Illustration: Aïda Amer/Axios

The legal and legislative fight over how much insurance companies must pay for coronavirus-related losses is just starting, and it's likely to get uglier.

Why it matters: COVID-19 is, as one insurance industry executive puts it, "the biggest insured loss event in history." For many companies, a successful insurance claim will make the difference between staying in business or going bust.

Where it stands: Insurance lawyers keeping tabs on the litigation say that hundreds of lawsuits have been filed against insurers over coronavirus-related claims — from companies like In-N-Out Burger, the Houston Rockets, and the nonprofit Simon Wiesenthal Center — with scant success so far.

What’s at stake, according to an insurance industry trade group:

  • COVID-19 could generate $40 to $80 billion in insurance payouts in the U.S., and over $100 billion internationally.
  • By contrast, 9/11 generated $47 billion, while Hurricane Katrina generated $54 billion.

The big picture: Companies naturally want to recover their losses. That's what insurance is for, in their view. But insurers argue that business interruption policies only cover physical damage — like the kind incurred during floods and fires — and that virus contamination doesn't count.

  • They also say the industry couldn't possibly afford to foot the bills being tossed at it.
  • "When the end of the world is coming and we’re being asked to pay for it, clearly that’s not something you can responsibly do," Robert Gordon, SVP of policy, research and international at the American Property Casualty Insurance Association, tells Axios.

So far, the handful of decisions that have been handed down in relevant cases have gone against the policy holders — who typically don't have enough money or time to pursue endless litigation against their insurers.

  • "The insurers are probably likely to prevail in a lot of this," Alexandra Roje, an insurance lawyer at Lathrop GPM, tells Axios. "Does that mean that we should stop fighting the good fight? I say no."

The latest: A showdown is taking shape between the prominent New Orleans attorney John Houghtaling II — who has represented policyholders after Hurricane Katrina and other disasters — and property and casualty insurance companies that say COVID-19 isn't covered under business interruption policies.

  • Houghtaling has filed lawsuits in California and Louisiana, representing famous chefs like Thomas Keller and Jerome Bocuse. He wants to establish precedent that a vast swath of insurance policies — including ones that don't specifically exclude contagious diseases — should remunerate policyholders.
  • "We're going to be battling from state to state," he tells Axios.
  • Insurance companies "give us the absolute lie that pandemics are not insured," he says, pointing to the $16 million payout led by AIG to the Mandarin Oriental Hotel in the wake of SARS.

At the same time, a battle is shaping up on Capitol Hill over legislation that would have the federal government backstop insurance companies in the event of a future pandemic.

  • The Pandemic Risk Insurance Act, which will likely be taken up by the House Financial Services Committee this fall, would set up a public/private insurance system for future pandemics, with the government shouldering most of the risk.
  • The bill, by Rep. Carolyn Maloney (D-N.Y.), has the support of some individual companies, but not the broader industry.
  • The insurance giant Chubb, which said this month that it anticipated $1.4 billion in global coronavirus-related losses for 2Q 2020, recently came out in favor of a public/private partnership (albeit a different plan from Maloney's). Marsh, a giant insurance broker, supports the concept as well.

Nationally, most of the insurance industry supports an alternative proposal that would shift responsibility for pandemic losses onto the federal government, much like the National Flood Insurance Program does.

  • So far, that proposal hasn't gotten a congressional sponsor.

A key question: How much can the insurance industry truly afford to pay? Critics like Houghtaling say insurers have deeper pockets than they admit. His evidence:

  • In an April 21 op-ed in the WSJ, Chubb CEO Evan Greenberg said forcing insurers to pay out all pandemic-related claims would "would bankrupt the insurance industry to prop up other parts of the economy," like small business.
  • In an April 22 earnings call, Greenberg said the coronavirus "will be an earnings event for Chubb. It will not threaten our balance sheet."

Chubb says Houghtaling is conflating issues and taking statements out of context.

  • The WSJ op-ed described what would happen if insurers had to cover all the claims their policyholders would like to see covered; the earnings call reflected the company's ability to handle the claims it says it owes.
  • "Paying all business interruption losses (most of which were not insured) will bankrupt the industry, paying insured claims will not," a Chubb spokesperson tells Axios. "We have been clear in all of our statements about this distinction."

What to watch: Expect the confrontations to get brutal and emotional.

  • And insurance of all kinds will get pricier. The most generous life insurance policies are currently being yanked off the market by companies like Prudential, says Erin Ardleigh, an independent insurance broker in New York City.
  • "This would be a good time to lock in what prices you can," she says.

Go deeper:

No, insurance doesn't cover that

Insurers are doing just fine during the coronavirus pandemic

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