By Naomi Grosman    |    15-minute read

In the summer issue of the CIP Society's Quarterly Review we’re exploring the impact of Covid-19 litigation on P&C insurance industry solvency; how the pandemic is affecting the industry's reputation; as well as checking in with adjusters, our industry's frontline workers.

Covid-19 litigation and insurance industry solvency

“[The pandemic] illustrates that most people didn’t have that coverage and there is a clear reason why the industry excludes this type of [coverage].”―Alister Campbell, PACICC

Business owners across Canada forced to close their operations due to the Covid-19 pandemic are looking at ways to recuperate the economic loss the global pandemic has thrust upon them.

But as business interruption insurance by-and-large does not cover pandemic-related losses, some have chosen the civil litigation route. In April, Alberta-based Merchant Law launched a business interruption class action lawsuit against 14 major Canadian insurers.

The law firm argues that loss of revenue related to Covid-19 should be covered by business interruption insurance and that “companies who provide business interruption insurance have shirked their obligations and are refusing to honour business interruption coverage,” the firm states.

Michael Doerksen, insurance lawyer at Field Law in Calgary, said proving that businesses are owed business interruption coverage due to Covid-19-related income loss will be an “uphill battle” to prove.

“They have the burden of proof…and in each case it’s going to come down to what the circumstances of interpretation of each policy and their variations,” Doerksen said. “Typical business interruption insurance is on an all risks basis and that will require insureds to establish direct physical loss to property and fortuitous peril (caused by the virus) — both of which will pose considerable difficulty to (prove).”

Pandemic coverage

Business interruption insurance with pandemic endorsements that would cover the losses businesses are encountering due to Covid-19 are both limited in supply and expensive, exorbitantly so for small businesses, said a Senior VP at global insurance brokerage HUB International.

“There are pockets of global insurers with a limited amount of policies giving insureds access to business interruption insurance with pandemic endorsements,” said Dave Chmiel, HUB’s Senior VP and National Director of Claims. “But like cyber insurance, it is very expensive and, in the middle market space, I’d say for the majority it wasn’t easily accessible.”

He said for small businesses, such as restaurants, pandemic coverage could cost $70,000.

“A hundred per cent of those small businesses would say no to that,” Chmiel said.

He said after the 2002-2004 SARS outbreak, pandemic coverage for big sporting events, such as world-renowned tennis match Wimbeldon, became more common.

“For those types of events, a pandemic endorsement on business interruption is well worth the investment,” Chmiel said. “The problem is that Covid-19 losses are hitting small and medium sized businesses in Canada and the U.S. the most where two-thirds of their income is lost.”

Solvency implications

According to rating company A.M. Best, both federal and state legislators south of the border are looking at ways to force insurers to pay for Covid-19-related business interruption losses typically excluded from commercial business interruption policies, which could lead to major solvency issues.

A.M. Best warns that if attempts are “successful in forcing insurers to retroactively apply cover for losses from COVID-19 related business interruption— despite specific exclusions in their policies—these considerations would have grave impacts for the industry, specifically for commercial lines insurers.”

Here in Canada, class actions such as the one brought forward by Merchant Law, if successful, could have solvency implications for the Canadian insurance industry, Field Law’s Doerksen said.

“With past disasters in Canada, when insurers have had to deal with big events like the Calgary floods or Fort McMurray wildfire, insurers have the opportunity to spread out premiums collected across the country,” he said. “If Covid-19 lawsuits are successful, that could open a floodgate of business interruption claims that could lead to serious solvency problems.”

Alister Campbell, president and CEO of The Property and Casualty Insurance Compensation Corporation, Canada’s insolvency protection organization, said going into the Covid-19 crisis Canadian insurers were “extremely well capitalized.”

He said if businesses are awarded pandemic-coverage through the courts, the solvency implications for insurers would be unrelated to the current financial stability of the insurance industry.

“A risk to the industry would unfold but it would require a real stretch for that to happen,” Campbell said. “Insurers haven’t been collecting premiums for it and don’t have reserves nor reinsurance for an exposure that there was no intention to cover.”

He said some insurers have acknowledged that policies for certain Canadian dentists, and hospitality programs include wording that indicates that pandemic losses are covered.

“At least one company has acknowledged it would lead to a significant loss because the policy wording was generous,” Campbell said. “Because the policies are open to clear and obvious interpretation that there was coverage…claims will be paid and reinsurance is expected to respond.”

