While the U.S. economy slowly returns to normal following the COVID-19 pandemic, the insurance industry continues to grapple with business interruption claims, court battles and the future of pandemic-related insurance. In Part I of a two-part Advisory Report, Nicole Milos, Assistant Counsel at AAIS, explains why BI policies were never meant to cover losses from pandemics.

Milos explains that while the Spanish Flu of 1918 most closely resembles the COVID pandemic, the industry and finance worlds were in much different places at that time, so few comparisons could be made. Further, it is too hard to compare COVID to more traditional catastrophes like floods and hurricanes, for which the industry has established models. The best through-line to COVID-19 is the SARS outbreak in 2003, though COVID has been more widespread, more deadly, and longer in duration.

“In response to the SARS pandemic, the industry sought to clarify the intent behind business interruption policies and as a result, the virus and bacteria exclusionary language was introduced to clarify and reinforce that business interruption insurance was never intended to extend to losses caused directly or indirectly by viruses or microorganisms,” explains Milos.

The reason for the exclusionary language was simple – the cost to cover such claims and an inability to rate the systemic risk and determine premiums. Still, the courts continue their debate.

“Without a doubt, COVID-19 claims have placed the industry’s intent for coverage afforded by way of business interruption polices at the forefront,” Milos says.

Even as the business interruption debate continues, the appetite for pandemic coverage has changed and information gathered since the start of the COVID pandemic is helping to define this type of insurance going forward.

Be sure to watch Part II to learn how the industry is using data to inform pandemic insurance.