Speaker 1: Welcome to Prognosis. I'm Laura Carlson. It's stay two hundred
Speaker 1: and fifty eight since coronavirus was declared a global pandemic.
Speaker 1: Today we have a special edition of the show in
Speaker 1: collaboration with Bloomberg Law posted by David Schultz. Business Interrupted
Speaker 1: is a special investigation podcast. Bloomberg Law reporters examined how
Speaker 1: businesses of every stripe, large and small, assumed they had
Speaker 1: insurance that covered them in the event of a shutdown,
Speaker 1: and how those assumptions were by and large wrong. The
Speaker 1: Bloomberg Law team looked into so called virus exclusion clauses
Speaker 1: that insurers quietly inserted into many of their business policies,
Speaker 1: and how those clauses are now creating major strife between
Speaker 1: insurers and their policy holders. Here's David Schultz with more.
Speaker 1: It's hard to run a business, really hard. And I'm
Speaker 1: not talking about how it's difficult to make stuff or
Speaker 1: then convince someone to exchange their money for your stuff.
Speaker 1: It's hard because there's just so much unforeseeable stuff that
Speaker 1: can happen. A ship bing gets damaged, someone slips and
Speaker 1: falls in your aisle, there's a fire in the place
Speaker 1: next door. All of these are things that can wreak
Speaker 1: havoc on even a successful business. Also, this Broadway has
Speaker 1: extended its shutdown shutdown or shut it down start over
Speaker 1: shutdown plan in New York City. This is why insurance exists.
Speaker 1: It can help mitigate the risk of, say, a worldwide
Speaker 1: pandemic that shuts down Way. It feels like the entire world.
Speaker 1: And there actually is a type of insurance that covers
Speaker 1: this exact type of thing. It's called business interruption insurance.
Speaker 1: And a lot of businesses across the country and the
Speaker 1: world started filing claims on their business interruption policies when
Speaker 1: all this madness began earlier this year. However, the vast
Speaker 1: majority of those claims were denied because years ago, the
Speaker 1: insurance companies quietly inserted clauses into all of their policies
Speaker 1: that said they wouldn't pay out in the event of
Speaker 1: a pandemic. It's almost as though they knew this could happen. Now.
Speaker 1: I'm not saying that insurance companies knew that at the
Speaker 1: end of twenty nine there would be a novel coronavirus
Speaker 1: that originated in China and that it infects humans via
Speaker 1: the respiratory tract. If you're looking for conspiracy theories, you
Speaker 1: have come to the wrong podcast. But right now you
Speaker 1: might be asking yourself, what podcast did I come to? Well,
Speaker 1: you're listening to Business Interrupted from Bloomberg Industry Group, and
Speaker 1: I'm your host, David Schultz. This is a podcast about
Speaker 1: how businesses of every stripe, large, small, you name it,
Speaker 1: assume they had insurance that covered them in the event
Speaker 1: of a shutdown, and how those assumptions were by and
Speaker 1: large wrong. You'll hear from myself, along with Bloomberg reporters
Speaker 1: Lydia Bayout and Evan Weinberger from our corporate desk, and
Speaker 1: David Hood from our tax desk, about what happened to
Speaker 1: those this is why, and what might happen next. So
Speaker 1: back to what I was saying earlier, you might not
Speaker 1: have seen the pandemic coming, but the insurance industry knew
Speaker 1: it might happen. Insurres did their homework and realized it
Speaker 1: was likely there would be a pandemic of some kind
Speaker 1: at some point, that it was in fact foreseeable. They
Speaker 1: paid very close attention to the stars outbreak back in
Speaker 1: the two thousands, and he's becoming more aggressive the number
Speaker 1: of victims expected to triple within weights, and they learned
Speaker 1: lessons that other industries and even many governments didn't. How
Speaker 1: do we know this, It's all in the policies that
Speaker 1: they wrote. Well, most commercial property policies contain what is
Speaker 1: the so called virus exclusion the quote exclusion of last
Speaker 1: due to virus or bacteria unquote. That's Scott Seamen, a
Speaker 1: Chicago based attorney with the firm Hinshaw and Culbertson who
Speaker 1: represents insurers and the commercial property policies. He's talking about
Speaker 1: our insurance held by many, many businesses. It's called business
Speaker 1: interruption insurance, and it's supposed to pay out if something
Speaker 1: out of your control happens and forces your business to
Speaker 1: shut down. It's supposed to replace some or maybe even
Speaker 1: most of the revenue you lost during a shutdown. But,
Speaker 1: as Scott Seaman just said, nearly all of the business
Speaker 1: interruption policies issued by nearly every insurance company, not all,
Speaker 1: but just about all came with a virus exclusion attached.
