A relaxation of some emergency orders will allow businesses that have been shut down during the coronavirus pandemic to reopen on a limited basis, but for people like Mark Poirier, owner of The Lodge at Smith Point in Alton, opening his doors to customers is not realistic.
“I’d do it in a heartbeat,” Poirier said, “but we can’t provide the quality of service people are expecting.”
Poirier is among several in the restaurant business who think the rules put in place by Gov. Chris Sununu are unworkable. Worse, Poirier said, is that the New Hampshire Restaurant Association, which pushed the governor to allow outside dining, is effectively picking winners and losers.
The governor’s initial executive order allowed takeout and curbside service only, which was a benefit to the restaurants that already provided takeout or could easily adapt to do so. For other restaurants, “the numbers just didn’t work out,” as the owner of The Mug in Center Harbor said. Even if takeout service increased significantly while inside dining is banned, it would not cover the restaurant’s overhead or pay to keep a chef on the payroll to prepare whatever meals were ordered.
The governor’s new executive order allows restaurants to offer outdoor dining, beginning on May 18, but very few of them have enough property to do so, or have too little outside space to meet physical distancing requirements. In addition to the six-foot distance required under the pandemic, tables need to be further separated so the wait staff is able to take orders while remaining six feet away from customers, effectively making it a 10-foot distancing requirement between tables.
“We have the space,” Poirier said of The Lodge, “but others do not. It’s unfair to them.
“Chris did a great job until he listened to the restaurant association on reopening,” Poirier said. “The first rule is to protect the vulnerable and isolate the infected, but they took a foolish step: Put people outside, and here come the mosquitoes and black flies. People who live in New England know what spring is like here, and a lot of restaurants are just taking a pass on it.”
Poirier said he took his cues from his chef during a discussion on May 4, three days after the governor agreed to allow restaurants to offer outside dining. Predominant reasons were the cost of opening with all the protective measures necessary for the health of the staff and customers; the uncertainty of how successful outside dining would be; and the likely inability to maintain the quality of the meals in such a setting.
“We did an email blast to 400 customers, and had only a tepid response,” Poirier said, adding, “A lot of companies are taking a wait-and-see attitude. I think opening would be an operational and executional nightmare.”
Covering the Losses
Like most businesses, The Lodge at Smith Point maintains a business interruption insurance policy to cover losses if the business has to shut down. Insurance carriers, however, point to policy exclusions for pandemics or say the policies cover only physical losses.
“I’ve put millions of dollars into the hands of the insurance companies, and in my hour of need, where are they?” Poirier asked.
New Hampshire Insurance Commissioner Chris Nicolopoulos told Poirier that business interruption insurance is for a “direct, physical” loss and that carriers typically exclude economic losses unaccompanied by “a distinct and demonstrable loss of the physical use of the business property.”
Because several businesses were asking the same questions, the insurance department placed relevant information online at https://tinyurl.com/vntf7mv.
The site states, “Most business property insurance policies either insure specific named perils, losses from specifically identified causes, or provide coverage for so-called ‘all-risks’ with specific named perils excluded. An example of a named peril is fire. Thus, the first question that needs to be asked is whether the COVID-19 related loss issue falls within one of the perils that would be covered by the business interruption section of the package policy.
“In addition to a covered peril, package policies will also require that the business interruption be the result of a direct physical loss. For example, if a person suffering from COVID-19 were to go to work at a restaurant, contaminating the kitchen by coughing, there would be an argument that there is a direct physical loss sustained by the restaurant for the period of time that it had to close to decontaminate the kitchen. This fact pattern is different from a restaurant that closed because customers ceased coming to the restaurant out of a general fear of infection.”
The question that arises is whether a government-ordered closing falls under business interruption insurance or not. Insurance carriers are arguing that it does not, and the New Hampshire Insurance Commission agrees: “The state of emergency does not change the terms of your business interruption coverage. Your policy likely will provide some coverage for the peril of ‘civil authority.’ The typical business package policy would likely still require that a direct physical loss be present .… However, it is important to read your specific policy to determine the scope of coverage that your insurer has agreed to provide.”
Sununu, in a March 23 letter to the nation’s congressional leadership, asked them to address that shortcoming. “In the long term,” he wrote, “we can hope that Congress will work with both state regulators and the insurance industry to develop a more permanent solution to this coverage problem. The National Flood Insurance Program and the Terrorism Risk Insurance Act are examples of such efforts. Now, however, what is needed is a short term and temporary solution that goes beyond the Economic Injury Disaster Loan Program administered by the Small Business Administration.”
