Legislation known as the Pandemic Risk Insurance Act of 2020 (the PRIA), which was introduced in the U.S. House of Representatives this week, aims to create a reinsurance program in response to the growing COVID-19 crisis and in anticipation of future pandemics and their effects on the insurance industry and broader economy. Similar in scope and with language comparable to the Terrorism Risk Insurance Act of 2002 (TRIA) that was passed after 9/11, the PRIA, if signed into law, would cap the total pandemic-related insurance losses that carriers might face going forward. Michelman & Robinson explains.

Q. What is the purpose of the PRIA?

A. As set forth in a press release issued earlier this week, the PRIA, introduced in the House by Congresswoman Carolyn B. Maloney (D-NY), would establish a system of shared public and private (read: insurer) responsibility for business interruption losses resulting from future pandemics and public health emergencies—this in order to help prevent associated economic losses by (1) requiring insurance companies to offer affordable business interruption policies that cover pandemics and (2) creating a program to ensure there is capacity to cover these losses through a federal backstop that maintains marketplace stability and shares the burden alongside the insurance industry.

Q. Why is there a need for the PRIA?

A. Millions of small businesses and nonprofits are unable to recover from the coronavirus outbreak due to exclusions in their business interruption policies. With that serving as its impetus, the PRIA seeks to create a market-friendly insurance solution that would guarantee business interruption and event cancellation coverage in the event of another pandemic. In terms of those presently impacted by the economic fallout of COVID-19, the public-private partnership and program that the PRIA envisions will instill the confidence needed for businesses large and small to reopen, which is a crucial element for the expected economic recovery.

Q. What lines of insurance would the PRIA affect?

A. The PRIA would apply to business interruption, event cancellation, and certain other property and casualty insurance policies.

Q. How would the goals of the PRIA be accomplished?

A. The PRIA contemplates the establishment of a voluntary Pandemic Risk Reinsurance Program (PRRP) within the U.S. Treasury Department that, among other things, would do all of the following:

Mandate that participating insurers offer business interruption insurance policies (including event cancellation insurance) that provide coverage for losses due to pandemics
Ensure that the program only be triggered when aggregate insured losses for a covered pandemic or public health emergency exceed $250M
Establish that the federal government would be on the hook for a sum equal to 95% of insured losses that exceed insurer deductibles, once the PRRP has been triggered
Set each participating insurer’s deductible at 5% of the value of its direct earned premiums during the preceding calendar year
Establish a $750B program cap for federal contribution and authorize the Treasury Secretary to determine the pro-rata share of compensation beyond that cap if losses exceed that amount
Clarify that the program does not prohibit insurers from purchasing reinsurance coverage in the private market

It is important to specify that the PRRP would be voluntary, and those carriers that elect to be involved must offer business interruption and event cancellation policies that cover, among other things, pandemic- or public health emergency-related losses in exchange for the federal government’s agreement to pay 95% of those losses (that exceed applicable deductibles) in excess of $250M.

Q. If passed, would the PRIA be retroactive and impact current business interruption insurance policies that do not cover pandemics?

A. No, the PRIA specifically states that it “may not be construed to affect any policy of business interruption insurance in force on the date of [the bill’s] enactment . . ..” Placing an even finer point on it, the PRIA defines covered public health emergencies as “any outbreak of infections disease or pandemic . . . for which an emergency is declared, on or after January 1, 2021. . ..”

Notwithstanding the foregoing, if an insurer elects to participate in the PRRP, policy exclusions in effect on the date of its enactment that specifically exclude losses covered under the PRRP will be void, and any state approval of those exclusions is preempted, unless the exclusion can meet certain criteria, such as written approval from the policyholder.

Q. Will the PRIA impose any other requirements on participating insurers?

A. Yes, in addition to the requirements set forth above, participating insurers will be required to submit information relating to insurance coverage for business interruption resulting from covered public health emergencies to the Treasury Secretary.

Q. Will the PRRP terminate?

A. Yes, the legislation, as written, is set to terminate on December 31, 2027.

Q. How will the public and insurance companies know if the PRIA and PRRP serving their purposes?

A. The PRIA specifically requires the Treasury Secretary to conduct studies on the effectiveness of the PRRP and the likely capacity of the property and casualty insurance industry to offer insurance for risk of public health emergencies after the termination of the PRRP. Moreover, the Treasury Secretary is instructed to conduct studies on small insurers participating in the PRRP and identify competitive challenges that they may be facing in the business interruption insurance market.

Q. How are the PRIA and TRIA similar?

A. The PRIA is comparable to TRIA in that, if passed, it will offer a similar federal backstop mechanism. Much of PRIA seems to have been based on the language and structure of TRIA; however, among other things, there are some notable differences regarding triggering amounts (aggregate insured losses of $200M under TRIA and $250M under PRIA); program caps for federal contribution ($100B under TRIA and $750B under PRIA); and participating insurer deductibles (starting at 20% under TRIA and 5% under PRIA).

M&R will be following the PRIA as it works its way through Congress, and will provide updates on the legislation as it becomes available.

We are working diligently to keep our clients up to date on coronavirus-related developments. Nevertheless, these developments are changing daily and, in some cases even hourly, so it is important that you make sure you are dealing with the most current information. That being said, this alert is not offered, and should not be relied on, as legal advice. You should consult an attorney for guidance and counsel regarding any specific concern or situation.