Speaker 1: This amendment specifically stated that the policy will not pay
Speaker 1: out if a business is shut down due to a pandemic,
Speaker 1: and that's no accident. The introduction of virus exclusions was
Speaker 1: a direct response to the last time a coronavirus threatened
Speaker 1: to infect all of mankind, the Stars epidemic. That epidemic
Speaker 1: caused some shutdowns in a few countries, but even then
Speaker 1: the claims were hefty, including one that reportedly totaled sixteen
Speaker 1: million dollars to an international hotel chain. Insurers saw this,
Speaker 1: it realized how much they'd have to pay out if
Speaker 1: a pandemic caused global shutdowns, and then quickly got to
Speaker 1: work adding these exclusions in. But while the insurers knew
Speaker 1: a global pandemic was possible, if not likely, the business
Speaker 1: owners who purchased their policies did not take Julia Mayor,
Speaker 1: the owner of a cafe and restaurant in Santa Barbara, California,
Speaker 1: She called her insurance broker right after the first COVID
Speaker 1: stay at home owners were issued and at that point
Speaker 1: are broker said, you do not have virus coverage and
Speaker 1: you do not have pandemic coverage, so there will not
Speaker 1: be any ability for you to access your insurance. And
Speaker 1: that was a very big shock for me to hear
Speaker 1: because I didn't expect that at all. I didn't expect
Speaker 1: my question wasn't am I covered? It was more when
Speaker 1: will this coverage kick in? As a result, instead of
Speaker 1: hunkering down and using her insurance money to dread water,
Speaker 1: Julia is barely staying in business and she's not alone.
Speaker 1: Business Owners across the country are getting their business interruption
Speaker 1: claims denied and denied fast, in some cases, within hours
Speaker 1: of filing them. So this might seem like a simple story, right,
Speaker 1: It's just those greedy insurance companies again, happy to collect
Speaker 1: your annual premiums, but always trying to avoid paying out
Speaker 1: a claim. And if you're a business owner like Juliet
Speaker 1: who's had her claim denied, that might be it. But
Speaker 1: the truth is it's actually much more complicated. If you
Speaker 1: start taking around looking at the origins of this virus
Speaker 1: exclusion and why it was even created, you wind up
Speaker 1: with existential questions about what insurance even is and why
Speaker 1: it exists in the first place. And podcast listeners, those
Speaker 1: are the questions we're going to ask, We're gonna look
Speaker 1: at buy So many companies that thought they were covered
Speaker 1: were in fact not what this means for them, and
Speaker 1: why the insurance industry maybe winning the battle but losing
Speaker 1: the war We'll hear from coffee roasters, theater owners, restaurateurs,
Speaker 1: angry politicians, frustrated insurance regulators, the Houston Rockets, and, for
Speaker 1: good measure, Benjamin Franklin. All will be explained. Stay with us,
Speaker 1: those nine justices in Washington that could be pretty hard
Speaker 1: to keep track up. That's where we come in. I'm
Speaker 1: Jordan Reuben and I'm Kimberly Robinson. On our podcast, Cases
Speaker 1: and Controversies, we give you a week by week accounting
Speaker 1: of the Supreme Court, the filings, the arguments, the opinions,
Speaker 1: and much much more. So check in on Fridays with
Speaker 1: Cases and Controversies to find out what's coming up on
Speaker 1: the horizon at the Supreme Court. Download and subscribe wherever
Speaker 1: you get your podcasts. So before we go any further,
Speaker 1: we all have to be on the same page about
Speaker 1: what insurance actually is. This is the point of the
Speaker 1: podcast where I might play a clip from one of
Speaker 1: those old timey nineteen fifties instructional videos at the use
Speaker 1: of showing high school economics class but I'm not going
Speaker 1: to do that. Instead, I'm gonna go all the way
Speaker 1: back to the beginning, back when modern property insurance. As
Speaker 1: we know it today. Was basically first conceived by this guy.
Speaker 1: You may have heard of him, Benjamin Franklin. Yes, that
Speaker 1: Benjamin Glinn. Long before he graced the bill, before he
Speaker 1: even signed the Declaration of Independence, Franklin started the Philadelphia
Speaker 1: Contributorship for the Insurance of Houses from Losses by Fire.
Speaker 1: If they were around today, it would probably be called
Speaker 1: the pc I HLF. But that's neither here nor there.
Speaker 1: Franklin didn't invent insurance, but he did help to invent
Speaker 1: property and casualty insurance, and importantly, or at least importantly
Speaker 1: for the purposes of this podcast, the pc I HLF
Speaker 1: was the first insurance company to inspect properties and issue
Speaker 1: policies based on their risk. If your home was made
Speaker 1: of faulty materials or restore flammable materials in your basement,
Speaker 1: no policy for you. Why was it such a big
Speaker 1: innovation because it allowed the insurer to manage its own risk,
Speaker 1: the risk of having to pay out more in claims
Speaker 1: than it's actually collected. As long as everyone's house doesn't
Speaker 1: catch on fire all at the same time, if you're fine,
Speaker 1: your policy holders pay their premiums. Their houses don't catch
Speaker 1: on fire, so they don't file claims, but when they do,
Speaker 1: you can afford it because you've insured lower risk houses. Hopefully.
Speaker 1: That's a really fundamental principle. And here's another way to
Speaker 1: put it. This is Dani Schwarz, a law professor at
Speaker 1: the University of Minnesota who specializes in insurance. The broad
Speaker 1: principle is one that's been around for for really the
Speaker 1: history of insurance, which is, insurers thrive when they can
Speaker 1: ensure risks that are not correlated with one another. So
Speaker 1: insurers like to find risks that are not correlated, and
Speaker 1: so then that's the question of, okay, well, how do
Speaker 1: you identify correlated risks? And so historically there were exclusions
Speaker 1: for war, there were exclusions for earthquakes, or exclusions for floods,
Speaker 1: lots of events that could simultaneously result in coverage for
Speaker 1: policy holders. That is a really important point. Insurers don't
Speaker 1: want to cover events that could cause all of their
Speaker 1: policy holders defile claims all at the same time. In
Speaker 1: other words, and unforseeable event is okay as long as
Speaker 1: it's both unforeseeable and discreet. But what does that mean
Speaker 1: for small businesses small business owners. Let's say, for example,
Speaker 1: a cafe owner in Santa Barbara, California. They're just trying
Speaker 1: to earn revenue and not go out of business. A
Speaker 1: business insurance policy is something they know they have to get,
Speaker 1: but for most small entrepreneurs it's probably not among the
Speaker 1: top one hundred most important decisions they have to make
Speaker 1: in running their business. However, there are now a whole
Speaker 1: lot of business owners who are really wishing they spent
Speaker 1: more time looking over the insurance policies they assigned years ago.