He said other businesses being denied business interruption claims shows that it was never the intent of the industry to cover losses for pandemics such as Covid-19.

“It illustrates that most people didn’t have that coverage and there is a clear reason why the industry excludes this type of (coverage),” Campbell said. “The principal intent of insurance is to pool risk and cover claims that happen to a small pool, which is paid by the premiums of many.”

“An event like this pandemic that happens to everyone, insurers can’t price or risk select and those losses need to be addressed by government rather than private insurance,” he said.

One of the fundamental principles of insurance (an excerpt from the Insurance Institute's C16: The Business of Insurance, 2019):

“The premium shall be commensurate with the risk. If premiums charged were woefully inadequate, and if too many losses had to be paid, then insurance as a risk management system would fail.”

Doerksen said if the class action comes to trial — it still has to be certified — the court has to interpret the insurance agreements under strict legal tests and if policy ambiguity is found, the courts have to consider the implications of ruling in favour of the plaintiffs.

“That has to be informed by the (question) that if this sweeps the entire nation, requiring insurers to bail out every business, is that really a private insurance matter?” he said.

He said, like with any civil litigation, it is likely a matter of years until a ruling is made.

“The limitation period for even making a claim in Alberta is two years, so the claims themselves do not have to be sued on for some time — although I don’t see why people would wait,” Doerksen said. “If a business makes a claim to an insurer within a reasonable time frame and insurer denies the claim, (insureds) won’t waste their time (suing).”

PACICC’s Campbell said the organization is looking closely to other jurisdictions to see what judicial decisions could have implications in Canada because international insurers provide one-third of insurance capacity in Canada.

“If something troubling happens in another jurisdiction…judicial conclusions could have ripple effects,” Campbell said. “But the insurance industry has a common approach to pandemic coverage worldwide and it would take a real stretch for courts anywhere to conclude the industry should cover these losses.”

Industry reputation and Covid-19

“There is no template for communicating with consumers during this event.”―Pete Karageorgos, IBC

While the insurance industry has had its fair share of handling consumer concerns and expectations in the wake of large-scale and unprecedented natural disasters, nothing comes close to the impact the Covid-19 pandemic is having on Canadians and there is no how-to guide for insurers on pandemic communication best practices.

“There is no template for communicating with consumers during this event,” said Pete Karageorgos, Director of Consumer and Industry Relations at the Insurance Bureau of Canada. “One of the challenges has been trying to communicate within the framework of health and safety being of paramount importance and the real challenge has been getting our message heard and aligned with other messaging regarding health implications of the virus.”

He said the industry has come together with common messaging on lowering auto insurance premiums to those driving less frequently, payment assistance for those grappling with income issues and coverage adjustments for people using their home as offices. And consumer inquiries about these matters have been consistent.

“We reinforce this message that the insurance companies are there to work with (consumers) and it’s important to speak to representatives directly…and we are guiding consumers to brokers, agents, and companies directly for answers and support,” Karageorgos said. “It has been a challenge, it is a lot for consumers to keep track of and we highlight that we are here to assist them.”

He said despite the IBC’s and its member companies’ best efforts in communicating a consistent message to consumers regarding Covid-19-related insurance coverage matters, each insurer may be applying different tactics to help consumers, which can lead to some confusion.

Sal Bagazzoli, president and founder of Stoney Creek, Ont.-based brokerage Acumen Insurance Group, said insurance companies have stepped up to the plate but the response has been fragmented leading to confusion for brokers and thus consumers.

“Brokers — especially those with many insurance company partners — are having a difficult time having to explain the various fragmented options and industry consensus on what to do (is lacking),” Bagazzoli said. “The hard part is getting specific information and relaying those specifics to clients.”

He said, from a public relations standpoint, not having a more consistent message to consumers could be problematic.

Some of the industry's formal Covid-19 relief measures include Allstate's Stay At Home payments; Aviva's #StayHome auto endorsement; CAA's Auto Insurance Relief Benefit; Commonwell's "Pay It Forward" initiative; Gore Mutual's Customer Care Package; and Travelers Stay-at-Home Auto Premium Credit Program.

“It’s good that insurers have been trying to help consumers — that is great, but having a lack of industry consensus means brokers have to justify each company’s actions,” Bagazzoli said. “The industry could have set minimum standards that clients could expect, that would be better PR and lead to more consistency.”

