New Legislation: The Pandemic Risk Insurance Act of 2020

The purpose of the Act is to establish a Federal program, including a Pandemic Risk Reinsurance Program (PRRP) within the Department of the Treasury, that provides for a transparent system of shared public and private compensation for business interruption losses resulting from a pandemic or outbreak of communicable disease, in order to:

• Protect consumers by addressing market disruptions and ensure the continued widespread availability and affordability of business interruption coverage for losses resulting from a pandemic or outbreak of a communicative disease; and
• Allow for a transitional period for the private markets to stabilize, resume pricing of such insurance, and build capacity to absorb any future losses while preserving State insurance regulation and consumer protections.

One key aspect of the Act, if enacted, is that, for participating insurers, exclusions in effect on the date of enactment that specifically exclude losses covered under the PRRP are void, and any state approval of those exclusions is preempted — unless the exclusion can meet certain criteria, such as written approval from the policyholder.

The Act authorizes the Treasury Secretary to administer the PRRP, and:

• Establishes that participation in the program is voluntary for insurers, who may sign up on an annual basis.
• For participating insurers, mandates that they provide business interruption insurance policies — including event cancellation — that include pandemics.
• Provides that the PRRP will only be triggered when aggregate insured losses for a covered public health emergency exceed $250 million.
• Once the PRRP has been triggered, establishes that the Federal share of compensation is equal to 95% of insured losses that exceed the insurer deductible.
• Sets each participating insurer’s deductible at 5% of the value of the insurer’s direct earned premiums during the preceding calendar year.
• Establishes a $750 billion program cap for Federal compensation, and if losses exceed the cap, authorizes the Treasury Secretary to determine the pro-rata share of compensation beyond the cap.
• Clarifies that the Act does not prohibit insurers from purchasing reinsurance coverage in the private markets.

In addition to defining the key terms, the Act establishes that the Treasury Secretary has authority to investigate and audit claims, prescribe regulations and procedures, issue interim final rules or procedures (including discretionary recoupment of Federal compensation under the PRRP). The Treasury Secretary will also require participating insurers to submit information relating to insurance coverage for business interruption resulting from covered public health emergencies. It also requires the Secretary to submit reports on an annual basis to Congress on the PRRP.

Nothing in the Act would affect the jurisdiction or regulatory authority of the insurance commissioner (or any agency or office performing like functions) of any State over any insurer or other person except as specifically provided in the Act.

The Treasury Secretary would be required to conduct a study 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, and the availability and affordability of such insurance for various policyholders. In addition, the GAO would be required to conduct a study on the availability and affordability of business interruption insurance in specific markets.

Further, the Treasury Secretary would be required to conduct a study on small insurers participating in the program and identify any competitive challenges small insurers face in the business interruption insurance market.

Much of the language of the Act mirrors that of the Terrorism Risk Insurance Act (Pub. L. 107-297), which was enacted in response to similar concerns regarding a shortfall in terrorism coverage following the 9/11 attacks.

Reactions to the Act have been mixed – not unexpectedly, efforts to enforce retroactive coverage or elimination of exclusions of COVID-19 claims have been met with a jaundiced eye by the insurance industry, while small businesses, nonprofits, retailers and other businesses whose business interruption coverage excludes pandemics favor the legislation. Indeed, it is expected that property and casualty insurance carrier groups will be developing their own proposal for a federal program to replace revenues lost by businesses shut down during pandemics where losses for future pandemics would be fully paid by the federal government, not backstopped.

If the Act is passed in its current form, or close to it, participation by insurers in the PRRP will not be mandatory and certain insurers that find the restrictions of the PRRP too great relative to benefit of the PRRP’s federal backstop will be free to not participate.

As proposed, the PRRP would terminate under the provisions of the proposed Act on December 31, 2027.

As of now there is no Senate counterpart, but it is likely there will be one. We will continue monitor developments in Congress on this and related bills.