Speaker 1: And this isn't just a big business thing or a
Speaker 1: small business thing. It's not limited to one industrial sector
Speaker 1: or one part of the country. Celebrity chefs are having
Speaker 1: problems with their insurance. Big clothing retailers are having problems,
Speaker 1: and even the NBA's Houston Rockets filed the lawsuit after
Speaker 1: their business interruption claim was my apologies rejected Bloomberg Laws.
Speaker 1: Lydia b you didn't speak with James Harden, but she
Speaker 1: did speak with a lot of small business owners and
Speaker 1: she says, right now, many feel like they were sold
Speaker 1: a bill of goods. Lydia takes over the story from here.
Speaker 1: Julia Meyer, the cafe owner we heard from earlier, has
Speaker 1: had truly awful luck with her business Interruption Insurance. The
Speaker 1: claim she filed this year after the pandemic shut her
Speaker 1: cafe down wasn't the first time she thought her policy
Speaker 1: would cover her but didn't. Back in, wildfires burned hundreds
Speaker 1: of thousands of acres in and around Santa Barbara, where
Speaker 1: her cafe is located. Huge parts of the southern California
Speaker 1: town were evacuated. So we were watching the fire kind
Speaker 1: of come across our city and they were evacuating block
Speaker 1: by block. Julia actually proactively called her insure before she
Speaker 1: shut down her cafe. Are Insurance said, well, once you're
Speaker 1: once your business falls into a mandatory evacuation, you we
Speaker 1: can talk. And we were one block away from the
Speaker 1: mandatory evacuation. That's the thing that time, Julius policy only
Speaker 1: kicked in if the government forced her business to shut down.
Speaker 1: It didn't matter that she couldn't have kept her cafe
Speaker 1: open anyway. There weren't many customers lining up to eat
Speaker 1: sandwiches and drink coffee with a wild fire looming. The
Speaker 1: policy required a ruling that's called a civil authority. Then,
Speaker 1: less than a month later, heavy rains came and with
Speaker 1: the landscape charred from the fires, mud slides became a problem.
Speaker 1: They are finding many cars. We don't know where those
Speaker 1: vehicles were parked last night, sometime after the rain came,
Speaker 1: mud surrounded them and carried them off. In fact, they
Speaker 1: were so bad they blocked the main highways leading in
Speaker 1: or out of the town. Julia thought, well, if people
Speaker 1: can't access my business because a civil authority shut down
Speaker 1: the roads, maybe that fits the criteria. So she tried
Speaker 1: again and reopened her already denied claim. But no luck.
Speaker 1: That was also denied because again we could get into
Speaker 1: our doors. Ultimately, Julia says she lost two months of
Speaker 1: revenue and survived only thanks to a loan from the
Speaker 1: Federal Small Business Administration. Bonnie Shock is also no stranger
Speaker 1: to how insurance companies work, but that's because it runs
Speaker 1: in her family. My father happened to be UM, an
Speaker 1: insurance underwriter, and I'm married to an insurance adjuster UM,
Speaker 1: so I've been around the industry quite a lot in
Speaker 1: my life. Bonnie runs the Fox Theater, a one thousand,
Speaker 1: one hundred and sixty four seat venue in downtown Tucson, Arizona. Fox,
Speaker 1: Like Julia, Bonnie submitted a business interruption claim after the
Speaker 1: pandemic hit, and like Julia, it was denied and the
Speaker 1: Fox theater actually had an endorsement and its policy that
Speaker 1: covered communicable disease. So our communicable diseases endorsement, one would
Speaker 1: think we would have been paid out on, but in
Speaker 1: fact that it's not the case because um, in that instance, uh,
Speaker 1: the policy requires that there actually be an incidence of
Speaker 1: disease in the space that requires the shutdown. Because this
Speaker 1: is a circumstance where the shutdown is related to the
Speaker 1: possibility and the and the UH avoidance of such a
Speaker 1: of of such an incidence, that that portion of the
Speaker 1: policy and that endorsement did not pay off. So, just
Speaker 1: to drive that point home, Bonnie's claim would have been
Speaker 1: paid out had there been an actual case of COVID
Speaker 1: nineteen at the theater. The policy requires that there actually
Speaker 1: be an incidence of disease. But because the Fox was
Speaker 1: shut down preemptively to prevent the spread, no dice. If
Speaker 1: that claim had been paid at the beginning of the pandemic,
Speaker 1: Bonnie says, the Fox could have avoided a lot of
Speaker 1: the struggles that followed. So, um, we are that very
Speaker 1: particular type of operation that simply cannot operate now, and
Speaker 1: what we're learning, unfortunately, is just how important that coverage,
Speaker 1: that that money could have been, because this is going
Speaker 1: to extend for at least another six months before we
Speaker 1: feel confident or in any kind of confidence whatsoever that
Speaker 1: we would be able to start holding events again and
Speaker 1: actually earning revenue again. Unlike Bonnie Bobby, Stucky didn't have
Speaker 1: a lot of experience with his insurer or the insurance
Speaker 1: industry at large before the pandemic. Stucky is a restaurateur
Speaker 1: who owns four places in Boulder and Denver, Colorado, everything
Speaker 1: from fine dining to fast casual pizza. He says when
Speaker 1: this all started he wasn't really planning for the worst. Well,
Speaker 1: I think when it first arrived, I think all of
Speaker 1: us were a little bit of asleep at the wheel.
