As proposed legislation to establish a Federal Pandemic Risk Reinsurance Program remains under review by the US House of Representatives’ Financial Services Committee and Oversight and Reform Committee, a number of significant amendments have been made to the discussion draft. Although the outlook for the legislation remains uncertain, in this article we review a number of these amendments and their potential impacts on the proposed Program.
As discussed in our April 10, 2020, alert, the proposed legislation to establish a Federal Pandemic Risk Reinsurance Program (the Program) to be housed within the US Department of the Treasury (Treasury) is a priority of House Financial Services Committee Chair Maxine Waters (D-CA) and House Oversight and Reform Chair Carolyn Maloney (D-NY). The discussion draft was circulated by Representative Maloney’s office on May 11, 2020, and incorporates a number of edits that further refine the draft text. A summary of significant amendments to the discussion draft—among others, adjusting the lines of business to be backstopped, adding captive insurers and increasing by 50% the proposed annual limit of federal responsibility—is below. A more detailed discussion of the Program (that analyzes the prior version of the discussion draft) is available here.
The outlook for this legislation is uncertain, of course, as debate ratchets up about another round of federally financed stimulus for a country divided on the public health aspects of the Coronavirus (COVID-19) pandemic and struggling to cope with the secondary economic dislocations for households, local and state governments, and private employers of all shapes and sizes.
The latest discussion draft continues to provide that the Program would be made available to insurers on a voluntary basis and would apply to certain losses that are covered by business interruption insurance in the event of a pandemic or outbreak of communicable disease. Key provisions include an aggregate event deductible (or trigger) of $250 million, an aggregate annual cap of $750 billion (up from $500 billion), and a 95% federal share of compensation for insured losses in excess of the aggregate deductible or trigger amount up to the aggregate annual cap.
Eligibility
Key Definitions
- “Business interruption insurance” is expanded to include “event cancellation insurance” or other non-property contingent business interruption insurance.
- “Event cancellation insurance” is defined as “insurance that indemnifies an insured for their losses incurred as a consequence of cancellation, abandonment, or rescheduling of an event and/or non-appearance at an event of a principal speaker.”
- “Event” is defined to mean a “trade show, consumer show, exhibition, fair, conference, convention, meeting, seminar, charity event, auction, gala dinner, or other similar event.”
- “Covered public health emergency” is now defined to mean any outbreak of infectious disease or pandemic that is declared under the Public Health Service Act and certified by the Secretary of Health and Human Services as a public health emergency. (The prior draft provided the Secretary of the Treasury (Secretary) with the ability to certify an event as a covered public health emergency and covered disaster as so declared by the president under the Stafford Disaster Relief Act.)
- “Insurer” is expanded to expressly include captive insurers and other self-insurance arrangements by municipalities and other entities (e.g., workers’ compensation self-insurance programs and state workers’ compensation reinsurance pools).
- “Property and casualty insurance” no longer expressly includes directors and officers (D&O) liability insurance in its definition and has been expanded to include event cancellation insurance.
Voluntary Participation
Federal Share of Compensation, Program Trigger, Aggregate Cap on Annual Liability
- Aggregate annual cap of $750 billion (previously $500 billion).
Funding Mechanism / Recoupment of Federal Share
- Unclear. The prior draft required Treasury to charge a premium from participating insurers and established a Pandemic Risk Reinsurance Fund to pay insured losses and to cover the costs associated with administering the Program. The new draft strikes this language but does not replace it with another funding/recoupment mechanism.
Studies and Reports
Federal Cause of Action
- The prior draft contained a “Litigation Management” section that provided for a federal cause of action, preempted all state causes of action, and provided the federal government with the right of subrogation with respect to any payment or claim paid by the United States. The new draft strikes this language.
Program Termination
- A new section has been added to provide for a termination date of December 31, 2027. The section also authorizes the Secretary generally to take action to ensure payment, recoupment, reimbursement or adjustment of compensation for insured losses arising under the Program.
State and federal governments have issued – and continue to issue – guidance to the insurance industry regarding the impact of COVID-19. COVID-19: State and Federal Insurance Developments is a comprehensive report that provides a state-by-state and nationwide analysis of key issues facing the insurance industry. The report is compiled and continually updated by McDermott’s Insurance Transactions and Regulation Group and focuses on property/casualty, life, and accident and health coverages, but does not include major medical.
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