Pandemic legislation: Lessons from the U.S. terrorism response
Will the United States federalize pandemic business-interruption losses in the same way the country did with terrorism losses?
The COVID-19 pandemic is the latest event to prompt questions about how society navigates very low-frequency, very high-severity events.
Just as with the Sept. 11, 2001 attacks, we are debating the limits of what private insurance, private industry, and the taxpayer can or should be expected to absorb.
In the case of this year’s unprecedented pandemic and lockdowns, the exposures in question are business interruption and lost income (BI), reflecting the devastating toll that shutdown orders and public fear have had on businesses large and small, particularly retail.
As with terrorism, questions of who should cover what, and how much, are informed by a number of variables — the science of underwriting, policy wording, market expectation, commercial custom and others. A once-in-a-century event such as the pandemic taxes all of these variables and raises fundamental issues of fairness in a world where unpredictable catastrophes happen.
In the wake of 9/11
Following the 2001 attacks, Congress enacted the Terrorism Risk Insurance Act of 2002, or TRIA, establishing a Terrorism Insurance Program within the U.S. Treasury. TRIA was renewed and amended in 2005, 2007, 2015 and 2019; the program currently runs until Dec. 31, 2027. Under the program: Reinsurance.
As such, losses under property & casualty insurance policies resulting from acts of terrorism (as defined in TRIA and certified at the time by Cabinet officials) are reinsured by the Federal government where the aggregate losses incurred by the insurance sector exceed a specified attachment point.
Under the most recent amendments, for the year 2020, the attachment point at $200 million, and the federal quota share of reinsurance coverage at 80% of losses in excess of the applicable insurer’s deductible (generally, 20% of the insurer’s direct earned premiums, or DEP), subject to the cap described below.
Neither the federal government nor any insurer that has met its deductible is liable for any portion of terrorism losses exceeding $100 billion on an industry-wide basis in a given year. In such event, the Treasury Secretary determines the pro rata share of insured losses to be paid by each insurer, but no insurer may be required to pay more than the aggregate of:
- Its deductible plus;
- Its retention under the reinsurance (that is, losses not reimbursed by the reinsurer’s 80% share).
Mandatory terrorism coverage
Participation in the terrorism insurance program is mandatory for each property & casualty carrier, and each such carrier must cover terrorism losses in its policies. However, insureds remain free to decline such coverage, and a carrier may reinstate a terrorism exclusion if the insured received notice of increased premium and failed to pay it.
Federal recoupment
The Treasury Secretary must recoup amounts paid by the government under the program by requiring insurers to impose premium surcharges and remit these to the government, up to a maximum specified in the statute (currently $37.5 billion, subject to additional adjustment beginning in 2021, less all insurer retentions and deductibles under the program). If this is not sufficient to recoup all government outlays, the Secretary may recoup additional amounts to the extent commercially practicable.
TRIA was a reaction to the insurance industry’s widespread non-renewal of terrorism coverage following 9/11 and concerns about subsequent attacks. The real estate and construction sectors in particular advocated for this backstop because of their unique exposure to large-scale terror attacks. There was widespread public anxiety about follow-on attacks from al-Qaeda or other militant groups.
Interestingly, unlike other major legislative initiatives in response to the 9/11 attacks, such as the USA PATRIOT Act, authorization of military response and so on, TRIA did not pass on a bipartisan basis. While the Senate vote was 86-11 and straddled party divisions, House members split overwhelmingly on party lines. Of the 227 aye votes, 207 were of President George Bush’s Republican Party, and of the 193 votes opposing TRIA, 183 were Democratic.
However, the 2019 reauthorization was virtually unanimous in both chambers (385-22 in the House), suggesting that the program has become more palatable over time. (The fact of an intervening Democratic Administration that supported reauthorization in 2015 may help explain acceptance across party lines.)
Pandemics: What can TRIA teach us?
On May 26, 2020, Rep. Carolyn Maloney (D–NY) introduced H.R. 7011, the Pandemic Risk Insurance Act of 2020, or PRIA. The legislation is currently in the House Financial Services Committee, chaired by Rep. Maxine Waters (D–Calif.).