Speaker 1: I mean, I think we had you know, my wife
Speaker 1: is naturally a nervous nellie and a worry Warton bought
Speaker 1: mass back in January, bought gloves. But I think we
Speaker 1: were just going through our typical day. And then it
Speaker 1: was funny. I was a guest civilier at an event
Speaker 1: March nine in New York where they had they had
Speaker 1: people from all over the world. There my wife and
Speaker 1: I flew there and she gave me a kit to
Speaker 1: go do wine service that night. She's like, okay, here's
Speaker 1: your parrel for your pocket. I want you to wash.
Speaker 1: You know, like we were hearing about it. But this
Speaker 1: is how fast it crept up on us. Is That
Speaker 1: was March ninth or tenth. By the next week, all
Speaker 1: of America was shutting down very quickly. The gravity of
Speaker 1: what was happening set in, and shortly after that, the
Speaker 1: Governor of Colorado, Jared Polis, issued shutdown orders by acting boldly,
Speaker 1: now we can limit the duration of this economic crisis
Speaker 1: rather and I will. And I literally told my staff
Speaker 1: in all Navite, I said, everyone was stressed out. I said,
Speaker 1: you know what we're gonna be. Okay, I've been paying
Speaker 1: business interruption insurance for fifteen years, that's what this is for.
Speaker 1: I hit send on that the second we get closed
Speaker 1: by the mayor of the governor, and that's exactly what
Speaker 1: Bobby did. We got closed, hit send to Farmers Insurance
Speaker 1: and I've never seen a reply come back that quick
Speaker 1: from an insurance claim saying UH denied. That's an important detail.
Speaker 1: We heard from several business owners who filed claims that
Speaker 1: their claims were denied really really quickly, like within a
Speaker 1: matter of hours. Bobby says he thinks this shows how
Speaker 1: well prepared the insurance industry was for this pandemic. This
Speaker 1: is not my job to be an expert of insurance,
Speaker 1: but I do know that I would have expected at
Speaker 1: least an investigation and maybe an on site visit if
Speaker 1: you were going to give a denial that quick. And
Speaker 1: my gut instinct is when you give a denial that quick,
Speaker 1: because you can't get that community to all the insurance
Speaker 1: employees that quick, that was probably premeditated. That they were
Speaker 1: probably planning this about the time when my wife bought
Speaker 1: the gloves in January. We reached out to Farmers Bobby's insurer.
Speaker 1: In an email from their spokesperson, they didn't comment on
Speaker 1: the speed of their denial, but on Bobby's particular claim.
Speaker 1: They did say, quote, in this circumstance, the claim for
Speaker 1: COVID nineteen related damages, including those resulting from governmental stay
Speaker 1: at home orders, is not covered under the policy and
Speaker 1: is subject to applicable policy exclusions. Unquote. That was Bloomberg
Speaker 1: Law Financial Services reporter Lydia Bayed, So that raises the
Speaker 1: question what exactly was the insurance industry doing in the
Speaker 1: months leading up to the pandemic. In the weeks immediately
Speaker 1: after all this craziness started, it seems like they really
Speaker 1: wanted to make sure they did not have any exposure
Speaker 1: to business interruption claims from stores that were shut down.
Speaker 1: Were these insurers just twirling their bad guy mustaches while
Speaker 1: laughing and count seem their policyholders money. No, No, they
Speaker 1: were not. The truth is it wasn't that the insurance
Speaker 1: industry didn't want to pay off business and eruption claims.
Speaker 1: It was that the insurance felt like they couldn't Blue
Speaker 1: Brook Laws. Evan Weinberger dug deep into the insurance industry
Speaker 1: is thinking here, and he explains what was going on
Speaker 1: this summer. We spoke to Ray Farmer. He's the top
Speaker 1: insurance regulator in South Carolina and the president of the
Speaker 1: National Association of Insurance Commissioners. And Ray got right to
Speaker 1: the point, you know you have an ask, but I'll
Speaker 1: tell you, in my opinion, of pandemic is not insurable.
Speaker 1: That's a line that we heard over and over and
Speaker 1: over and over again when we were reporting out this podcast.
Speaker 1: Insurance can help protect you from some really catastrophic events,
Speaker 1: but a global pandemic just isn't one of them. The
Speaker 1: reason gets back to what Dan Schwartz, the Minnesota law
Speaker 1: professor said earlier, the whole correlated risk thing. David Sampson,
Speaker 1: the head of the American Property casualty insurance is so
Speaker 1: siation breaks it down here. In other words, there are
Speaker 1: just some risks that exists that are not ensurable risks,
Speaker 1: and pandemics are one of those risks that are at
Speaker 1: this point in time, largely uninsurable. The insurance product and
Speaker 1: the insurance industry was never designed and can't design a
Speaker 1: product that will cover the collapse for the shutdown of
Speaker 1: an entire nation's economy all at one time. It's a
Speaker 1: point that gets at some really fundamental questions about what
Speaker 1: insurance actually is and what it can and can't do.
