How COVID-19 Affects the Insurance Industry | Scaringi Law

At this point, most of us have probably felt the ramifications of the COVID-19 pandemic in some way. From stay-at-home orders to the biggest economic downturn in almost a century, the coronavirus has impacted the US significantly.

Industries across the US have been affected by COVID-19, and the insurance industry—particularly in the arena of commercial insurance—is no exception. Some insurance experts even speculate the pandemic could bankrupt the industry at large, depending on what actions politicians take in the coming months.

Today, we're exploring exactly how COVID-19 affects the insurance industry, and what you can expect later down the line.

COVID-19 & Businesses in the US

To understand why insurers are worried about the potential impact of COVID-19, we have to dig into how COVID-19 affects businesses in the US.

The US Department of Commerce released figures in July, stating that the US gross domestic product (GDP) shrunk by 9.5% in the second quarter. While that may not seem like a lot, it amounts to an annualized GDP shrinkage rate of 32.9%, the biggest economic downturn since the 1940's. Personal spending also dropped by an annualized 34.6%, the most on record.

Over 40 million US workers have lost their jobs since the pandemic kicked off, accounting for the reduction in personal spending. Citizens who lose their jobs are reticent to spend money superfluously, instead choosing to focus on necessities like rent and trying to save money until they can find new employment. US citizens don't have that much extra capital to spend anyways—around 78% live paycheck to paycheck—so the COVID-19-associated job losses hit the economy hard.

The less money citizens inject into the economy, the worse it is for businesses who rely on consistent income.

Obviously, the stay-at-home orders issued by cities across the US play an integral role here. While the orders help keep citizens safe, they also have the unfortunate ramification of devastating small businesses. Businesses in the restaurant and hospitality industries, as well as enterprises that rely on foot traffic, have been particularly hard-hit by COVID-19-related lockdowns.

At the time of writing this article, over 100,000 small businesses have already closed their doors, and around 7.5 million are at risk of closing. Given that the future of stay-at-home orders remains unsure, these figures could escalate further in the coming months.

Why Insurers Are Worried About COVID-19

With that overview of the US economy as it stands currently, we're ready to look at why insurers are so afraid of COVID-19.

Since businesses can no longer depend on customers to bring in consistent revenue, many are turning towards other sources—including their insurance providers.

Small, medium, and large businesses have filed claims against insurers, contending that providers should compensate them for the "interruption of business" caused by COVID-19. However, insurers state that most policies specifically exclude pandemic coverage. It's one of the reasons policies that do cover loss of business due to pandemics, like Wimbledon's insurance policy that netted the tennis tournament organization $141 million from the city of London, have made headlines.

However, the question now has become less of one about whether insurers have to cover COVID-19-related losses, as opposed to whether they should.

Politicians across the country are advocating for insurance companies to start compensating businesses for loss of income during COVID-19. Advocates of this strategy contend that many business owners pay for expensive policies and never see anything in return, and that extraordinary circumstances like the COVID-19 pandemic require extraordinary measures.

However, insurance providers contend that paying for COVID-19-related losses could literally bankrupt the industry. The money would come out of the policyholders' surplus, which contains the cumulative value of the insurers' assets, minus their liabilities. The surplus shrunk from $847 billion to $770 billion in the first quarter of 2020.

Providers argue that, if insurers set a precedent of paying out policies for COVID-19, the resulting wave of claims from business owners could literally wipe out the surplus completely, bankrupting the insurance industry.

As the pandemic draws on and the plight of business owners and workers across the US escalates, business owners will only become more desperate to recoup their losses and keep their enterprises alive—and insurers will probably continue to resist. The outcome of this dispute could set a valuable precedent going forward, affecting businesses and commercial insurers for years or even decades to come.

If you're involved in a business law dispute, we can help. To schedule a consultation with our team, contact us online or via phone at (717) 775-7195.


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