Legislation that would amend New York’s insurance law to allow insurers to offer standalone business interruption coverage that isn’t tied to physical damage could fill a gap in the market.
But insurers may be wary of writing business interruption policies without a physical damage trigger because of a lack of clarity over when coverage would kick in, some experts say.
A.B. 10342, is expected to be sent to Gov. Kathy Hochul for her signature soon, though the timing is unclear. The legislation, introduced at the request of the New York Department of Financial Services, passed both houses of the legislature in early June.
The bill defines business interruption insurance as “insurance against loss of use and occupancy, rents, and profits resulting from a business closure due to loss of or damage to insured or neighboring property; an act or threatened act of violence while the perpetrator is on the business premises; or a government order.”
Standalone coverage would most likely be offered through the excess and surplus lines market, sources said.
The legislation is a response to the COVID-19 pandemic and the perception that business interruption insurance failed to protect businesses because there was no physical loss, said Daniel Rabinowitz, New York-based partner at Kramer Levin Naftalis & Frankel LLP.
“Most of the cases asserting coverage under business interruption policies have failed in the courts because of the physical loss requirement,” Mr. Rabinowitz said.
Standard business interruption policies typically are triggered when there is loss of business income as a result of direct physical loss of or damage to insured property caused by a covered peril, such as fire or theft.
Business interruption coverage is nuanced and expanding availability of coverage for losses that are not tied to physical damage would be welcomed by risk professionals, said Manny Padilla, New York-based vice president of risk management and insurance at MacAndrews & Forbes Inc., and a board member of the Risk & Insurance Management Society Inc.
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“Is it a product that we would like? Yes, absolutely,” Mr. Padilla said.
The coverage could be useful for “those subtle issues where a road is closed and that triggers a loss even though you haven’t had physical damage,” he said.
“We have a business model where we have to deliver product from point A to point B. Once it’s accepted at point B, which happens to be a U.S. post office, then that triggers our ability to bill our customer for the transaction,” Mr. Padilla said.
However, in one instance during a widespread flood, roads were closed, and a product couldn’t be delivered to the post office, which meant the transaction and request to bill couldn’t be made, even though the post office was not physically damaged, Mr. Padilla said.
Tim Strong, London-based global head of crisis management for Aspen Insurance Holdings Ltd., said there’s growing demand among businesses for non-physical damage business interruption coverage for active assailant attacks.
“Quite often, there might be a mass casualty event, an active assailant, active shooter event where there is no physical damage, but the client may still incur significant business interruption losses,” he said.
Active assailant policies typically are designed so coverage begins if there is a bodily injury and/or physical damage, he said.
The legislation potentially fills a gap in the market, but various coverages, like cyber and event cancellation, already cover business interruption losses without any physical damage trigger, noted Robert Hartwig, clinical associate professor and director, Risk and Uncertainty Management Center, at the University of South Carolina’s Darla Moore School of Business.
The Wimbledon Championships in the United Kingdom had purchased event cancellation coverage when the Grand Slam tennis tournament was canceled due to COVID-19 in 2020, he said. The policy payout was reported to be around £114 million ($149.4 million) at that time.
In the future economy, where there are fewer bricks and mortar and more virtual businesses, it’s increasingly less likely that business interruption coverages will be tapped as a result of physical damage, Mr. Hartwig said.
The New York bill is a signal from the legislature that lawmakers would like more insurers to write this coverage, said Steve Clarke, vice president of government relations for Verisk Inc. in Jersey City, New Jersey.
There’s no mandate for insurers to offer the coverage or that existing business interruption policies conform to include it, so no changes to Verisk’s programs and policy forms are expected, Mr. Clarke said.
Verisk is conducting research around active shooter-type situations and possible effects, he said.
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Trigger often unclear with business interruption policies
Non-physical damage business interruption risks can be difficult to underwrite and price, some industry experts say.
There’s unlikely to be “a stampede” of insurers into the market, said Robert Hartwig, clinical associate professor and director, Risk and Uncertainty Management Center, at the University of South Carolina’s Darla Moore School of Business.
“There are a number of potential obstacles. For example, what would the trigger be?” Mr. Hartwig said.
When it comes to loss of attraction claims, there can be additional challenges in adjusting the claim, said Tim Strong, London-based global head of crisis management for Aspen Insurance Holdings Ltd.
If a hotel reopens but there’s still a revenue shortfall for the next four or five months, it can be challenging to attribute the shortfall to one event and not a global pandemic or a downturn in the economy, for example, he said.
Critics of the New York legislation say non-physical damage business interruption coverage could be difficult to underwrite and price because it’s hard to predict when government orders or other external events may lead to declines in business or cause businesses to close, said Daniel Rabinowitz, New York-based partner at Kramer Levin Naftalis & Frankel LLP.
“The counterpoint to that is that insurers will figure out how to write this coverage and they’ll learn to price it correctly,” he said.
The COVID-19 pandemic and period of quarantines and government orders highlighted the catastrophic potential of pandemic-related business interruption risks, said Steve Clarke, vice president of government relations for Verisk Inc. in Jersey City, New Jersey.
“The inability to really spread that type of risk across a broad population tends to make it an underwriting and pricing challenge,” Mr. Clarke said.