In general, PRIA mimics the structure of TRIA, with two important departures: PRIA is voluntary among insurers on an annual basis (the terrorism insurance program under TRIA is mandatory), and PRIA lacks a recoupment mechanism.
On the numbers, PRIA would mostly be a more generous program than TRIA. PRIA’s Federal reinsurance quota share is 95% of losses exceeding deductible (compared to TRIA’s current 80%), although PRIA’s attachment point is $250 million, some $50 million higher than TRIA’s. An insurer’s deductible is 5% of DEP (TRIA’s insurer deductible is 20%), and PRIA’s cap on losses, beyond which neither the government nor an insurer is on the hook, $750 billion. TRIA’s $100 billion cap pales in comparison.
Predicting legislation, particularly during turbulent times and a presidential election year, is fraught with uncertainty. Yet some factors are coming into focus as variables that may help determine PRIA’s trajectory.
State legislative initiatives
Beginning shortly after the initial lockdowns in March, a number of states, including New York, California, Massachusetts, New Jersey, Louisiana, Michigan, Ohio, Pennsylvania, Rhode Island, South Carolina and the District of Columbia, began considering legislative bills that would retroactively require business interruption coverage in in-force property policies, even where such policies had contained an express exclusion for viral outbreaks.
Widespread adoption of such bills would effectively impose all pandemic-caused BI losses, both this year’s and those in future years, on the insurance sector.
Coverage claims
A number of lawsuits have already been commenced between insurers and insureds on BI coverage resulting from the pandemic. In many cases, the outcome hinges on whether, in the absence of an explicit exclusion, BI losses from the pandemic satisfy the requirement for “physical” loss or damage on which coverage in property policies is predicated.
At this early stage, it is impossible to predict categorically how insureds will fare in such claims, but there have been some notable victories thus far for carriers, suggesting that the physical-loss requirement could be a high hurdle.
Political maneuvering
The political landscape reflects the range of views on these issues. Business groups are perceived to be supportive of the state-level BI bills mentioned above, insofar as these constituencies, particularly smaller businesses, have complained bitterly that they expected their policies to respond to major events such as a pandemic.
The insurance industry has vigorously challenged this view, arguing that they did not price pandemics into premium rates and that imposing such liabilities on the insurance industry would wipe out insurers’ surplus. They have also invoked Constitutional contract-clause and due-process provisions. Insurers have largely been joined, and vocally so, by state insurance regulators and the NAIC, which has opposed the state bills.
Prominent Republican members of Congress, in open letters this past spring, supported this pro-insurer view as well. Democrats have seemed more sympathetic to imposing BI losses on insurers, a view that even President Donald Trump appeared to support in off-the-cuff public remarks on the pandemic in April.
Business groups and insurance groups have both made sympathetic statements about PRIA. Insurers seem especially pleased about its voluntary nature — suggesting that a consensus around this approach is coalescing.
However, interested parties might be waiting to see how their respective fortunes play out in other fora (such as state legislatures and the courts) before making a push to get PRIA adopted. PRIA does not appear to have solid bipartisan support, with some GOP members of Congress indicating opposition. With a divided Congress, any perception that support for the bill could break down along party lines could be a death knell unless substantial political pressure is brought to bear to move this issue to the forefront of public consciousness.
That said, despite the ubiquity of the pandemic in American life these days, the specific issue of BI coverage does not seem to have ignited as a “retail” issue. Both political parties may be waiting to see if this continues or if a game-changer between now and the November general election moves BI coverage to the front burner.
Despite the volatile political environment, PRIA represents an adaptation of the tried-and-true TRIA model for allocating catastrophic losses and perhaps the best hope to achieve predictability for the economic consequences of future pandemics and lockdowns.
Attorney Dan Rabinowitz (drabinowitz@kramerlevin.com) is head of the insurance practice at Kramer Levin Naftalis & Frankel LLP in New York.
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