Business interruption

Sat in on a fairly interesting webinar on business interruption insurance claims under coronavirus yesterday evening. According to the presenter, anecdotal observations say that about 70% of business policies have clauses excluding claims related to viruses, whereas 30% don't. Those that don't generally insist that claims demonstrate physical loss or damage to a property for the claim to be upheld. The presenting attorney and his partner are representing businesses who are trying to claim that the virus itself constitutes damage to property, and they have a couple of different angles to work.

But basically they are going after what Buffett, particularly in reference to decades of asbestos cases but also around concepts such as "negative externalities" associated with emissions etc., has called "social inflation." That is, risks that were not understood in the past that come to light in the future, and people generally recognize that it was a broad societal mistake in need of redress and therefore the costs should be shared broadly.

But how to share the costs of businesses being disrupted by COVID-19? One obvious way would be through taxes. I.e. have the government do big stimulus spending (as it has) to pull us through in the present and then tax in the future. The difficulty there is garnering to political will to raise taxes. If the government is split, that will be hard (probably the best strategy for Republicans at this point in time is to tank 2020, let the Democrats raise taxes, and then revive the Tea Party to do an ideological re-set for mid-terms in 2022). That will also be a drag on future growth.

Expanding the scope of business interruption coverage to encompass COVID-19 is another strategy. Insurers (including reinsurers and retrocessionaires) will get slammed and will have to raise rates. The rate raises will be analogous to a tax hike and will be passed through to end consumers as inflation and/or will drive cost-cutting, automation or business failure if price anchoring has been made too rigid by the extended period of low inflation we've enjoyed (a curse in its own way).

The difference between the judicial/administrative solution of ruling to extend business interruption coverage and the tax hike strategy is that the former path forces the courts to make the decision and insurance companies to raise the money. Everybody is used to hating on insurance companies, and if the courts make the ruling, conservatives can point to this as judicial overreach. Honestly, a legislative path would be better, but much harder in the post-Cronkite world.