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By: Zach Moura
Business interruption coverage typically requires that there be direct physical loss of or damage to property, and many business interruption policies contain virus exclusions. But there are currently a number of legislative proposals at the state and federal level seeking to expand business interruption coverage to cover pandemic-related business losses more generally, both prospectively and retroactively.
The House Financial Services Committee has proposed a bill that aims to create a reinsurance program similar to the Terrorism Risk Insurance Act (TRIA), but for pandemics. The Pandemic Risk Insurance Act (PRIA) would extend business interruption insurance to cover any loss resulting from a public health emergency arising from an infectious disease outbreak or pandemic. According to Chairwoman Maxine Waters, the PRIA “would create a reinsurance program similar to the Terrorism Risk Insurance Act for pandemics, by capping the total insurance losses that insurance companies would face.” Like the TRIA, the PRIA is forward-looking and seeks to safeguard businesses against future losses.
The PRIA would create the Pandemic Risk Reinsurance Program within the Treasury Department. Participation in the program would be voluntary and involve payment by carriers of a reinsurance premium to the Treasury, based upon actuarial calculations and program administration costs.
Under the current draft of the PRIA, the total amount insurers would have to pay out against a public health emergency is capped at $500 billion per year. The discussion draft of the PRIA offers several possibilities for establishing a qualifying public health emergency, such as a declaration under the Public Health Service Act, a presidential declaration under the Stafford Act, or certification by the Secretary of the Treasury.
In the event of a public health emergency, participating insurers would be obligated to pay out for covered losses up to 5% of their direct earned premiums from the preceding calendar year as a deductible. The program would reinsure the rest.
A professor at Butler University in Indiana who helped craft, outline, and lobby for the PRIA explained to Inside Indiana Business that the PRIA is “just a more efficient way for the government to backstop the insurance industry so that this coverage can exist in the private marketplace.” He believes that the PRIA could “turn the market for [business interruption] coverage back on.”
There is some question as to whether the proposed size of the program is sufficient. Some prominent investors have recently predicted that the COVID-19 pandemic could end up costing U.S. businesses as much as $4 trillion, 8 times the proposed cap on the program.
Nonetheless, some industry insiders are in favor of creating a backstop like that proposed under the PRIA, noting that the insurance industry is in the best position to offer this coverage as it has the experience to properly price it.
We will continue to monitor developments related to the PRIA and provide updates as they occur.
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