Insurance policies likely to respond to civil unrest, riots in US cities
Advisen
Insurance policies likely to respond to civil unrest, riots in US cities
Pandemic may complicate business interruption recovery
By Erin Ayers, Advisen
As nationwide protests against police brutality and systemic racism gave way to nights of violence, questions quickly arose over whether damage to businesses, vehicles, and property would be covered by insurance – and the answer in most cases is yes.
Thousands of people took to the streets worldwide to protest the death of George Floyd, a black man who died after a white Minneapolis Police officer knelt on his neck for over eight minutes. The looting and destruction that has accompanied -- and in many cases, appears to be distinct from -- peaceful demonstrations comes at a time when many businesses remain shuttered or at reduced operations due to the COVID-19 pandemic. News reports offer a glimpse at the experience of businessowners, with some begging rioters to desist and many others declaring support for the Black Lives Matter movement.
Most commercial insurance policies cover losses due to civil unrest, as do auto policies and homeowners policies. According to James “Chip” Stuart, executive vice president and chief sales officer for Hub International, outside of some rare cases where riots have been excluded or businessowners opted not to buy malicious mischief/vandalism coverage, insurance will respond to both property damage and business interruption due to the protests.
Stuart, an insurance professional who also experienced the 1992 Los Angeles riots, cited some potential “gray areas” for insureds who could not access their properties during the civil authority shutdown, but also suffered no physical damage.
At a time when businesses have struggled during the pandemic, this experience might feel familiar; the key difference will be the fact that riots/civil commotion are a covered peril for most policies.
“If it’s anything like in 1992, there will be some resistance [to paying claims] without having any physical damage,” said Stuart. In 1992, those gray areas usually resulted in business interruption claims being paid, given nearby damage, he added.
However, amid the COVID-19 pandemic, business interruption valuation may be difficult for insurers and policyholders. The limits of the policy are clear, but the lost revenue will be harder to estimate. Forensic accountants will usually look back one year to determine the amount – looking only at the last three months would be “shortsighted,” according to Stuart.
For businesses just now starting to emerge from shelter-in-place orders, damage from the riots may keep them shuttered for good.
“What a tough blow that is, to get the green light to open and somebody ransacks your business,” Stuart said. He noted that businesses should give notice of claims to their insurers as soon as possible and keep track of extra expenses such as boarding up windows.
Even for businesses with insurance, underestimation of the risk could mean even full payouts won't match the economic losses. Insuring to value continues to be a problem, despite the best efforts of brokers, Stuart said. The higher the limits for building, contents, and business interruption, the higher the premium.
“It depends on the insured. People like to save money. They’re thinking, ‘I’ll never have a loss that’ll wipe out my entire property,'” he said.
For the insurance industry, the losses due to the protests are expected to be “modest,” per an advisory from financial services firm Keefe Bruyette Woods. However, combining the impact of the pandemic with the riots and a predicted above-average hurricane season “could turn 2020 into a capital event for some (re)insurers,” said KBW.
Verisk Analytics' Property Claims Services unit (PCS) formally designated the Minneapolis-area riots as a catastrophe, the first since the 2015 Baltimore riots and potentially the first riot/civil disorder event to span more than one state.
In an email to Advisen, PCS noted that riot catastrophe events typically generate low insured losses, with the total from 12 PCS-designated events since 1965 falling just under $1 billion. PCS head Tom Johansmeyer suggested looking to last year's riots in Chile, which resulted in more than $2 billion in insured damages, to understand more of the potential risk with the current events.
"At least a third of the industry loss, as we’ve estimated so far, comes from a handful of large retailers’ property programs. In fact, approximately 20 percent of the insured loss comes from one retailer. Losses to large programs could have a disproportionate impact on the insured losses from a catastrophe event, resulting in surprisingly large totals," Johansmeyer said.
The riots may also drive property insurance rates – which already increased an average 21% in the U.S. during the first quarter of 2020, according to a recent Marsh report -- even higher in areas exposed to civil commotion.
Insured losses for the top 10 costliest U.S. civil disorders range from $24 million to $1.1 billion for the 1992 Los Angeles riots, per numbers tallied by the Insurance Information Institute in 2008 and adjusted for inflation.
In 2015, after riots in Baltimore sparked by the death of Freddie Gray, a 25-year-old black man who died in police custody, insurers paid out an estimated $12.9 million in claims, according to the Maryland Insurance Administration.
Advisen data offers a look at some of the losses stemming from civil unrest, both expected and unexpected. In addition to multi-million dollar settlements between cities and demonstrating civilians, following the 2015 Baltimore riots, looting of prescription information forced a pharmacy to notify customers of a data breach of their personally identifiable health information.
Editor Erin Ayers can be reached at eayers@advisen.com.