Speaker 1: And make no mistake, if insurers did have to pay
Speaker 1: out all or even most of the business interruption claims
Speaker 1: they've received, it's not an exaggeration to say that lots
Speaker 1: and lots of insurance companies, maybe even most, would go
Speaker 1: out of business. Sampson says the entire insurance industry has
Speaker 1: roughly eight hundred billion dollars in cash to pay any
Speaker 1: and all claims that may arise. But he says industry
Speaker 1: data shows that pandemic related losses for just small companies
Speaker 1: are running at four hundred billion dollars a month. It
Speaker 1: would end up being a solvency event for the industry
Speaker 1: and inhibit the ability of the industry to pay for
Speaker 1: all of the claims that are covered in policies, both
Speaker 1: on commercial policies as well as personal lines policies. It
Speaker 1: would take only a couple of months before all of
Speaker 1: that statutory surplus is exhausted, and then who's going to
Speaker 1: be left to pay planes for uh, you know, tornadoes
Speaker 1: and hurricanement. There's an important point to make here. Some
Speaker 1: insurers did sell policies that covered pandemics. After all, you
Speaker 1: didn't get almost anything insured. Used to be common practice
Speaker 1: for movie stars to ensure their own faces, but the
Speaker 1: question is at what price. Here's an example, you know, Wimbledon,
Speaker 1: that big tennis tournament in England. It's unclear why, but
Speaker 1: ever since the Stars outbreak, the organizers of the tournament
Speaker 1: purchased a business interruption policy that specifically covered pandemics. They
Speaker 1: were covered after this year's tournament had to be canceled,
Speaker 1: but their coverage reportedly came at the cost of nearly
Speaker 1: two million dollars a year every year for almost two
Speaker 1: decades leading up to this year. Rhonda or In, an
Speaker 1: attorney with the firm Anderson Kill who represents policy holders
Speaker 1: and suits against their insurance companies, says, it's irrelevant whether
Speaker 1: a business could have or couldn't have protected itself before
Speaker 1: the pandemic. That's a fundamental misunderstanding of the role insurance
Speaker 1: is supposed to play in society. She says, who steps
Speaker 1: forward in a national crisis of this scale is always
Speaker 1: a capitalist society, a conflict between government and private industry.
Speaker 1: So you have insurance companies that are supposed to step
Speaker 1: forward in a crisis, and it sounds like they're pushing
Speaker 1: back and saying, sorry, this one's too big for us.
Speaker 1: We're gonna step back now. And where this is the
Speaker 1: government's problem. This crisis is too huge for a private
Speaker 1: industry to handle. It has to be handled on the
Speaker 1: government level. That is a deep philosophical conversation, really, And
Speaker 1: she says that would be fine, except the government doesn't
Speaker 1: treat insurance companies like normal companies. For example, they enjoy
Speaker 1: lots of perks from the government, like exemptions from antitrust laws.
Speaker 1: Insurance companies are not supposed to be cutting their lasses
Speaker 1: when there's a crisis. That is the time for them
Speaker 1: to step up and say they're here. It's completely backwards
Speaker 1: for the insurance industry to say, but if we pay,
Speaker 1: these losses will go back for him. Well, I guess
Speaker 1: you didn't do a good risk job with your reserves.
Speaker 1: Then that is your raison debtre that's what you are.
Speaker 1: Congress can and does get involved in regulating insurers, but
Speaker 1: really the lion share of the oversight happens at the
Speaker 1: state level. Mike Krieedler, the top insurance regulator in Washington State,
Speaker 1: says he's not happy with how quickly insures our rejecting
Speaker 1: claims in some cases just hours after they've been filed.
Speaker 1: Became clear that the insurance companies were, in my opinion,
Speaker 1: being somewhat cavalier in their response to their policy holders
Speaker 1: as to whether they had coverage or not. I made
Speaker 1: it very clear. I sent out a notice to all
Speaker 1: of the insurance companies saying, if if you deny a
Speaker 1: claim for business interruption, you would have a legal obligation
Speaker 1: to give a thorough and complete answer as to why
Speaker 1: you're covered or not covered. But while Creeler made bristle
Speaker 1: at how the message is being delivered, he ultimately agrees
Speaker 1: with Samson that this crisis is not something the insurance
Speaker 1: industry can be expected to handle. As a player in
Speaker 1: the public sector. However, Creeler is thinking about what all
Speaker 1: this means. He says it's not tenable to just tell
Speaker 1: businesses they can't get insurance for any future pandemic shutdowns,
Speaker 1: because now we all know how devastating a pandemic can
Speaker 1: be and how it can hit at any time. If
Speaker 1: businesses can't ensure this risk, banks won't lead to them.
Speaker 1: Creeler can already imagine what discussions and boardrooms will be
Speaker 1: like when companies learn they can't ensure pandemic risk. Listen,
Speaker 1: we've got to have some kind of coverage here. You know,
Speaker 1: I can't convince the banks. I can't convince my stockholders
Speaker 1: that this is a prudent activity. Uh. If we've got
Speaker 1: this kind of risk cat hang over our head, So
Speaker 1: you've got to offer me insurance coverage. That's who's going
Speaker 1: to have lead the charge. Then with the Congress. Congress
Speaker 1: is going to feel some hot breath in the back.
