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By: Wayne Hammack
Since March 2020 the House Financial Services Committee has considered the creation of a federal reinsurance program to provide a safeguard for businesses against future pandemic-related business interruption losses. An early memorandum calling for the creation of the Pandemic Risk Insurance Act (PRIA) has been revised and augmented, and on May 26, 2020 legislation was introduced by Congresswoman Carolyn B. Maloney (D-NY). The PRIA (H.R. 7011) is intended to provide for a transparent system of shared public and private compensation for business interruption losses resulting from a pandemic or outbreak of communicable disease. The legislation has been crafted to protect consumers by addressing market disruptions; to ensure the continued widespread availability and affordability of business interruption coverage for losses resulting from a pandemic or outbreak of a communicable disease; and to allow for a transitional period for the private markets to stabilize, resume pricing of such insurance, and build capacity to absorb any future losses, while preserving state insurance regulation and consumer protections.
The proposed legislation would create the Pandemic Risk Reinsurance Program (PRRP), a system of shared public and private compensation or business interruption losses resulting from future pandemics or public health emergencies. In introducing the legislation, Congresswoman Maloney stated, “Millions of small businesses, nonprofits, mom-and-pop shops, retailers, and other businesses are being left out in the cold and will never be able to financially recover from the coronavirus crisis because their business interruption insurance excludes pandemics. We cannot allow this to happen again.”
As drafted, the PRIA defines a “Covered Public Health Emergency” as any outbreak or infectious disease or pandemic for which an emergency is declared on or after January 1, 2021, under the Public Health Service Act, and is certified as a public health emergency by the Secretary of Health and Human Services. Under the PRIA, the PRRP will be administered by the Treasury Secretary, and participation will be voluntary for insurers, who may sign up on an annual basis. Participating insurers will be required to have business interruption policies, including event cancellation, that include coverage for pandemics.
The PRRP would only be triggered when aggregate insured losses for a covered public health emergency exceed $250 million. Once triggered, the federal share of compensation would be equal to 95% of insured losses that exceed the insurer deductible. The PRIA would set each participating insurer’s deductible at 5% of the value of the insurer’s direct earned premiums during the preceding calendar year.
The PRIA would provide for a $750 billion cap for federal compensation. Should losses exceed that cap, the Treasury Secretary is authorized to determine the pro-rata share of insured losses beyond the cap. (In contrast, an early memorandum outlining the PRIA would have capped the amount insurers would have to pay out against a public health emergency at $500 billion per year). Insurers are not prohibited from purchasing reinsurance coverage in the private markets.
The proposed legislation gives the Treasury Secretary the authority to investigate and audit claims and prescribe regulations and procedures. Participating insurers are required to submit information relating to insurance coverage for business interruption resulting from covered public health emergencies, and the Treasury Secretary is required to submit annual reports to Congress on the PRRP.
Since the onset of the most recent coronavirus pandemic, there have been numerous state and federal legislative proposals to expand business interruption coverage to cover pandemic-related losses. For insurers participating in the PRIA as currently drafted, exclusions in effect on the date of enactment of the Act that specifically exclude losses covered under the PRRP would be deemed void, and any state approval of those exclusions would be preempted, unless the exclusion meets certain criteria, such as a written statement from the insured that affirmatively authorizes the reinstatement of the exclusion.
The legislation proposed by Congresswoman Maloney would terminate on December 31, 2027.
While the proposed legislation has been endorsed by a number of industry groups including Marsh & McLennan Companies, the Retail Industry Leaders Association, and The Council of Insurance Agents & Brokers, among others, the National Association of Mutual Insurance Companies and the American Property Casualty Insurance Association are calling for an alternative approach. Whereas PRIA was modeled after the Terrorism Risk Insurance Act (TRIA), certain participants in the insurance industry have suggested a Federal Pandemic Loss Program as an alternative to PRIA, which as outlined would fully back future losses due to pandemic response initiatives, providing direct funding to businesses through a predetermined formula.
While there remains significant work to be done to reconcile the competing interests, the introduction of PRIA and other alternative proposals are an indication that federal relief is an inevitability given the catastrophic losses suffered to date as a result of Covid-19 and the potential for a resurgence in the coming months and years.
We will continue monitoring developments related to the PRIA legislation and alternative proposals and provide updates as the legislative proposals move forward.
If you have questions or would like more information, please contact Wayne Hammack at [email protected].