As countless businesses across the country face layoffs and closures, financial experts have said there's a factor at play.
Business insurance policies aren’t recognizing the pandemic in the fine print for coverage, leaving vulnerable small businesses high and dry.
Industry analysts like insurance expert Jay Bregman say something needs to change.
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“We see a world where most small businesses in America are going to be reborn over the next few months, and they’re going to be slightly different businesses in a lot of ways,” he said.
Bregman is CEO and co-founder of Thimble, a company that offers on-demand small business insurance designed to address the uncertainty of starting a smaller business. He recently wrote about the confusion over insurance in an article for Barron's Magazine, a publication by Dow Jones & Company.
In a virtual interview with NBC 5, Bregman explained the situation many business owners are finding themselves in. Over the last few years, many insurance companies sold a limited business-interruption policy to a third of the U.S. of businesses, one Bregman said generally excluded pandemics and outbreaks from the coverage.
"After the SARS epidemic, most insurance companies added an exclusion of coverage for any virus, pandemic or organism-related loss. So now that businesses who think they have coverage or thought they did for business interruption broadly, are finding that actually it wasn’t covered and it isn’t being offered to anybody, outside maybe some large enterprises," he said.
Bregman said traditional insurance policies do not work for systemic risks like pandemics because most or all policies will pay out at the same time and private companies can't even afford to pay those claims and survive, which means there are tremendous pressures on insurers right now.
However, there is something the U.S. government is working on right now. Congress is the process of drafting the Pandemic Risk Insurance Act of 2020. The new legislation is pulling from lessons learned during the business interruption the country saw around the 9/11 terrorist attacks.
Back then, the government responded with the Terrorism Risk Insurance Act of 2002, which required insurers to offer coverage for terrorism events and added a federal backstop so it could be more widely sold and accessible to businesses. Under the act, the government established a deductible that insurers must cover, after which the government would cover 80% of the costs up to $100 billion.
Bregman said there needs to a similar type of response to this pandemic or else this cycle will repeat itself.
"There already is a framework that has been used to allow the federal government to supplement the risk takers in the insurance industry to be able to provide widespread coverage after a disaster," he said. "There is the Pandemic Risk Insurance Act that is being evaluated by Congress right now among many other things but we think that has got to be a real priority for American businesses. There’s just so much more that we could do with a government backstop to allow greater amounts of coverage to more people at cheaper prices.“
The PRIA of 2020 would be triggered if industry losses exceed the $250 million threshold. According to an April 3 draft of the bill, the federal program "provides for a transparent system of shared public and private compensation for business interruption losses resulting from a pandemic or outbreak of communicable disease."
Unfortunately, this new legislation could be a long process for Congress but Bregman said the private sector is doing something in the interim.
He's seeing a new trend in the insurance industry where companies are offering a small business-interruption policy with a lower limit that would pay out directly and instantly if certain criteria were met.
He said a quick payment like that wouldn't cover all losses, but it could buy businesses time which could stave off the layoffs and closures we've been seeing lately.
"I think what we’ve seen now is a lot of customers coming to us that are established businesses that no longer can predict their payroll or revenues, therefore traditional insurance is not as good as a fit as it was before. They're looking for something on a month-to-month basis while they ride things out," Bregman said. "The whole point is people in this kind of environment really want a flexible solution because they have no idea what tomorrow is going to bring.”
Either way, Bregman said both insurance companies and businesses are learning lessons now and he believes there could be innovation coming out of this pandemic.
“There’s been some really great insurance brands, iconic insurance brands that all seem to have been created on the time of some real market cataclysms. USAA was created right around the great depression, Geico and Progressive right around World War II. It seems like sometimes these events actually bring out the best in the insurance industry."