Speaker 1: That's GONDO on this one. We talked about this with
Speaker 1: Steve Dennis, the head of the Small Business Finance Association.
Speaker 1: That's a group that represents banks who make loans to
Speaker 1: businesses like these. He was genuinely unsure how things would
Speaker 1: play out in the future if small businesses can't get
Speaker 1: pandemic insurance. He said, many of the lenders he represents
Speaker 1: are struggling already and he doesn't know how they'd be
Speaker 1: able to take on the risk of lending to an
Speaker 1: uninsured business. Ultimately, Dennis says operating a small business needs
Speaker 1: to somehow be made less harrowing. The federal government needs
Speaker 1: to quote send a message to small business owners that
Speaker 1: it's safe to open their doors unquote. That was Bloomberg
Speaker 1: Law Financial Services reporter Evan Weinberger. All right, so we've
Speaker 1: established that the ball is in Congress's court. All those
Speaker 1: lawmakers on Capitol he'll have to do is remake the
Speaker 1: entire property and casualty insurance industry. This is where you
Speaker 1: have an essentially unstoppable force meeting an immovable object, you
Speaker 1: have insured saying pandemics are essentially unensurable events because they
Speaker 1: hit everyone all at once, and you have business owners
Speaker 1: saying we can't function without insuring the risk of a
Speaker 1: future pandemic. Bloomberg taxes. David Hood talked to lawmakers on
Speaker 1: both sides of the aisle about this and found few
Speaker 1: signs that they're anywhere close. Believe it or not, there
Speaker 1: actually is precedent for Congress stepping in and forcing the
Speaker 1: insurance industry to cover something it wasn't or just creating
Speaker 1: a whole new insurance product out of whole cloth. That's
Speaker 1: basically what happened in the late nineties sixties with the
Speaker 1: creation of the National Flood Insurance Program and if I P.
Speaker 1: Congress got tired of stepping in and footing the bill
Speaker 1: to rebuild communities after floods, but no private company would
Speaker 1: offer flood insurance. It was that whole correlated risk thing.
Speaker 1: Remember what Professor Schwartz said earlier, if when they can
Speaker 1: ensure risks that are not correlated with one another, So
Speaker 1: now apply that to floods. In Hurricane Betsy, caused an
Speaker 1: inflation adjusted eleven and a half billion in damages. That
Speaker 1: was the final straw the eye of the hurricane crosses
Speaker 1: key logo heading west. So what Congress did with the
Speaker 1: n f I P was basically just create its own
Speaker 1: insurance company. Now, through this program, private companies can sell
Speaker 1: you a flood policy, but all the premiums go to
Speaker 1: the federal government and all the claims are paid by
Speaker 1: Uncle Sam. So that's one possible model, but that might
Speaker 1: not be the best model for Congress. According to Vicky Schmidt,
Speaker 1: she's the top insurance regulator in the state of Kansas.
Speaker 1: There are some compelling arguments that probably could and should
Speaker 1: be made that it's not the most well run program,
Speaker 1: and it's expensive and it can be abused. Vicky's midwesternness
Speaker 1: is showing. What she's too polite to say is that
Speaker 1: the n f I P is in deep trouble. Because
Speaker 1: it's run by the FRONMNT, there's been a strong incentive
Speaker 1: to keep premiums lower than they should be to avoid
Speaker 1: angering voters in coastal states. As a result of this
Speaker 1: and the results of you guessed it, climate change, the
Speaker 1: n f I PEOPLE is operating an enormous deficit year
Speaker 1: after a year seventeen study from the Congressional Budget Office
Speaker 1: found that in an average year, the program pays out
Speaker 1: around one point four billion dollars more than it brings
Speaker 1: in from premiums, which means taxpayers are subsidizing this insurance
Speaker 1: program to the tune of around one point four billion
Speaker 1: dollars a year. Before we're well above working. Of course,
Speaker 1: it had to be in the range. So even though
Speaker 1: floods happen more frequently than global pandemics, maybe federally run
Speaker 1: and pandemic insurance isn't the way to go. There's another
Speaker 1: option Congress can consider. In fact, they already did it
Speaker 1: once after the terrorist attacks of September eleven, and we
Speaker 1: have unconfirmed reports this morning that a plane has crashed
Speaker 1: into one of the towers. Back then, this is were
Speaker 1: in a similar situation to where they are now. They
Speaker 1: needed to be able to ensure the risk of another
Speaker 1: terrorist attack happening, but the insurance industry felt they couldn't
Speaker 1: handle that. Mike Creedler, the insurance Commissioner of Washington State,
Speaker 1: remembers it, well, the losses could have been really quite
Speaker 1: unprecedented depending on the Terrorism Act, and getting insurance companies
Speaker 1: to build that into their into their policies, they found
Speaker 1: extremely difficult to do. Um and in order to make
Speaker 1: sure that you were having adequate coverage for all kinds
Speaker 1: of losses, including acts of terrorism. Um, the federal government
Speaker 1: stepped in. What they did was create the Terrorism Risk
Speaker 1: Insurance Program. Instead of essentially having the federal government issue policies,
Speaker 1: what Congress did was tell private insurans, hey, you need
Speaker 1: to issue policies that cover terrorism, but if a terrorist
Speaker 1: attack actually happens and your claims exceed a certain mount
Speaker 1: we the U S taxpayers will cover the rest. In
Speaker 1: this way, the federal government essentially became what's known as
Speaker 1: a reinsurer, an insurance company that covers other insurance companies.
