“I gotta tell you, small businesses are not inclined to take on debt just to keep their head above water,” Knapp said. “They’re going to figure out some other way of cutting their costs or shutting down.”
Politico
March 24, 2020
By CARLA MARINUCCI and KATY MURPHY
SACRAMENTO — After shutting their doors and laying off staff amid the Covid-19 pandemic, thousands of California’s panicked business owners are confronting another head-spinning crisis: insurance firms rejecting their loss claims.
Ron Schur, owner of The Galley, a Santa Monica institution founded in 1934, said it was heartbreaking enough to abruptly close his doors last week at the direction of Gov. Gavin Newsom and lay off a staff of 25 — some who’d been with him 30 years. But the frustration wasn’t over.
“I tried to make a claim and the insurance person wouldn’t take it,’’ said Schur, who’s known to many of his loyal customers as Captain Ron. “She said it would be rejected.’’
Schur, whose restaurant is believed to be one of the oldest in the Los Angeles area, said insurance agents handed him the fine print in his policy noting that insurers “would not pay for losses or damages resulting from any virus, bacterium or other microorganism.”
That same sinking feeling is hitting small business owners everywhere as they realize their insurance policies will not help them weather pandemic-related closures. Few insurance policies are written to cover such losses. But their stories have bubbled up to policymakers, raising the possibility of government intervention.
A New Jersey lawmaker last week proposed that the state force insurers to make payouts for business interruptions. Gov. Gavin Newsom’s business adviser, Lenny Mendonca, tweeted late last week that “Insurance companies must fulfill their obligations to customers in this crisis — full stop.” A restaurant in Louisiana is suing to get its insurance company to pay up, and earlier this month, a bipartisan group of House lawmakers urged big insurance trade groups to “recognize financial loss due to Covid-19 as part of policyholders’ business interruption coverage.”
The possibility of government intervention, however remote, has industry groups on high alert. They warn that policies are priced according to risk, and that expanding coverage retroactively could destabilize a market already bracing for an onslaught of medical claims, along with an uptick in highly destructive natural disasters in California and elsewhere. Some experts also assert it may be illegal for the government to force changes to an existing contract.
“Insurance stability is especially important in a time of increased natural catastrophes,” said David A. Sampson, president and CEO of the American Property Casualty Insurance Association. “Spring flood season is underway, hurricane season is around the corner, and wildfires pose a threat year-round.”
Carriers have excluded pandemics from their policy coverage since the Spanish Flu of 1918, said Michel Leonard, a senior economist at the Insurance Information Institute, an industry association based in New York City. The SARS outbreak in the 2000s prompted broader exclusions for losses caused by viral or bacterial infections and add-on provisions with higher premiums for such coverage.
Only about 30 percent of small and medium-sized businesses in the U.S. have policies to cover losses during unexpected shutdowns, Leonard said. What’s more, those policies — in addition to the outbreak exclusions — generally require there to be property damage associated with the claim. Even eligible claims usually require a monthlong waiting period, carry high deductibles and cover just a small percentage of the losses, he said.
“The government right now is considering ways to provide short-term liquidity for businesses,” Leonard said. “That’s not what the insurance industry is in the business of doing.”
Jot Condie, president and CEO of the California Restaurant Association, said he’s heard that story repeatedly in the days since restaurants and bars have shut down under state guidance. And that’s especially concerning, he said, since the financial implications for California’s estimated 100,000 restaurants — 36,000 of them “full service” sit-down establishments — are monumental. Condie said Newsom’s statewide guidance has also left the state’s 265,000 servers and 41,000 bartenders in a panic — without work, some of them on 24 hours notice.
He’s calling for the governor and other officials to enact insurance and other protections to preserve an industry the California Restaurant Association says generated $7 billion last year in sales tax, ranking as the state’s leading sales tax revenue producer.
“I hope it’s not lost on policy makers, that we represent massive revenue for the state of California,’’ says Condie, who says these California small business owners and entrepreneurs are “a critical part of the community and are in the space of 72 hours trying to figure out: do I close, or hibernate?”
The challenge for state and federal leaders is to get the aid out fast enough to help the small businesses before they close for good, emptying downtowns overnight, said Jesse Rothstein, an economist and professor at UC Berkeley’s Goldman School for Public Policy.
“Economically that is cataclysmic in a way we have not experienced before,” Rothstein said.
The governor’s edicts have in recent days offered state renters protection from eviction for non-payment related to the crisis. But so far, the restaurant industry’s small business owners have not gotten such assurance, and that would be a start, Condie said.
California Insurance Commissioner Ricardo Lara sent a letter to House Speaker Nancy Pelosi and California’s congressional delegation “alerting them to the scale of the business interruption crisis and calling on them to take immediate action now to protect these businesses and their workers” with grants and interest-free loans in the stimulus package, Lara spokesperson Michael Soller said on Tuesday.
But it doesn’t appear that Lara will force the industry to cover coronavirus claims excluded by their policies. The Department of Insurance plans to “evaluate the number and type of businesses with business interruption coverage,” Soller said, and Lara will work with other state leaders and the industry on “creative state-level solutions.”
Los Angeles Mayor Eric Garcetti has already acted to allay some of the concerns. His office announced an $11 million economic relief package Wednesday for small businesses impacted by the coronavirus crisis. The program approved by the Los Angeles City Council, the Economic and Workforce Development Department, Garcetti’s office said, “will provide $11 million in no-fee microloans of $5,000 to $20,000 — which may be used to cover working capital.”
Private sources, too, have stepped up — with Facebook this week announcing a small business fund of $100 million in grants and other assists to those that have been slammed by coronavirus impacts.
Small businesses need grants, not loans, said Frank Knapp, Jr. co-chair of Businesses for Responsible Tax Reform and chair of the South Carolina Small Business Chamber of Commerce. Knapp’s group has been calling on Congress to send stimulus relief their way, and fast.
“I gotta tell you, small businesses are not inclined to take on debt just to keep their head above water,” Knapp said. “They’re going to figure out some other way of cutting their costs or shutting down.”
But Schur says with longtime customers and staff gone at The Galley, it’s unclear whether he can count on insurers and the state to now serve the folks who served Californians at the table for years. “I’m wondering how you’re going to pay the rent, and the house bills,” he said.