The original property/casualty insurance industry reaction that business interruption losses may be modest may have been too optimistic, according to a leading insurance analyst.

KBW’s Meyer Shields believes that the “combination of an aggressive trial bar, legitimately suffering insureds and potentially ambiguous policy language” could contribute to loss exposure for the industry.

However, to the extent that the insurance industry ends up paying business interruption losses due to the coronavirus, more of those losses are likely to be paid by specialty insurance carriers than standard carriers, Shields said.

Echoing the standard analysis in the industry, Shields noted that the Insurance Services Office’s policy form that is widely used by most small and midsize standard commercial multiple-peril insurers specifies that the insurer “will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

Most insurance companies with which he has spoken still expect “limited business interruption losses” despite increasingly likely widespread interrupted business, “specifically because of this exclusion,” he wrote.

Shields shared his updated opinion on the potential for business interruption losses in a new investor note in which he cites two developments that could potentially challenge the conventional wisdom of there being limited BI exposure:

• A Louisiana lawsuit against Lloyd’s underwriters in which a restaurant maintains its “all-risks” policy has no exclusion for viruses and that contamination of its premises by the coronavirus constitutes a “direct physical loss” that requires remediation to clean the surfaces of the restaurant. This lawsuit also claims that city and state orders restricting and closing restaurants could trigger the civil authority provision of the policy.

• New Jersey legislation that would force insurers to cover business interruption from the coronavirus for small businesses, even where the policy explicitly excludes virus-related coverage as with policies with the ISO form. The bill would allow insurers to recoup some of the payouts from a special fund.

While he is not a lawyer or legislator, Shields said he believes the New Jersey approach will ultimately prove unconstitutional because he “cannot imagine that legislative efforts to retroactively rewrite policy language will succeed.”

However, insurance policies from specialty carriers without ISO’s or similar exclusion language might face some claims.

“We think it’s far too early to estimate industrywide (much less individual company) business interruption losses, but at this point, we expect some losses to materialize, and if so, they’ll probably disproportionately impact specialty rather than standard insurers, since the latter group’s policy language is typically subject to regulatory approval and is usually more consistent, less customized and hence less prone to including unintended coverage,” he concluded.

*This story was previously published by our sister publication Insurance Journal