Speaker 1: It's kind of like the insurance industry version of that
Speaker 1: movie Inception very meta. This can't be done. Dreams within
Speaker 1: dreams is too unstated. It is possible, so this seems
Speaker 1: like a viable option. Tell ensures they have to cover pandemics,
Speaker 1: but let them know that John and Jane taxpayer will
Speaker 1: have their backs if the amount of claims gets too big.
Speaker 1: And actually this is exactly what some lawmakers want to do.
Speaker 1: Carolyn Maloney, a senior Democrat from New York who sits
Speaker 1: on the House Financial Services Committee, introduced to bill in
Speaker 1: May that would create something like the Terrorism and Risk
Speaker 1: Insurance Program, but for pandemics. After the terrorist attack on
Speaker 1: nine eleven, the economy and New York completely shut down.
Speaker 1: I can tell you you could not even insure a
Speaker 1: hot dog stand. We couldn't build anything. Everything stopped because
Speaker 1: insurance companies would not ensure any property against terrorist attacks.
Speaker 1: But Congress recognized that if companies couldn't get terrorism insurance,
Speaker 1: then there would be no more construction and millions of
Speaker 1: jobs would be lost. But even this might not be
Speaker 1: palatable for someone capital Hill. Blaine Lucameyer, a Missouri Republican
Speaker 1: who also sits on the House Financial Services Committee, says
Speaker 1: without some kind of backstop, Maloney's bill could lead to
Speaker 1: the government spending a nearly infinite amount of money if
Speaker 1: another pandemic hits the program that she's outlined. Quite frankly, Uh,
Speaker 1: and my mind has got a lot of problems with it.
Speaker 1: And I just really don't see that it's um it's
Speaker 1: got much of a chance of working. Uh, It's just
Speaker 1: not something I think can actually happen. It's poorly structured
Speaker 1: and costs her you know, holy account. Or do we
Speaker 1: really have a backstop or do we not have a backstop.
Speaker 1: This thing with the Luke Myer is ultimately of the
Speaker 1: school of thought that a pandemic is an unensurable event
Speaker 1: and the only way to respond to it is to
Speaker 1: do exactly what Congress is already doing right now. Number One,
Speaker 1: is it's something we can actually fix and prepare for,
Speaker 1: because this is a once in a hundred year event, apparently,
Speaker 1: is you know, this seems to be the magnitude of
Speaker 1: this pandemic, seems to be comfortable to nothing until other
Speaker 1: than one back in the early ninet you know, So
Speaker 1: how do you prepare for something, you know, just even
Speaker 1: fifty years in the future, you know, is it something
Speaker 1: that we're maybe better off just left to responding to
Speaker 1: at that moment and just do like we're doing now,
Speaker 1: just come up with a solution to fix that problem
Speaker 1: at that point in time, Uh, so that we can
Speaker 1: continue to exist and get our company, our company's and
Speaker 1: nan backup in business, you get employees back to work,
Speaker 1: and get our country up and on again. Of course,
Speaker 1: this means that all the businesses that we're relying on
Speaker 1: their insurance policies to save them in a situation like
Speaker 1: the coronavirus, well, unless the government directly bails them out.
Speaker 1: That's it for them. There is another solution, one not
Speaker 1: quite as fatalistic as Luca Myer's. It would involve simply
Speaker 1: passing a law requiring insurance companies to pay out all
Speaker 1: the business interruption claims, both the ones already filed and
Speaker 1: ones that will be filed in the future. In other words,
Speaker 1: lawmakers retroactively go back and essentially take all those virus
Speaker 1: exclusions that were tucked into all the business and interruption
Speaker 1: policies and basically obliterate them, putting aside the dubious legality
Speaker 1: of lawmakers just rewriting existing contracts. Doing this would be extreme,
Speaker 1: so extreme that few, if anyone, in Congress is even
Speaker 1: talking about it. But if you travel north a few
Speaker 1: hundred miles to Albany, New York, Robert Carroll will be
Speaker 1: glad to chat with you. He's a state legislator from
Speaker 1: New York City who has a bill that would mandate
Speaker 1: retroactive payment of post pandemic business interruption claims. These small
Speaker 1: businesses of zero bargaining power. A broker comes to them
Speaker 1: says you should have this insurance. Sometimes the state, and
Speaker 1: in New York, the state requires certain small businesses to
Speaker 1: carry certain um casualty and liability insurance which sometimes business
Speaker 1: interruption and baked into UM and they pick it out
Speaker 1: the way you picked the between a Verizon an a
Speaker 1: T and T cell phone contract, or the difference between
Speaker 1: a Bank of America and Wells Fargo mortgage. UM. You
Speaker 1: know you are not negotiating the terms of those contracts.
Speaker 1: Carol says, in a way, his bill would prevent the
Speaker 1: insurance industry from successfully outsmarting its clients. You were smarter,
Speaker 1: more sophisticated than every small business in America. Kudos to you,
Speaker 1: but no, we're not gonna let you sit on possibly
Speaker 1: as much as one point four trillion dollars of reserves,
Speaker 1: pay out your executives million dollar bonuses at the end
Speaker 1: of this year, and see economic devastation ripple part our
Speaker 1: small businesses, especially in our big expensive cities. Carol's bill
Speaker 1: is showing no signs of momentum in Albany. Other similar
Speaker 1: bills than other state legislatures are suffering the same fate.