He emphasized that brokers take the time to explain why there is discrepancy between each insurers’ response and that Canadian insurers are stable and still have brand strength.

But the impact a broker can have on their client is directly correlated with the relationship they have fostered with their client, he said.

“If brokers don’t have a good relationship and trust with their clients …they won’t be a broker for much longer coming out of this situation,” Bagazzoli said. “For brokers that don’t have that level of trust, they are going to have a hard time explaining these matters to customers who don’t have trust in their insurance company and don’t see their value — for that broker this situation is going to be much harder.”

He added that generally brokers are good at what they do and have good relationships with their clients on which they can rely during this crisis.

But he said the biggest potential public relations issue arising due to Covid-19 is confusion around business interruption insurance, which is rooted in the policy terminology.

What's in a name?

“There is a lot of confusion that has been started by our industry when we present a policy called ‘all risk’ (because by) using that specific term it puts the idea into the client’s head that everything is covered even when there are exclusions,” Bagazzoli said. “Why wouldn’t a customer think that (pandemic losses) are included?”

He said business interruption insurance should be sold using terminology such as a “multi risk” instead of “‘all risk’ because that term is deceiving and misleading.”

He said moving forward he will not be using the term “all risk” policy when selling business interruption insurance and it would be best if senior insurance decision-makers evaluate policy wording.

“As far as the client is concerned, they don’t understand these technical terms and industry jargon,” Bagazzoli said. “Brokers try to simplify terms when selling insurance policies and now we are having to defend ourselves so I hope at some point this issue will be addressed.”

He said the industry has made massive policy changes before and partnered with governments of all levels to address major gaps in insurance coverage.

“The industry needs to do what it did when we had the big flood issues,” Bagazzoli said. “Before (2013) the only water coverage available was sewer back-up, burst pipes and now there is overland flood coverage — the industry responded properly.”

IBC’s Karageorgos said the bureau has received inquiries from consumers regarding business interruption policies and how they may respond to pandemic-related losses.

Excerpt from IBC's Business Insurance Q&A (last updated April 24, 2020):

Will my standard business policy or business interruption policy cover me for interruptions due to COVID-19?

• Generally, commercial insurance policies and traditional business interruption policies do not offer coverage for business interruption or supply chain disruption due to a pandemic such as COVID-19.

• Some organizations may have purchased specialized contingent business interruption coverage, stand-alone business interruption coverage and supply chain disruption coverage which may be triggered as a result of the World Health Organization's declaration of a pandemic.

• Commercial insurance is complex and specialized and specific to your business which makes it important that you speak to your insurance representative if you have any questions or need clarification about your coverage. 

But a known issue that was particularly pronounced after the 2013 Calgary floods and now Covid-19 is that consumers tend to only see the value of their insurance policy after a loss occurs, which underscores the importance of consumer education.

“That is a critical piece — people need to understand their policies before the time comes that they have to use it,” Karageorgos said. “We try on a regular basis through various IBC communications to reach out to the public and assist with that effort which helps the industry reputation in showing that we are there to assist and provide help before rather than after an event.”

He said it’s not out of the realm of possibility that Covid-19 will change the business interruption insurance landscape.

“Another key lesson may be to look — post pandemic — at business interruption coverage options and availability,” Karageorgos said. “After Calgary, overland flood was not widely available but that changed. If we use that as a marker we might see something similar come out after pandemic — but only after society responds to the public health side.”

Checking in with our industry’s frontline workers

“We need to be cautious because adjusters want to help people, inspect and advise but sometimes we have to scale back to make sure the adjuster is comfortable but we also have to make sure the policyholder is comfortable.”―Jim Eso, Crawford & Company Canada

Like other sectors of the economy, the insurance industry has had to adjust to the new reality of working remotely because of Covid-19. But not all insurance transactions are compatible with government work-from-home guidelines and insurance adjusters have emerged as the industry’s own frontline workers.

And the pandemic doesn’t stop complex claims from arising, such as the ones resulting from the April floods in Fort McMurray, Alta.

Jim Eso, Senior VP of Claims Solutions at Crawford & Company Canada, said the global independent adjuster was able to mobilize its staff quickly in the wake of the Fort McMurray floods and avoid government travel restrictions.