Unaddressed Risk
Gerry Kennedy and Rogan Dwyer of Observatory Holdings, a risk management company that works with insurance carriers, maintain that the insurers have ignored their warnings of such a calamity for years. Their predictions focused on cyber security risks, but said the potential business losses from a computer virus apply equally to a biological virus. In fact, with people now working from home, there is an enhanced risk of a computer virus striking businesses at the same time they are dealing with the coronavirus.
On his LinkedIn site, Kennedy writes, “I just had a good conversation with a colleague about the cause-and-effect of the pandemic forcing people to work from home. With everyone working from remote sites is going to open up tremendous amounts of unsecured access points all at once for the next few weeks. The hackers are already sending nefarious packets under the guise of coronavirus education.… The data will be flowing from unsecured homesites.…”
Kennedy said insurance companies have been negotiating with the government about another bailout for the unsecured liability they have, but he believes they will “miss the mark because they can’t see the target.”
Poirier said insurance companies “have the potential to be the good guy and step up” to address the policyholders’ needs, but are not doing so.
Carriers are offering some concessions, such as offering partial rebates on auto insurance because vehicle usage has been significantly curtailed, and the airlines have relaxed their policies on trip cancellation, waiving fees for rescheduling and reducing other penalties. Those measures appear to recognize the hardships that businesses and travelers are experiencing, but Kennedy and Dwyer maintain that they are not addressing the larger issues.
“Insurance policies are a contract of adhesion,” Dwyer said, explaining, “The insurance companies draw up the contract, the agents submit it to the policyholder to agree, so it’s the responsibility of the insurance company to specifically exclude what they’re not liable for. Insurers are responsible for everything they have not specifically identified for exclusion.
One example of “adhesion” was the crisis with superfund sites where the cost of mitigating pollution had not been factored into insurance rates. The carriers tried to claim that environmental cleanup was not a covered cost, but the courts ruled otherwise.
Likewise, insurers were faced with huge losses during the 2005 hurricane season when Katrina, Rita, Wilma, and several smaller storms devastated businesses.
When calculating the impact from a major computer virus, Observatory Holdings chose the term “cyber hurricane” to describe a situation they said “would almost put us on a war footing” with downstream liabilities reaching trillions of dollars.
Kennedy and Dwyer have been warning insurance carriers of the potential liability for three years, saying the companies were not meeting their legal obligation of reporting the shortage in reserves necessary to pay the potential claims.
The same numbers apply to the coronavirus pandemic, they say. In a recent paper, Dwyer wrote, “The insurance industry is broken but either has not realized it yet or is ignoring the flashing red warning signs. There is not enough money in the system to pay the tsunami of claims that will fall upon carriers from legal rulings on coverage from the Coronavirus catastrophe, in impending cyber ‘hurricane’ and the knock on effect they will have to almost all classes of business.”
Andrew G. Simpson, in a March 30 article appearing in the Insurance Journal, had a similar assessment: “the property/casualty industry estimates that business interruption losses from the coronavirus just for small businesses in the U.S. could be between $220-383 billion per month — or a quarter to half of the total industry surplus available to pay all P/C claims.”
The estimates say there could be as many as 30 million claims from small businesses — 10 times the number of claims processed during the 2005 hurricane season.
Kennedy and Dwyer point out that those numbers represent only a small portion of potential claims, failing to take into account employee wages and other liabilities, or the potential of doubling under a cyber virus.
Reservation of Rights
Observatory Holdings is urging business owners to file a Reservation of Rights letter prior to filing any insurance claims.
Kennedy explained that insurance carriers routinely issue Reservation of Rights letters to policyholders which put them on notice prior to reviewing their claims that their policies may not cover all losses. He said policyholders can turn that process around by reserving their rights to recover legitimate losses under their policies.
While not tested in court, the policyholders’ Reservation of Rights letter may lead to a better outcome when carriers attempt to deny coverage.
The website www.reservationofrights.com provides guidance on improving the prospects of a satisfactory outcome.
Another approach that many businesses are taking is to enter into a class-action lawsuit against insurers who are denying claims.
Kennedy and Dwyer say it is not a case of insurance carriers being “bad people” but of their sudden realization that they cannot possibly meet their obligations without a massive federal bailout.
“Creating and managing the funeral for the old industry will require government support, huge amounts of money and determination, strong leadership, and cooperation between the old order and the new order,” Dwyer wrote in an article on the problem.
“As always,” he continued, “this creates opportunity for new entrants to the insurance world who are unencumbered by legacy issues and can dictate terms according to a rewritten playbook.”
