Re-rigging a ship is a difficult task at any time. Best perhaps not to start in the middle of a storm. Those who want to change the rules of insurance policies in the midst of today’s coronavirus crisis risk making a bad situation much worse. A chorus of public opinion and some lawmakers have suggested that insurers have a moral obligation to pay out to businesses and individuals that have fallen victim to the pandemic, regardless of small-print exclusions. The sentiment is understandable. But overriding contractual commitments would trample on the rule of law and endanger an industry that is vital to the functioning of modern economies.
Insurers point out, quite rightly, that they have specifically excluded pandemics or communicable diseases from some policies, having been alerted to the risks they pose by the Sars epidemic. If a whole category of event is excluded, it is hard to make a legal case that the policy is being incorrectly interpreted.
Lawmakers in the US are pushing nonetheless for the industry to soften its stance and pay out regardless of the shutdown costs. Insurers are right to push back. It may not be a welcome message for policyholders but the industry relies on contracts; it pays out from the premiums it collects and if it has not collected premiums to cover a risk like coronavirus, it cannot economically pay claims on such a risk. Retroactive amendments to policies would threaten the industry’s viability, and set a dangerous precedent that any contract can be overturned.
Sticking to contracts, however, will not obviate insurers from responsibility. Some policy wordings will not exclude coverage. Where that is the case, insurers must clearly pay out — even if it means bankruptcy. Many policies, such as in business interruption cover, may not be clear-cut.
A tacit acknowledgment of this is the decision by some insurers to rush to close loopholes, and be more explicit in their exclusion of pandemic risks, in policies that are up for renewal. This is regrettable. It undermines the whole principle of insurance, which is to protect against the unforeseen.
If grey-area policies end up in litigation that lasts months or years, that would be a travesty — businesses need answers one way or another, and in short order, if they are to have any hope of surviving this coronavirus crisis. Governments and regulators must press for an early resolution of such cases, with concrete guidance on policy meanings if feasible.
Erring on the side of honouring coverage could be expensive for insurers in the short term but at a time of unprecedented crisis, when the world is under such stress, executives would do well to demonstrate a conciliatory approach. To fail to do so smacks of practices that have given the industry a bad name.
Financially, the industry is in a more robust state to weather this storm than many previous ones. The introduction of more stringent capital regimes means that solvency ratios are high. There is also scope to cut dividends and to reduce new business to help boost solvency if needed.
Any structural changes to how pandemics are insured will require careful consideration. During the second world war, the US and UK governments provided insurance for damage incurred to private property but both initiatives ended in subsequent years. Lloyd’s of London, the insurance market, has a proud history of insuring any conceivable risk — at a price. It should play a role in any solution, but a state backstop may be required. Like terrorism and war, insuring pandemics may prove such a vast risk that public-private partnership is the only answer.
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