“We were fortunate because we opened an office in Fort McMurray in 2016 for the wildfires,” Eso said. “At the time we thought it would be a temporary office but it ended up being a permanent location so our adjusters were ready to go and all personal protective equipment was ready to ship…that has made it simpler to follow government health and travel guidelines and avoid quarantining.”

He said in Fort McMurray, Crawford adjusters have been relying more heavily on its ‘WeGoLook’ application that facilitates remote claims handling.

WeGoLook is an application that helps businesses and individuals gather and validate information. According to Crawford's website, "WeGoLook combines technology with an on-demand workforce of over 40,000 Lookers to help businesses gather and validate information anytime, anywhere."

“We can use the app as a triaging tool for the most urgent files and, while in the past it has been used a cost control and time saving tool, now it is a safety tool,” Eso said.

Dara Banga, president and chief adjusting officer of Brampton, Ont.-based DBS Claims Solutions, said, despite there being a global pandemic, ultimately this is a time like any other for adjusters because they have to show up for the policyholder.

He said since early on in the pandemic DBS Claims Solutions have had team members ensuring that policyholders are pre-screened for Covid-19 symptoms prior to dispatching an adjuster to handle a claim.

“We retained experts to look at the pre-screening process…because our adjusters’ and the insureds’ safety is the most important (and) we were advised on social distancing, wearing gloves and masks…not having too many occupants in the room, getting more information and limiting time on site,” Banga said. “We are also using technology where we can to triage claims before we do an on-site visit.”

Both Crawford & Company Canada and DBS Claims Solutions said, while well aware of the personal protective equipment shortages most pronounced at the beginning of the pandemic, the organizations were able to rely on strong supplier relationships to ensure their adjusters’ physical safety was held to the highest standard.

But the pandemic’s health risks are not only physical in nature as people grapple with anxiety associated with the new virus and economic challenges due to the shut down of the economy.

Mental health aspect

“We hear it and feel it,” Banga said. “We have homeowners that are stressed financially or are being held in quarantine because of health concerns and just in general there is more anxiety because of the pandemic.”

He said adjusters at DBS Claims Solutions are trained to be empathetic and connect with policyholders on a human level, during a pandemic and in any other scenario.

“Adjusting a claim is not just paying a cheque and each and every claim experience is important,” Banga said. “For us it’s not a job but a passion and…to connect on a human level is important to be able to set and realize expectations.”

For Crawford & Company, alleviating policyholder anxiety is of utmost importance and staff mental well-being is part of the firm’s comprehensive pandemic response plan.

“We have HR involved in regular conversations with staff across the country with online resources and 24-hour help,” Eso said. “We have been clear with staff from the first days of the pandemic: employee safety comes first. We have a rule that no adjuster will be put in a situation they are not comfortable with — if they don’t feel safe, they don’t have to go in.”

He said people are nervous and Crawford & Company does basic public health measure coaching around hand washing and sanitizing, wearing masks and maintaining social distancing.

“These are basics to alleviate stress and…there is this human element because policyholders are also nervous and we have to make sure there is a conversation and we have that as a requirement on file when adjusters do site attendance visits,” Eso said. “We need to be cautious because adjusters want to help people, inspect and advise but sometimes we have to scale back to make sure the adjuster is comfortable but we also have to make sure the policyholder is comfortable.”

Mark MacDonald, Atlantic Region Claims Manager at Economical Insurance, said his team of telephone adjusters has noted that the pandemic is affecting each policyholder differently.

“It can be stressful because it is at the forefront of everyone’s mind,” he said. “Some customers who have had a loss are afraid to have contractors come to do work…some people are edgier, others are rolling with it — it runs the whole gamut, but at the end of the day we still have to deal with the claim.”

He said working remotely has been an interesting experience and losing in-person contact with co-workers is an unfortunate ramification of the pandemic.

“Losing the ability to be all in one place and see each other is probably the biggest negative impact,” MacDonald said. “We are still getting our work done, and we can try to make it up with video calling and increased frequency of (communication), but losing that in-person connection has been a big drawback.”

Composition of claims 

Another Covid-19-related change adjusters are noticing is that the composition of property claims has changed since the pandemic hit, said Banga of DBS Claims Solutions.

“On the private property side, as more people are home, we are seeing an increase in fire claims but on the other hand we are seeing fewer burglary claims and water losses are less severe as policyholders are catching and mitigating (flood damage),” he said. “On the commercial side we are seeing more theft and vandalism because businesses are closed and we are seeing more business interruption claims inquiries.”