewal of TRIA, and was among the first to push the federal government for a similar program for pandemic risk. Nageer has researched for both initiatives and drew another likely parallel between this year's downturn and the 9/11 aftermath: the need for an affordable insurance market to keep small-business loans flowing.

After the terror attacks, banks began to require businesses to insure against terrorism to get loans, just as insurance capacity was contracting.

"This caused a slowdown in the construction industry," Nageer said. "Deals weren't able to get done." After the COVID-19 pandemic, lenders will likely apply the same scrutiny to business' revenue streams and their exposure to similar losses, he said.

Views differ on ideal model

Marsh believes that insurers should retain a portion of the risk as they do for terrorism loss coverage in a public-private venture, but three of the largest organizations representing insurance companies and brokers disagree with that provision.

The American Property Casualty Insurance Association, the Independent Insurance Agents & Brokers of America Inc. and the National Association of Mutual Insurance Companies introduced a proposal that would be government-funded and administered. TRIA is not a good model on which to base a public-private risk partnership because pandemic risk to too potentially widespread and unwieldy to underwrite, the trade groups said in a statement in May.

R.J. Lehmann, of the free-markets think tank the R Street Institute, said that not only should the industry not bear any of the risk for pandemic insurance, it also lacks the personnel to respond to a nationwide disruption like the one that COVID-19 caused.

Lehmann, who worked on the government-funded-only alternative the trade groups crafted, cited as an example the resources the insurance industry had to deploy to adjust the damages from Hurricane Katrina, the largest such response in history.

"Katrina pretty much maxed out the nation's claims-adjuster capacity just for that one event," Lehmann said. "If you were a claims adjuster, and you were in America, you got called to Louisiana and Mississippi."

The adjustment for the coronavirus pandemic would be larger by orders of magnitude, Lehmann said. Alternatively, under a government-funded and administered program, payments could be sent out not just from insurance agents and brokers but via banks who process business payrolls and any other entity with a direct line to companies, he said.

Dixon, of RAND, said the insurance claims mechanism would be an attractive vehicle to respond to pandemic stoppages, but would be less so if the private portion of the risk is very small.

"Pandemic losses are so large, the amount private insurance paid would be a drop in the bucket, so why spend all the effort to set up a public-private partnership?" he said.

However, Nageer noted that terrorism was once considered uninsurable and that since TRIA was adopted through a government-backed market, prices for coverage have come down and terms have grown more generous.

Chubb Ltd. put forth a public-private design that would encourage broad participation for small businesses for coverage that triggers automatically in times of lockdown while offering a separate program for mid-sized and large businesses that would be subject to an adjustment process.

Maloney said during her press conference to introduce the bill that she did not think a government-only program would gain enough support in Congress to pass.

Zachary Finn, a risk management and insurance professor at Butler University, said that with federal backing, pandemic losses can be insurable if risk is spread across enough policyholders, time and catastrophe exposures.

Catastrophe perils that are difficult to insure on a voluntary basis should be insured across major risks on a mandatory basis, Finn said. People exposed to floods but not terrorism could pay premiums for both, and cyber and ransomware insurance should be folded into coverage for pandemics, terrorism and other perils with potential widespread losses, he said.

"Then we'd be able fix problems that we already have instead of just solving new ones that pop up," Finn said.