Speaker 1: But despite that, the insurance industry seems to feel the
Speaker 1: threat of this retroactive approach. In earnings calls earlier this year,
Speaker 1: several industry executives said they will fight legislation forcing retroactive payouts.
Speaker 1: Christopher Swift, the CEO of the Hartford Financial Services Groups,
Speaker 1: frame this debate in existential terms. Any effort to retroactively
Speaker 1: rewrite these contracts presume coverage where we remove exclusions with
Speaker 1: threaten the very foundation of the insurance industry. The same
Speaker 1: to city of contracts under our constitution and the principles
Speaker 1: of a free market economy. And finally, what does the
Speaker 1: insurance industry itself want to do well? Its plan would
Speaker 1: basically take the insurance industry out of the equation altogether.
Speaker 1: The industry's proposal would create kind of a piggy bank
Speaker 1: at the Treasury Department that businesses would gradually pay into.
Speaker 1: If another pandemic hits, or if COVID nineteen causes another
Speaker 1: federal emergency order, those companies could make withdrawals to cover
Speaker 1: lost revenue in payroll. If there's not enough funds, the
Speaker 1: government would cover the rest. And so the whole idea
Speaker 1: behind our proposal is, let's learn the lessons from what
Speaker 1: we're going through right now and design a more systemic,
Speaker 1: predictable approach. God forbid that we have future outbreaks of
Speaker 1: COVID nineteen or other pandemics. That's David Sampson, the insurance
Speaker 1: industry head who you've heard from earlier. He also said
Speaker 1: the new Treasury fund would be more effective than insurance.
Speaker 1: No claims, no forensic investigations into companies, books, no advanced documentation, automatic,
Speaker 1: fast and easy for everyone. But it doesn't seem like
Speaker 1: this is getting much traction on Capitol Hill. Powerful on
Speaker 1: makers like Maloney's say this wouldn't deal with the problems
Speaker 1: companies are facing now and that insures should play a
Speaker 1: more active role. That was Bloomberg Law tax reporter David Hood.
Speaker 1: And that's what the debate over the future of insurance
Speaker 1: will look like in the coming weeks, months, and most
Speaker 1: likely years. But what about the people who aren't so
Speaker 1: much worried about the future, but are worried about the present,
Speaker 1: The business owners who just need money to stay in business.
Speaker 1: Is there any hope for them? Well, since we talked
Speaker 1: with them earlier this year, Bonnie, the theater owner in Tucson,
Speaker 1: is still presiding over a totally closed theater. She told
Speaker 1: us she expects the Fox to be closed through the
Speaker 1: first quarter of next year, and said it's future will
Speaker 1: depend on some mix of philanthropy and new federal performing
Speaker 1: arts subsidies. By Be, the restaurant ur in Colorado, has
Speaker 1: had all of his insurance claims denied. He's suing, isn't sure,
Speaker 1: but doesn't have a court date until next summer. And Julia,
Speaker 1: the cafe owner in Santa Barbara, also hasn't collected on
Speaker 1: her business interruption claims, but she says she's still watching
Speaker 1: for new quarantine orders from California Governor Gavin Newsom. She
Speaker 1: says depending on the exact wording of a future order
Speaker 1: from Newsome, her insurance policy may finally kick in. Her
Speaker 1: cafe is still in business, but just for delivery and
Speaker 1: pick up with the rent sky high. She's not sure
Speaker 1: how much longer she can stay in business, but Julia
Speaker 1: told us we're still here and we're still hanging on.
Speaker 1: Business Interrupted was produced by myself, David Schultz, along with
Speaker 1: Lydia Bayoud, Evan Meineberger, and David Hood. Additional help came
Speaker 1: from Andrew Sadder. Our editors were Josh Block and Adam Allington,
Speaker 1: and Josh Block is our executive producer. If you love
Speaker 1: Business Interrupted or even just liked it, please share it
Speaker 1: on social media, and also check out our extensive coverage
Speaker 1: of the insurance industry and lots of other legal issues
Speaker 1: at Bloomberg Law dot com. And if you like podcasts,
Speaker 1: and if you've made it this far, I'm sure you do,
Speaker 1: check out our suite of podcasts. We've got weekly shows
Speaker 1: on everything from the environment to the Supreme Court. You
Speaker 1: can find them at news dot Bloomberg Law dot com,
Speaker 1: slash podcasts. That's news dot Bloomberg Law dot com slash podcasts.
Speaker 1: Thank you so much for listening. That was David Schultz
Speaker 1: from Bloomberg Law and that's it for our show today.
Speaker 1: For coverage of the outbreak from one and twenty bureaus
Speaker 1: around the world, visit Bloomberg dot com slash coronavirus and
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Speaker 1: The Prognosis Daily Edition is produced by Tophor Forhes, Jordan Gospoure,
Speaker 1: Magnus hen Rickson and me Laura Carlson. Original music by
Speaker 1: Leo Sidran. Our editors are Rick Shine and Francesca Levi.
Speaker 1: Francesca Levi is Bloomberg's head of podcasts. Thanks for listening.