Pandemic Risk Insurance Act and the future of business interruption insurance
What is PRIA, and how may it help mitigate the damages caused by the coronavirus pandemic?
The impact of COVID-19 on the international community cannot be overstated, and as our lives have seemingly come to a halt, so have the operations of many of the world’s businesses.
The insurance industry is no exception. It is perhaps ironic that while most insurance companies and agencies continue operating as “essential businesses” under applicable state mandates, the flood of claims under business interruption insurance policies could make the prospect of shuttering doors a real possibility.
In response to the tragedies of September 11th, 2001 (arguably the most appropriate comparison in magnitude to COVID-19 in a generation), the U.S. Congress passed the Terrorism Risk Insurance Act, or “TRIA,” which helped provide sufficient terrorism insurance to U.S. policyholders by mandating the offering of terrorism insurance coverage while providing a backstop for losses payable through funds provided by the U.S. Secretary of Treasury (the “Treasury”). It should come as no surprise that, in the wake of COVID-19, there is increasing momentum for the passage of a Pandemic Risk Insurance Act, or “PRIA,” as well.
What is PRIA?
One of the realities of a post-9/11 world was that the pricing and availability of terrorism insurance coverage was thrown into flux. Reinsurance markets around the world faced the prospect of drying up, and underwriting large, metropolitan risks would quickly become a laborious and risky endeavor. TRIA’s federal backstop provided the national and international insurance and reinsurance industries a financial cushion through the Secretary’s backstop to weather another potentially catastrophic event. At the same time, it provides prospective insureds access to terrorism coverage by requiring insurers to “make available” on most forms of commercial property and casualty insurance terrorism coverage.
The U.S. now faces a similar threat that the market for business interruption insurance will be substantially interrupted as well (pun intended). Fortunately, the TRIA model — which has seen bipartisan support over the last two decades and general support among the insurance industry — provides an efficient framework around which PRIA may be structured.
On March 18, 2020, Maxine Waters formally called for the implementation of PRIA, which would “create a reinsurance program similar to [TRIA] for pandemics, by capping the total insurance losses that insurance companies would face.” A number of initial structures have been suggested, including combining both TRIA and PRIA into one, singular piece of legislation that would provide insureds a second opportunity to purchase both TRIA and PRIA coverage at an enhanced premium.
More recently, a model PRIA draft bill (the “PRIA Discussion Draft”) has been circulating through Congress. The PRIA Discussion Draft very closely mirrors TRIA and requires participating insurers to “make available” insurance coverage for a “covered public health emergency,” which includes “any outbreak of infectious disease or pandemic” on terms that do not differ materially from the terms applicable to losses arising from other events.
The PRIA Discussion Draft would apply to any insurance company licensed in any U.S. state, territory or possession, as well as any insurance company eligible to write insurance in the U.S. on a surplus lines basis, including non-U.S. insurance companies listed on the Quarterly Listing of Alien Insurers of the NAIC. Like TRIA, such participating insurers would be subject to individual and industry deductibles, and then such insurers would share with the Treasury in losses up to certain thresholds.
PRIA versus TRIA
While it certainly makes sense that PRIA would follow in the footsteps of TRIA, there are a number of practical and legislative differences that could impact PRIA’s reach and success.
As an initial matter, terrorism risks and pandemic risks are inherently different. While both sets of risks present the prospect of catastrophic damage and immense insurance liabilities, terrorism risks are likely to be greatest in global city centers. While large metropolitan areas also are likely to be most impacted by pandemics, COVID-19 has clearly demonstrated that disease does not respect state lines or stay confined to discrete neighborhoods, with nearly every state imposing some level of business closures as a result of the pandemic.
As such, because PRIA will likely contemplate that pandemic insurance be provided on terms that “do not differ materially” from other components of business interruption insurance coverage, the insurance and reinsurance markets will need to collaborate closely to determine what the premium price points should be.
From a drafting standpoint, there are a number of important distinctions between TRIA and the PRIA Discussion Draft. First, the PRIA Discussion Draft is a voluntary program whereby participating insurers would be required to pay reinsurance premiums to the Treasury for participation; by contrast, TRIA is a mandatory program. Moreover, it also remains to be seen how broad PRIA’s “make available” requirement will extend if passed. TRIA requires that each insurer “shall make available, in all of its property and casualty insurance policies, coverage for insured losses…” By contrast, the PRIA Discussion Draft is worded slightly differently and requires that each insurer shall “make available, in all of its business interruption insurance policies, coverage for insured losses…” (Emphasis added). Therefore, on its face, TRIA is significantly broader and mandates that terrorism coverage be provided in connection with any commercial property and casualty insurance policy. In contrast, PRIA may only require coverage for “covered public health emergencies” in connection with business interruption insurance policies, and only then for voluntarily-participating insurers.
While certain components of PRIA have been met with general optimism, efforts to enforce retroactive coverage by insurance companies of COVID-19 claims (particularly when in-force insurance policies contain communicable disease exclusions) has been met with a significantly different tone from the insurance community.
A number of states have bills in their respective legislative chambers that would augment current in-force business interruption insurance policies to compel coverage for COVID-19. In addition, the “Business Interruption Insurance Coverage Act of 2020” draft bill has been circulating through Congress, which, if passed into law, would force all insurers that offer business interruption insurance to offer coverage for a viral pandemic and “[a]ny exclusion in a contract for business interruption insurance that is in force on the date of the enactment of [the] Act shall be void to the extent it excludes” viral pandemics. Similarly, PRIA also may require that participating insurers void exclusions in current, in-force policies for pandemic-related losses. However, the PRIA Discussion Draft currently leaves open as a discussion point whether this mandate would go into effect as of the date of PRIA or at some later date, and PRIA’s participation under the PRIA Discussion Draft would be voluntary. These “retroactive coverage” legislative efforts will quite likely be challenged in the courts should they become law.
While it may feel like we have endured a lengthy war against COVID-19, we may yet be in our early days with respect to formulating a recovery strategy. Numerous frameworks exist to help align the interests of current and prospective insurance policyholders and their respective insurance carriers to help mitigate past, present and future pandemic-related losses.
The TRIA model provides a proven framework to facilitate the implementation of PRIA efficiently. While it remains to be seen where federal and state legislatures ultimately land, it is likely inevitable that before COVID-19 is truly in the past, legislation to help mitigate the damage it has caused will become the law of the land.
Zachary Lerner is a partner at Locke Lord LLP and represents domestic and international insurance companies, insurance agents and brokers, reinsurance intermediaries, adjusters, third party administrators, captives, special purpose vehicles and other related entities in connection with their needs. Mr. Lerner also works with both insurance and non-insurance entities on an array of transactional matters, including mergers and acquisitions, corporate filings, annual reports and affiliate transactions.
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