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The Coronavirus Might Change Commercial Real Estate Insurance Forever

While the coronavirus pandemic affects businesses and consumers worldwide, the impact is rippling through the commercial real estate insurance industry. Insurers are fielding a variety of claims, from business owners looking to recoup costs due to federally mandated closures to consumers seeking compensation from allegedly negligent companies. They also face political pressure to make payouts. 

A flood of insurance claims is expected to keep pouring in from businesses worldwide looking to insurers to cover devastating economic losses associated with government-mandated lockdowns. Policies typically cover business-interruption costs due to physical loss or damage to a property following unforeseen events such as a fire, but they often exclude damage or losses due to a virus or bacteria. This is an exclusion many insurers installed following the SARS outbreak in 2002-2004, which resulted in millions of dollars in business-interruption claims.

Legal disputes may erupt over these COVID-19 related claims as policyholders look closely at the wording on their policies and for specific exclusions related to pandemics. The outcome of these disputes could depend partly on the jurisdiction where the dispute takes place. For instance, some states may have had previous cases where a court ruled on what constitutes physical damage, such as a noxious odor, potentially impacting the outcome of a case relating to contamination by a virus. Many businesses, including restaurants, have already filed claims seeking reimbursement from their insurers.

Many commercial real estate insurers are now grappling with pressure from United States lawmakers to cover business-interruption claims filed by businesses forced to close due to the Covid-19 pandemic. They warn that retroactively rewriting insurance policies and making these payouts could potentially bankrupt the insurance industry, according to a statement by the National Association of Insurance Commissioners. Requiring insurance companies to cover the claims would make it difficult for insurance companies to pay other types of claims and potentially worsen the economic and financial impacts on the U.S., the group said.

A group of Pennsylvania lawmakers this month introduced a bill asking for federal funds to reimburse insurers that pay claims on business-interruption policies during the Covid-19 pandemic. Liability insurers also may see more claims from businesses whose infected customers allege they were negligent in protecting against the virus. Princess Cruise Lines and its parent company Carnival Corp. were recently sued by some passengers who were aboard one of the company’s cruise ships from San Francisco to Hawaii. Some passengers and crew members came down with the virus, and the plaintiffs alleged negligence by the cruise companies in exposing them to COVID-19. Coverage for coronavirus-related claims will vary by policy.

COVID-19 also deflated the economy with a rush of event cancellations and travel restrictions. Personal travel and event cancellation policies likely will be overwhelmed with claims. Trade credit insurers will be impacted by these events as well. Trade credit insurance, a type of property and casualty insurance, covers the risk that a seller’s customers cannot pay for goods or services purchased on credit. A rise in payment defaults can lead to more insolvencies. Corporate insolvencies are expected to hit 2.4 percent this year, up from 1.9 percent in 2019, largely due to the virus and the economic slowdown it has caused, according to trade credit insurance specialist Atradius.

COVID-19 has repercussions felt throughout the global economy. Its full impact on commercial real estate insurers and policyholders is not yet known, but it is certain that there will be a wave of claims. As payouts come into question, all parties will be looking closely at their coverage details to determine the outcome. An individualized approach to claims rather than a blanket plan will likely be the protocol. Insurers at the same time will be coming to grips with a dip in premiums due to full or partial closures of businesses and fewer people buying insurable items such as houses. How insurers respond and support communities and businesses will help determine the country’s path through the crisis and toward economic recovery.

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