I’m skeptical of R. J. Lehman’s suggestion at RealClearPolicy that we need federally subsidized business interruption insurance:
About once a generation, the U.S. insurance market encounters a crisis that demands a federal response. In the 1960s, it was severe uninsured flooding. In more recent memory, it was the catastrophic terrorism of September 11th. Yet another protection gap has been revealed in recent weeks, as the COVID-19 pandemic shutters thousands of businesses across the country.
Business owners have responded to the unexpected — and, in many cases, mandated —interruption in business by filing claims on their business insurance policies. However, most of these have been denied, as existing policies simply don’t include coverage for cases like this.
Certainly, some of those denied claims will be disputed. In fact, a spate of lawsuits has already been filed. Ultimately, it will be up to the courts to scrutinize the nuances of contractual exclusions for pandemics and determine whether a virus can count as a “physical loss.†Even if some of these suits prove successful, insurers will simply redraft their policies to make the exclusion more explicit in the future.
This may be the reality, but it cannot be the end of the story. If private insurers won’t provide businesses with this sort of protection in future pandemics, then the federal government must.
The reason I’m skeptical is that every example he cites is an example of moral hazard and the heightened level of public risk that ensues from the federal government’s insensitivity to it.
The flooding in the 1960s is the easiest one. There should be no federally-subsidized flood insurance. It encourages the behavior we should wish to avoid—people building in flood plains. The more you indemnify people against the consequences of their own folly, the more they will engage in folly.
The attacks on 9/11 didn’t just materialize out of thin air. They were a consequence of our stationing troops in Saudi Arabia at the end of the Gulf War and our maintenance of the “no-fly” zone over Iraq. Those in turn were the price of assembling the coalition that were our allies during the Gulf War and that in turn was a consequence of our intervention on behalf of Kuwait. Each step in that chain was deemed the less risk-filled alternative. Those calculations were clearly wrong. The net effect was to offload risk from the Kuwaitis to Americans and the cost of those risks tell us clearly that the calculations were wrong. It doesn’t seem to me that you reduce risk by assuming more risk but that’s what’s being proposed. IMO the key question is not how do you mitigate the risk but how do you ensure that those making the decisions have more incentives that are better-aligned with reality? I think they need to have more “skin in the game”.
The present circumstances are more complex. I think that the author’s point that mitigating the risk was beyond the ability of any insured or any insurer is a good one but it makes some assumptions. The fact is that greater exposure to pathogens that may result in a pandemic is a risk of globalization. Some very smart people have been telling us for quite a while that the risk was being understated, e.g. Bill Gates. Is the correct strategy to indemnify insurance companies against the risks of what may not be nearly as rare an occurrence as they had assumed. Additionally, the discontinuity wasn’t caused by the virus but by the regulatory response to the virus. Are acts of government insurable risks? I don’t think so.
“physical loss” — I don’t think Lehman appreciates the significance of that requirement. A conventional policy will provide a variety of coverages that arise from physical damage (fires, water, collision). So if the pipes break, a business might have a policy that pays for the repairs, including lost business while the repairs are being made. If a business temporarily shuts its door because it lost its cook or a failed health inspection, there is no physical loss, its business risk.
In almost 99% of the “virus” cases, businesses were closed without any physical damage; they were closed by government mandate. In those cases were there is a viral infection in the building, the argument can be made that there has been physical injury, but by analogy with other coverages, it would simply provide business interruption while decontamination occurred. A day or two?
I first got interested in this when I started reading a lot of complaints in the English press that the government should not simply encourages businesses to close, it needs to order them so they could make insurance claims. That didn’t make sense to me, insurance companies aren’t in the business to protect against government regulation. How long would a government lock-down last if a wealthy third-party paid for it? How long if the government paid for it?
‘How long would a government lock-down last if a wealthy third-party paid for it? How long if the government paid for it?’
The wealthy third-party wouldn’t be wealthy for long, which would end the lockdown. But the government lock-down would last as long as the government has enough electricity and ink and paper (and/or the computer memory) to print money. The people screaming for continued lockdowns ‘for the general safety’ are generally the same people who don’t worry about where their next meal is coming from.
‘The attacks on 9/11 didn’t just materialize out of thin air. They were a consequence of our stationing troops in Saudi Arabia at the end of the Gulf War and our maintenance of the “no-fly†zone over Iraq.’
Which were a consequence of Bush Sr. to remove with prejudice Saddam Hussein and his chief subordinates, Roman punitive expedition-style, when he had the chance, and damn the UN resolution, or done so when Saddam first violated the cease fire agreement. After Saddam’s eradication there would have been little need to station many if any troops in Saudi Arabia, the Iranians wouldn’t have dared attack Kuwait or the Saudis or the Gulf states after seeing what happened to The Father of all Defeats.
As I noted in the body of the post, that was the price of the UN authorization and our coalition.
I think it has been pretty well shown that people were staying home well before govt ordered lockdowns. The lockdowns were what have been done in the past, with success, to control airborne diseases.
“But the government lock-down would last as long as the government has enough electricity and ink and paper”
They are going away in every state already.
Steve