Wharton’s Howard Kunreuther speaks with Wharton Business Daily on SiriusXM about businesses lacking insurance for losses during the pandemic.

Businesses in the U.S. and elsewhere are fighting what appears to be a losing battle with insurance companies over claims relating to losses incurred during the pandemic. Many business owners mistakenly assumed that their coverage for “business interruption losses” includes the financial pains brought on by coronavirus lockdowns, said Howard Kunreuther, co-director of the Wharton Risk Management and Decision Processes Center, during a recent segment of the Wharton Business Daily radio show on SiriusXM. (Listen to the podcast above.) Kunreuther is also a Wharton professor of operations, information and decisions.

“They didn’t realize that they had been excluded from viruses, which happened because insurers excluded this coverage following the SARS epidemic [of 2002–2004],” said Kunreuther. Meanwhile, insurers have been slugging it out in courts with businesses over the claims (with insurers securing favorable rulings in many cases).

For many small businesses such as restaurants, the denial of business interruption insurance for COVID-19 losses spells bankruptcy and closure, said Kunreuther. He called for public policy intervention — especially public-private partnerships — to find ways to balance the insurance needs of businesses with the reluctance of insurers to provide coverage for pandemic losses. John Doyle, president and CEO of Marsh, the world’s largest insurance brokerage, has endorsed the idea of public-private partnerships as the way out.

According to Kunreuther, insurers incurred big losses because of SARS, but they were not “enormously severe.” But the SARS episode was “a signal to insurers that if there were future epidemics or pandemics, they would be in serious trouble,” he said. “Insurers took stock and said, ‘This is a risk that we don’t feel that we can really insure. And this is a warning to us that we probably should take this out of our coverage.’”

Most businesses felt that they were covered on viruses for business interruption, Kunreuther noted. “They were not aware of the exclusion on their policy. They would have had to read it very carefully.”

No Easy Solution

No solution is readily in sight to resolve the impasse. “Business owners can only get insurance that is available,” Kunreuther said. “If the insurance company says, ‘This is an uninsurable risk,’ then business owners will have to be very concerned about this.”

Kunreuther said the Wharton Risk Management and Decision Processes Center is working on trying to find a viable alternative. In his view, “insurers can’t cover all losses from a pandemic; they would be subject to insolvency and bankruptcy if they did.”

At the same time, the public sector has a key role, particularly in protecting small businesses who might not be able to purchase insurance if the premiums were based on risk, Kunreuther said. “That’s what the challenges are. A lot of small businesses are in serious trouble…. So, there is a real need for some type of public-private partnership, with insurers playing a role, but not the full role.”

The U.S. Congress, too, is weighing alternatives that could be fair to both sides. Earlier this month, the House of Representatives held a virtual hearing for a bill titled the Pandemic Risk Insurance Act of 2020. Rep. Carolyn Maloney (D-N.Y.), co-sponsor of the bill, has proposed automatic pandemic coverage for up to three months of payroll, plus rent and utilities.

“Insurers can’t cover all losses from a pandemic; they would be subject to insolvency and bankruptcy if they did.” –Howard Kunreuther

How much coverage would be justifiable for both businesses and insurers? “We don’t have any firm answers, but … the most important thing is that you need to help the small businesses particularly,” Kunreuther said. “Restaurants are closing left and right around the country,” he noted, citing a New York Times opinion column that made a case to save them. “There has to be some support. You’re going to have towns that will be ghost towns, without any restaurants at all, if we don’t provide them the coverage through the public sector.”

How Much Longer?

The uncertainty over the path of COVID-19 makes it worse for businesses, Kunreuther said. “With a fire and a flood, you know exactly what has happened. It’s over, and you have to deal with it. With a pandemic, there’s an enormous amount of uncertainty on how long it’s going to last. I think there’s consensus by the scientists and the epidemiologists that over the next few months we’re going to have even more losses.”

Unlike businesses, “the insurance industry has not been hit all that badly because of the exclusion [of pandemic coverage],” Kunreuther noted. “Had they covered business interruption, they could have lost not only billions, but possibly trillions of dollars, because of what has happened and what kind of coverage they would have provided.”

Even as insurance companies avoided getting scarred in the pandemic, “they are concerned about the future,” he said. “What role should they play in the future is on everyone’s agenda.”